fin final

if you start with $50, gain $25 but end with $50 in two years, the aritmatic return is

12.5

95%

2 standard deviations

For the period 1926-2019, the average risk premium on large-company stocks was about:

8.7

systematic risk

A risk that influences a large number of assets. Also, market risk.

Which one of the following statements best defines the efficient market hypothesis?

All securities in an efficient market are zero net present value investments.

The CAPM formula is:

E(RE) = Rf + B(E(MR)−Rf)

reward to risk ratio

E(Ra)-Rf/beta A = E(Rb)-Rf/beta B

pretax cost of debt

Face amount * coupon rate

what does the weighted average cost of capital do?

It is the return investors require on the total assets of the firm.

The historical record for the period 1926-2019 supports which one of the following statements?

Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year.

the relationship between the standard deviation on a portfolio and the standard deviations of the assets in the portfolio

The standard deviation of return on a portfolio decreases if we increase the number of securities in the portfolio.

arithmetic average return answers

What was your return in an average year over a particular period?

WACC formula

[ Rd(1-CTR) debt/(debt +equity)] + [Re*equity/debt+equity]

Of the options listed below, which is the best example of a diversifiable risk?

a firm's sales decrease

A ________ is the market's measure of systematic risk.

beta of 1

strong form efficiency

prices reflect all information, including public and private

markets tend to respong

quickly to new inforamation

Inside information has the least value when financial markets are:

strong efficient form

the expected return on an asset depends only on

that asset's systematic risk

geometric average return

the average compound return earned per year over a multiyear period

capital gain yield

(P1-P0)/P0

Dividend Growth Model disadvantages

- cost of equity is sensitive to estimated growth rate - applicable to only companies that pay dividends - does not explicitly consider risk

what mechanism does diversification reduce some of the total risk?

- spreading investment across many assets

99.7%

3 standard deviations

Which of the following statements is true based on the historical record for 1926-2019?

Bonds are generally a safer, or less risky, investment than are stocks.

Generally speaking, which of the following best correspond to a wide frequency distribution?

High standard deviation, large risk premium

Of the options listed below, which is the best example of systematic risk?

Investors panic causing security prices around the globe to fall precipitously.

Which one of the following correctly describes the dividend yield?

Next year's annual dividend divided by today's stock price

An investor wants to reduce the unsystematic risk in her portfolio. Which of the following actions is least likely to do so?

Reducing the number of stocks held in her stock portfolio

________ measures total risk, and ________ measures systematic risk.

Standard deviation; beta

Vanessa purchased a stock one year ago and sold it today for $3.15 per share more than her purchase price. She received a total of $2.60 per share in dividends. Which one of the following statements is correct in relation to this investment?

The capital gains yield is positive.

With respect to risk, which of the following statements is accurate?

The systematic risk of a portfolio can be lowered by adding T-bills to the portfolio.

WACC

Weighted average cost of capital. The average cost of financing a firm in percentage terms.

geometric average return answers

What was your average compound return per year over a particular period

effecient capital market

a market in which security prices reflect available information

Security Market Line (SML)

a positively sloped straight line displaying the relationship between expected return and beta

unsystematic risk

a risk that affects at most a small number of assets. Also, unique or asset-specific risk

The systematic risk of a portfolio can be lowered by

adding T-bills to the portfolio.

The return earned in an average year over a multiyear period is called the _____ average return

arithmetic

The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk.

capital asset pricing model

among the dividend yield, capital gains yield, and total returns, which of them can be negative

capital gains yield total returns

the dividend and the capm are both estimates for the

cost of eqity

the unexpected component of the total return behaves over the short-run

could be + or _

ways to determine cost of equity

dividend growth model security market line

total dollar return

dividend income + capital gain (or loss)

Dividend Yield

dividends per share/market price per share

Dividend Growth Model advantages

easy to understand and use

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?

efficient capital market

Of the options listed below, which is most directly impacted by the level of systematic risk?

expected rate of return

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the:

expected return

Eliminating unsystematic risk is the responsibility of the

individual investor.

