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
