Financial Management - Test 2

Of the options listed below, which are examples of diversifiable risk? I. Wildfires damage an entire town II. The federal government imposes a $1,000 fee on all business entities III. Payroll taxes are increased nationally IV. All software providers are required to improve their privacy standards

1 and 4

Which one of the following statements is correct concerning market efficiency?

A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.

Which of the following items are included when calculating the expected return on a portfolio? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy

All the above

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

Capital asset pricing model

Which one of following is the rate at which a stock's price is expected to appreciate?

Capital gains yield

Which of the following yields on a stock can be negative?

Capital gains yield and total return

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

Geometric

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

High standard deviation, large risk premium

To convince investors to accept greater volatility, you must:

Increase the 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 of the following statements regarding unsystematic risk is accurate?

It can be effectively eliminated by portfolio diversification

The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.

Next year's

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 most volatile annual returns over the period 1926-2019?

Small-company stocks

Which one of the following earned the highest risk premium over the period 1926-2019?

Small-company stocks

What best describes the principle of diversification?

Spreading an investment across many diverse assets will eliminate some of the total risk.

________ measures total risk, and ________ measures systematic risk.

Standard deviation ; beta

The rate of return on which type of security is normally used as the risk-free rate of return?

Treasury bills

Which one of the following is most indicative of a totally efficient stock market?

Zero net present values for all stock investments

Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock:

is underpriced

The slope of the security market line is the:

market risk premium

According to the capital asset pricing model (CAPM), the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

market risk premium and the amount of systematic risk inherent in the security

When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the:

market value of the investment in each stock.

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

The dividend growth model:

requires the growth rate to be less than the required return

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

reward-to-risk ration

If a security is fairly priced, its ________ divided by its beta will equal the slope of the security market line.

risk premium

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information.

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

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

unsystematic risk

The expected return of a stock, based on the likelihood of various economic outcomes, equals the:

weighted average of the returns for each economic state.