Evidence seems to support the view that studying public information to identify mispriced stocks is:

ineffective

what is true of unsystematic risk

it can be effectively eliminated by portfolio diversification.

what is beta's relation with a security's risk premium according to CAPM?

larger betas have greater systematic risks

The slope of the security market line is the:

market risk premium

Given a well-diversified stock portfolio, the variance of the portfolio:

may be less than the variance of the least risky stock in the portfolio.

weak form efficiency

prices reflect all past market information such as price and volume

will simpleminded scheme bases on public information be sucessful

probably not

Assume a manager determines the cost of capital for a specific project based on the cost of capital at another firm with a line of business that is similar to the project. Accordingly, the manager is using the ________ approach.

pure play

If the market is efficient and securities are priced fairly, all securities will have the same:

reward to risk ratio

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.

risk free rate

Assume that last year T-bills returned 2.2 percent while your investment in large-company stocks earned an average of 8.1 percent. Which one of the following terms refers to the difference between these two rates of return?

risk premium

The ________ is a positively sloped linear function that plots securities' expected returns against their betas.

security market line

Which one of the following categories of securities had the highest average annual return for the period 1926-2019?

small company stocks

Most financial securities have some level of ________ risk.

systematic

the cost of capital depends primarily on the use

the funds, not the source

arithmetic average return

the return earned in an average year over a multiyear period

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant.

unsystematic

________ measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset.

beta

Which one of the following categories of securities had the most volatile annual returns over the period 1926-2019?

small-company stocks

semistrong form efficiency

suggests that security prices fully reflect all public information, such as firm announcements, economic news, or political news

which risk can be effectively eliminated via portfolio diversification?

unsystematic risk -diversifiable risk

Over time, the average unexpected return will be

0

if you start with $50 and end with $50, the geometric return is

0

68%

1 standard deviation

Implications of Efficient Market Hypothesis -- 3

1. Future changes in stock values should be largely unpredictable, e.g., follow a "random walk." 2. "Past performance does not guarantee future performance" 3.if mispriced stock exist, there is no obvious means of identifying them

CAPM depends on 3 things

1. The pure time value of money 2. The reward for bearing systematic risk 3. The amount of systematic risk

Velasquez Manufacturing has two vastly different lines of business: Alpha and Omega. The Alpha line is the riskiest of the two, and accounts for 72 percent of the firm's sales. When deciding which project proposals should be accepted, the managers should:

assign appropriate, but differing, discount rates to each business line and then select the projects with the highest net present values.

total return R=E(R)+U

expected return + unexpected return

The average compound return earned per year over a multiyear period is called the _____ average return.

geometric

Assume a firm utilizes its WACC as the discount rate for every capital project it implements. Accordingly, the firm will tend to:

increase the average risk level of the company over time.

An increase in an unrealized capital gain will

increase the capital gains yield.

To convince investors to accept greater volatility, you must:

increase the risk premium

the reward to risk ratio

must be the same for all the assets in the market

Which one of the following is defined by its mean and its standard deviation?

normal distribution

Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n):

portfolio

For any given capital project proposal, the discount rate should be based on the:

risks associated with the use of the funds required by the project.

Which risk cannot be diversified away and why?

systematic risk - affects almost all assets to some degree

beta coefficient

the amount of systematic risk present in a particular risky asset relative to that in an average risky asset

variance

the average squared difference between the actual return and the average return

risk premium

the excess return required from an investment in a risky asset over that required from a risk-free investment

Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient.

the information was expected

Cost of Equity

the return that equity investors require on their investment in the firm

To determine a firm's cost of capital, one must include:

the returns currently required by both debtholders and stockholders.

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2019?

u.s. treasury bills

An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of ________ risk.

unsystematic

standard deviation of returns measures

volatility - square root of the variance

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

weak

A portfolio beta is a

weighted average of the betas of the individual securities contained in the portfolio.

the unexpected component of the total return behaves over the long-run

will be 0