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Corporate Finance > Chapter 10 "Recharge" > Flashcards

Chapter 10 "Recharge" Flashcards

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1
Q

Geometric averages are usually ____ arithmetic averages.

A) Smaller than.
B) The same as.
C) Larger than.

A

Smaller than.

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2
Q

Historically, there is a(n) ____ relationship between risk and expected return in the financial markets.

A) Inverse
B) Indirect
C) Stagnant
D) Direct

A

Direct

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3
Q

Normally, the excess rate of return is:

A) Zero
B) Negative
C) Positive

A

Positive

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4
Q

True or False: The risk premium can be interpreted as a reward for bearing risk.

A) True
B) False

A

True

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5
Q

What is the form of market efficiency that identifies with all information as being quickly and accurately reflected in stock prices?

A) Strong Form Efficiency
B) Semistrong Form Efficiency
C) Weak Form Efficiency

A

Strong Form Efficiency

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6
Q

What is the form of market efficiency that identifies with all public information as being quickly and accurately reflected in stock prices?

A) Strong Form Efficiency
B) Semistrong Form Efficiency
C) Weak Form Efficiency

A

Semistrong Form Efficiency

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7
Q

What is the form of market efficiency that identifies with historical stock prices as being quickly and accurately reflected in stock prices?

A) Strong Form Efficiency
B) Semistrong Form Efficiency
C) Weak Form Efficiency

A

Weak Form Efficiency

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8
Q

True or False: Arithmetic and geometric averages are useful because they are not influenced by volatility.

A) True
B) False

A

False

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9
Q

An efficient market is one that fully reflects all available:

A) Redundancies
B) Inefficiencies
C) Information
D) Investments

A

Information

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10
Q

Which type of stock price adjustment time path occurs when there is a bubble (price run up) in the path followed by a decline after the market receives information about the stock?

A) Overreaction and Correction
B) Delayed Reaction
C) Efficient Market Reaction

A

Overreaction and Correction

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11
Q

Select all that apply. Which of the following are examples of information that may impact the risky return of a stock?

A) The outcome of an application currently pending with the Food and Drug Administration
B) Last year’s net income as a percentage of sales and gross fixed assets
C) The trend in sales growth over the last 10 years
D) The Fed’s decision on interest rates at their meeting next week

A

The outcome of an application currently pending with the Food and Drug Administration and The Fed’s decision on interest rates at their meeting next week.

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12
Q

Which of the following types of risk is not reduced by diversification?

A) Asset-Specific Risk
B) Systematic, or Market Risk
C) Unique Risk
D) Unsystematic Risk

A

Systematic, or Market Risk

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13
Q

By definition, what is the beta of the average asset equal to?

A) 0
B) Between 0 and 1.
C) 1
D) 2

A

1

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14
Q

True or False: The expected return is the return that an investor expects to earn on a risky asset in the future.

A) True
B) False

A

True

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15
Q

What is systematic risk?

A) It is a risk that increases in a systematic, gradual fashion.
B) It is a risk that affects only one or a few assets.
C) It is a risk that pertains to a large number of assets.
D) It is a risk that is caused by failure of the internal control system of a corporation.

A

It is a risk that pertains to a large number of assets.

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16
Q

What is unsystematic risk?

A) It is a risk that affects a single asset or a small group of assets.
B) It is a risk that affects all the assets in a diversified portfolio.
C) It is a risk that is unavoidable.
D) It is a risk that is always caused by external factors.

A

It is a risk that affects a single asset or a small group of assets.

17
Q

True or False: It is possible for the unsystematic risk of a portfolio to be reduced to almost zero.

A) True
B) False

A

True

18
Q

If an asset has a reward-to-risk ratio of 6.0%, that means it has an ____ of 6.0% per unit of ____.

A) Return; Systematic Risk
B) Return; Risk
C) Systematic Risk; Risk Premium
D) Risk Premium; Systematic Risk

A

Risk Premium; Systematic Risk

19
Q

Select all that apply. Studying market history can reward us by demonstrating that:

A) The greater the potential reward is, the greater the risk.
B) The greater the potential reward is, the lower the risk.
C) There is a reward for bearing risk.
D) The stock market is nothing but a casino.

