Finance Final Exam
beta of 1
A ________ is the market's measure of systematic risk.
Efficient capital market
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?
Risk Premium
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?
Expected rate of return
Of the options listed below, which is most directly impacted by the level of systematic risk?
Investors panic causing security prices around the globe to fall precipitously.
Of the options listed below, which is the best example of systematic risk?
portfolio weight
Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n):
Volatility
Standard deviation is a measure of which one of the following?
The actual expected stock return indicates the stock is currently overpriced
The common stock of Alpha Manufacturers has a beta of 1.24 and an actual expected return of 13.25 percent. The risk free return is 3.7 percent and the market rate of return is 11.78 percent. Which one of the following statements is true given this information.
rate of return on a perpetuity
The cost of preferred stock is equivalent to the:
return on a risky security minus the risk free rate
The excess return is computed as the:
Treasury bills
The rate of return on which type of security is normally used as the risk free rate of return?
arithmetic
The return earned in an average year over a multiyear period is called the _____ average return.
risk-free rate
The security market line intercepts the vertical axis at the:
prefer higher risk projects over lower risk projects.
Thornton Homes has multiple divisions which operate as separate lines of business and face risks unique to those lines. The firm uses its overall WACC as the discount rate to evaluate all proposed projects. Accordingly, each division within the firm will tend to:
risk-free rate
To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return.
increase the risk premium
To convince investors to accept greater volatility, you must:
depends upon how the funds raised for that project are going to be spent.
When evaluating any capital project proposal, the cost of capital:
the average squared difference between the actual returns and the arithmetic average return
Which one of the following best defines the variance of an investment's annual return over a number of years?
Small-company stocks
Which one of the following categories of securities had the highest average annual return for the period 1926-2019?
US Treasury Bills
Which one of the following had the least volatile annual returns over the period of 1926-2019?
The information was expected.
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.
expected 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:
Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.
With respect to capital project analysis, which of the following statements is accurate?
cost of debt
Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the: