Final FINC 340

You have analyzed the financial statements and other data associated with a firm, and you have compared this firm to other firms in the same industry. Based on your analysis, you are convinced that this firm will increase its profits by at least 20% next year. What behavioral bias is this?

A. Compartmentalization 2. Relativism **3. Overconfidence D. Narcissism

The investment portfolio of a large insurance company has the following three equally likely outcomes: 6%, 18%, and 33%. Calculate the expected return and the standard deviation of the rate of return for this portfolio. Round your answers to the nearest tenth of a percent.

A. E(r ) = 14.3%; Sdv(r ) = 0% B. E (r ) = 28.5%; Sdv(r ) = 19.1% C. E(r ) = 19.0%; Sdv(r ) = 0% **D. E(r ) = 19.0%; Sdv(r ) = 11.0%

Rank the following asset classes in terms of risk, from highest risk to lowest risk: I. Bonds II. Individual stocks III. S&P 500 Index IV. Certificates of deposit

A. IV, II, III, I B. II, IV, III, I C. II, I, III, IV **D. II, III, I, IV

On June 23, 2008, American Capital Agency declared a cash dividend of $0.31 a share, to be paid on July 29, 2008, to shareholders of record as of July 2, 2008. The ex-dividend date is June 30, 2008. In order to receive this dividend, an investor would have to purchase the stock on or before

A. June 23, 2008 B. July 2, 2008 **C. June 29, 2008 D. July 29, 2008

The macroeconomic analysis includes:

A. Looking in to the fiscal policy B. Checking out inflation C. Investigating the level of employment **D. All of the above

The arithmetic average rate of return will always be greater than the geometric average rate of return

A. The arithmetic average rate of return will always be greater than the geometric average rate of return B. The geometric average rate of return will always be greater than the arithmetic average rate of return C. The difference between the geometric and arithmetic average rate of returns will be greater, the greater the variability of the annual returns **D. Both A and C are true statements

A "real return"

A. a return that has not been adjusted for inflation B. the type of return that is quoted for securities by the financial press **C. the return that a security would have earned had there been no inflation D. both A and B

The last date on which an investor can purchase a stock and receive the next dividend payment is on the

A. declaration date B. record date C. ex-dividend date **D. cum-dividend date

The Gordon growth model ( Stock Price = Dividends Next Year / r - g ) assumes that

A. dividends will remain at their current level indefinitely B. dividends will grow at the constant rate of r forever **C. dividends will grow at the constant rate of g forever D. dividends will remain at next year's level indefinitely

A stock dividend

A. increases the earnings per share of the firm. B. reduces the market price per share of the firm's stock. C. increases the aggregate market value of the firm's stock. D. increases the total wealth of the shareholder.

The most difficult CAPM input to estimate is the

A. market beta of the project B. risk-free interest rate **C. equity premium D. standard deviation

According to a 1996 study, the CPI tends to

A. overstate the general increase in price levels B. understate the general increase in price levels C. be manipulated frequently by the government for political purposes **D. Both A and C are true

All else equal, the price of a stock will increase if

A. the required rate of return on the stock increases B. the expected growth rate increases C. the expected future dividend payment increases **D. Both B and C are correct

The CAPM expected rate of return is equal to the

A. time premium plus the default premium plus the expected risk premium **B. default premium plus the expected risk premium C. time premium plus the default premium D. time premium plus the expected risk premium

Active investors do not believe that there are mispriced securities (or groups of securities) in the market. True or false?

False

Historical and expected returns are the same. True or False?

False

There is no difference between direct and indirect investing. True or False?

False

Avoiding regret and seeking pride affects a person's behavior. True or false?

True

Quantitative analysis of bonds is based on qualitative factors. True or false?

True

The expected rate of return on the portfolio is the weighted average of the expected returns on its component securities. True or false?

True

Treynor's ratio shows an excess actual return over risk free rate, or risk premium, by unit of systematic risk, measured by Beta. True or false?

True

The major advantage of options is that they can be profitable when the price of the underlying security goes up or down. True or false?

true

A mutual fund has five equally likely outcomes: -5%, 8%, 12%, 15%, and 20%. Calculate the expected return.

**A. 10% B. 12% C. 12.5% D. 15%

A firm paid a dividend of $1.52 a share this year and had earnings per share of $5.42. Its market price per share is $69.10. What is its dividend yield?

**A. 28.0% Example: DPS/EPS B. 7.8% C. 3.6% D. 2.2%

A zero-coupon bond has a beta of 0.15 and promises to pay $5,000 next year with a probability of 96%, $1,000 with a probability of 2%, and there is a 2% probability of total default. One-year Treasury securities are yielding 4%, and the expected return on the market is 10%. Refer to the information above. What is the time premium for this bond investment?

**A. 4.0% B. 5.3% C. 5.4% D. 6.0%

An issue of preferred stock pays an annual dividend of $5.00 and is selling for $75 a share. What annual return would you earn if you purchased the stock for its current price?

**A. 6.67% B. 7.76% C. 5.00% D. 15.00%

Which of the following statements is true?

**A. Assets with lower levels of market risk will sell for higher prices B. Assets with lower levels of market risk will have higher expected rates of return C.Assets with higher levels of market risk will sell for higher prices D. Assets with higher levels of market risk will have lower expected rates of return

Which of the following is (are) a measure(s) of portfolio reward?