A

The greater the potential reward is, the greater the risk, and there is a reward for bearing risk.

20
Q

Select all that apply. ____ risk is reduced as more securities are added to the portfolio.

A) Unsystematic
B) Company-Specific
C) Diversifiable
D) Marketwide

A

Unsystematic, Company-Specific, and Diversifiable risks.

21
Q

What is the beta of the risk-free asset?

A) .5
B) Unknown
C) 1.0
D) Zero

A

Zero

22
Q

The ___ rate of return is the difference between the rate of return on a risky asset and the risk-free rate of return.

A) Nominal
B) Excess
C) Subliminal
D) Real

A

Excess

23
Q

More volatility in returns produces ___ difference between the arithmetic and geometric averages.

A) A smaller
B) A larger
C) No change in the

A

A larger

24
Q

What is the reward-to-risk ratio?

A) [Rf − E(RA)]/βA
B) [E(RA) + Rf]/βA
C) [E(RA) − βA]/Rf
D) [E(RA) − Rf]/βA

A

[E(RA) − Rf]/βA

25
Q

If a study of a firm’s financial information will not lead to gains in the market, then the market must be at least ___ efficient.

A) Semistrong Form
B) Strong Form
C) Weak Form

A

Semistrong Form

26
Q

What is an uncertain or risky return?

A) It is the portion of return that depends on information that is currently unknown.
B) It is the return that is classified as risky by bond rating agencies.
C) It is the portion of return that is unaffected by present or future information.
D) It is the portion of return that depends on information that is currently known.

A

It is the portion of return that depends on information that is currently unknown.

27
Q

An efficient market is one in which any change in available information will be reflected in the company’s stock price:

A) Immediately
B) In a day
C) At least within a week
D) In two days

A

Immediately

28
Q

If the arithmetic average return is 10% and the variance of returns is .05, find the approximate geometric mean.

A) 7.5%
B) 10.025%
C) 15.075%
D) 5.025%

A

7.5%

29
Q

The geometric average rate of return is approximately equal to:

A) The arithmetic mean plus half of the standard deviation
B) Half the arithmetic mean minus half of the variance
C) The arithmetic mean minus half of the variance
D) Half of the arithmetic average plus half of the standard deviation

A

The arithmetic mean minus half of the variance

30
Q

Which of the following types of risk is not reduced by diversification?

A) Asset-specific risk
B) Unsystematic risk
C) Systematic, or market risk
D) Unique risk

A

Systematic, or market risk

31
Q

Select all that apply. Unsystematic risk will affect:

A) The market as a whole.
B) All manufacturing firms.
C) Firms in a single industry.
D) A specific firm.

A

Firms in a single industry or a specific firm.

32
Q

Select all that apply. As more securities are added to a portfolio, what will happen to the portfolio’s total unsystematic risk?

A) It may eventually be almost totally eliminated.
B) It is likely to increase.
C) It will not change.
D) It is likely to decrease.

A

It is likely to decrease and it may eventually be almost totally eliminated.

33
Q

Beta tells us the amount of ______ risk of an asset or portfolio relative to ______.

A) Unsystematic; an average risky asset
B) Systematic; the risk-free asset
C) Systematic; an average risky asset
D) Unsystematic; the risk-free asset

A

Systematic; an average risky asset

34
Q

The risk ____ can be interpreted as the reward for beating risk.

A

Premium

35
Q

If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?

A) An overreaction and correction
B) A delayed reaction
D) An efficient market reaction

A

An efficient market reaction.

36
Q

What is the definition of expected return?

A) It is the return that was earned in the past on a risky asset.
B) It is the expected variation in return on a risky asset.
C) It is the variation in return during the last period.
D) It is the return that an investor expects to earn on a risky asset in the future.

A

It is the return that an investor expects to earn on a risky asset in the future.

Corporate Finance (13 decks)

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