**A. Expected Return B. beta C. Standard Deviation D. both a and B

Which of the following assets would not be classified as cash according to the definitions used in this book?

**A. Municipal bonds B. CD C. Commercial Paper D. Neither A or C are considered to be cash assets

The market -beta of a stock

**A. depicts the relationship between a stock expected return and its risk as measured by its standard deviation B. reflects the degree to which the stocks return moves with the return on a market index C. reflects the degree to which the stocks return varies with the company's earnings per share D. reflects the degree to which the stocks return varies with inflation

Which of the following inputs is not needed when using the Gordon growth model to determine the market value of a share of stock?

**A. the number of years the investor expects to own the stock B. the expected growth rate of the dividends C. the required rate of return for the stock D. the dollar amount of the dividend payment

Which of the following inputs is not needed when using the Gordon growth model to determine the market value of a share of stock?

**A. the number of years the investor expects to own the stock B. the expected growth rate of the dividends C. the required rate of return for the stock D. the dollar amount of the dividend payment

One hundred basis points equal

A. $1 **B. 1% C. 10% D100%

If $100 is deposited into an account that earns a quoted rate of 16%, compounded quarterly, for five years, how much will be in the account at the end of the 5th year? Round your answer to the nearest dollar.

A. $190 B. $210 C. $216 **D. $219

What is the value of an issue of preferred stock that pays an annual dividend of $4.00 if the prevailing interest rate is 7% a year?

A. $51.14 **B. $57.14 Example: $4/.07= C. $64.50 D. $114.18

You have deposited $5,000 in an account that pays 5% interest each year. How much will you have in the account at the end of six years? Round your answer to the nearest dollar.

A. $6,700 B. $6,500 **C. $6,381 D, None of the above

You would like to establish a fund that will be used to offer a scholarship each year to a worthy student at your alma mater. You would like the total annual award to be $5,000, with the first award to be presented next year. Your alma mater is able to invest the funds at a constant, annual, tax-free rate of 8%. How much must you donate today to fund this award? Round your answer to the nearest dollar.

A. $62,500 B. $46,296 **C. $67,500 D. $51,296

A firm has 12 million shares outstanding, and the market value per share is $25. If the firm executes a 3-for-1 stock split, what will the total market value of the shares then be?

A. $900 million B. $100 million **C. $300 million D. $33.3 Million

Your savings account yielded 1.5% last year. The inflation rate was 2%. What real return did you earn on this account? Round your answer to the nearest tenth of a percent.

A. +0.1% B. +1.0% **C. -0.5% D. -1.0%

What range of inflation rates do many economists currently believe is healthy?

A. 0% to 1% **B. 1% to 3% C. 2% to 4% D. 3% to 5%

A mutual fund has five equally likely outcomes: -5%, 8%, 12%, 15%, and 20%. Calculate the variance of the rate of return. Round your answer to the nearest tenth of a percent.

A. 0.0% B. 89.5% **C. 71.6% D. 358.0%

A mutual fund has five equally likely outcomes: -5%, 8%, 12%, 15%, and 20%. Calculate the standard deviation of the rate of return. Round your answer to the nearest tenth of a percent

A. 0.0% **B. 8.5% C. 9.5% D. 18.9%

The following returns have been estimated for Security T and S: Scenario Security T Security S 1 20% 10% 2 13% -6% 3 15% 20% Each scenario is equally likely to occur, and you plan to invest 70% in Security T and 30% in Security S. Refer to the information above. What is the expected return of the portfolio? Round your answer to the nearest tenth of a percent.

A. 1.7% **B. 12.0% C. 13.6% D. 14.0%

Final Question Chart Refer to the information above. Calculate the 20-year geometric average annual rate of return on the S&P 500 Index.

A. 13.04% **B. 11.81% C. 10.54% D. 4.66%

You purchased a house for $330,000 cash one year ago. You can sell it today for $277,000. What rate of return did you earn on this investment? Round your answer to the nearest tenth of a percent.

A. 19.1% **B. -16.1% C.83.9% D. None of the above

An investor invests $4,000 to buy 200 shares of Sand Corporation, which has an expected return of 24%; $2,000 to buy 100 shares of Water Corporation, with an expected return of 18%; and $4,000 to buy 400 shares in Beach Corporation, with an expected return of 28%. What is the expected return on this portfolio?

A. 25.4 **B. 24.4% C. 17.8% D. 23.3%

Portfolio R offers an expected return of 12% with a standard deviation of 20%. Portfolio S has an expected return of 8% with a standard deviation of 10%. The correlation of the portfoliosʹ returns is 0.5. Refer to the information above. What is the expected return of a new portfolio that is 60% invested in Portfolio R and 40% in Portfolio S?

A. 5.2% **B. 10.4% C. 8.0% D. 12.3%

You purchased a share of stock for $58.00. At the end of a quarter, the stock paid a dividend of $0.75, and you sold it for $63.00 right after receiving the dividend. Refer to the information above. What was your total rate of return on this investment? Round your answer to the nearest tenth of a percent.

A. 7.2% B. 8.6% C. 10.9% **D. 9.9%

Which of the following statements about initial public offerings (IPOs) is (are) true?

A. An IPO refers to the initial sale of a firm's stock or bonds B. The securities sold through an IPO are typically sold at a fixed price C. The securities sold during an IPO tend to be underpriced **D. both B and C