Chapters 12 & 13

Question 1

Studying market history can reward us by demonstrating that _____.

on average, investors will earn a reward for bearing risk

the greater the potential reward is, the lower the risk

the greater the potential reward is, the greater the risk

the stock market is nothing but a casino

Answer 1

on average, investors will earn a reward for bearing risk
the greater the potential reward is, the greater the risk

Question 2

The dividend yield for a 1-year period is equal to the annual dividend amount divided by the ______.

beginning stock price

average of the beginning and ending stock prices

ending stock price

Answer 2

beginning stock price

Question 3

The capital gains yield can be found by finding the difference between the ending stock price and the initial stock price and dividing it by the ______.

cost of capital

initial stock price

correct

ending stock price

dividend yield

Answer 3

initial stock price

Question 4

The second lesson from capital market history is that there is a direct link between ____________ and reward.

Answer 4

risk

Question 5

Kate Corporation has discovered a very secret new product, but hasn’t yet announced the discovery to the public. If the stock price reacts before the announcement (assuming no corporate “leaks”), the market is _____ form efficient.

weak

semistrong

strong

Answer 5

strong

Question 6

Percentage returns are more convenient than dollar returns because they ____.

are more accurate than dollar returns

apply to any amount invested

Answer 6

apply to any amount invested

Question 7

The _________________ (greater/lower) the risk, the greater the required return.

Answer 7

greater

Question 8

The dividend ______________ is defined as the annual dividend amount divided by the beginning stock price.

Answer 8

yield

Question 9

The ______________ gains yield can be found by taking the difference between the ending stock price and the initial stock price and dividing it by the initial stock price.

Answer 9

capital

Question 10

The second lesson from studying capital market history is that risk is _____.

handsomely rewarded

largely ignored

to be avoided altogether

always detrimental to returns

Answer 10

handsomely rewarded

Question 11

__________________ returns tell how much was received for each dollar invested, so they can be applied to any initial investment amount.

Answer 11

Percentage

Question 12

Which one of the following correctly describes the dividend yield?
A. Next year’s annual dividend divided by today’s stock price
B. This year’s annual dividend divided by today’s stock price
C. This year’s annual dividend divided by next year’s expected stock price
D. Next year’s annual dividend divided by this year’s annual dividend
E. The increase in next year’s dividend over this year’s dividend divided by this year’s dividend

Answer 12

A. Next year’s annual dividend divided by today’s stock price

Question 13

Small-company stocks, as the term is used in the textbook, are best defined as the:
A. 500 newest corporations in the U.S.
B. companies whose stock trades OTC.
C. smallest 20 percent of the companies listed on the NYSE.
D. smallest 25 percent of the companies listed on Nasdaq.
E. companies whose stock is listed on Nasdaq.

Answer 13

C. smallest 20 percent of the companies listed on the NYSE.

Question 14

Standard deviation is a measure of which one of the following?
A. Average rate of return
B. Volatility
C. Probability
D. Risk premium
E. Real returns

Answer 14

B. Volatility

Question 15

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?
A. Weak
B. Semiweak
C. Semistrong
D. Strong
E. Perfect

Answer 15

A. Weak

Question 16

The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient.
A. weak
B. semiweak
C. semistrong
D. strong
E. perfect

Answer 16

D. strong

Question 17

You own a stock that had returns of 12.78 percent, −16.46 percent, 22.04 percent, and 20.36 percent over the past four years. What was the arithmetic average return for this stock?
A. 10.07%
B. 9.07%
C. 8.46%
D. 9.68%
E. 10.49%

Answer 17

D. 9.68%

Arithmetic average return = add all returns together and divide by # of years

12.78 + (-16.46) + 22.04 + 20.36 / 4

Question 18

You purchased a stock at a price of $53.85. The stock paid a dividend of $2.19 per share and the stock price at the end of the year is $60.25. What is the capital gains yield?
A. 10.62%
B. 15.95%
C. 10.09%
D. 4.07%
E. 11.88%

Answer 18

E. 11.88%

Capital gains yield = P (t+1) - P (t) / P (t)

P(t+1) = 60.25
P(t) = 53.85

60.25-53.85/53.85

Question 19

You purchased a stock at a price of $45.82. The stock paid a dividend of $1.75 per share and the stock price at the end of the year is $51.67. What was the dividend yield?
A. 4.20%
B. 12.77%
C. 3.82%
D. 4.58%
E. 16.59%

Answer 19

C. 3.82%

Dividend yield = D (t+1)/P(t)

1.75/45.82

Question 20

If the risk premium on the stock market was 7.14 percent and the risk-free rate was 2.66 percent, what was the stock market return?
A. 7.84%
B. 7.14%
C. 4.48%
D. 9.80%
E. 10.69%

Answer 20

D. 9.80%

Total return = risk premium + risk free rate

7.14 + 2.66 = 9.80%

Question 21

A stock had returns of 18.18 percent, 21.25 percent, −14.27 percent, 8.81 percent, and 27.88 percent for the past five years. What is the standard deviation of the returns?
A. 13.12%
B. 2.69%
C. 26.89%
D. 20.50%
E. 16.40%

Answer 21

E. 16.40%

add all years together and divide by # of years to get average return

(18.18- avg return)^2
(21.25-avg return)^2……

Add all these together then multiply by 1/# of years - 1

Standard deviation = square root of answer above

Question 22

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock’s expected return.
A. expected market rate of return
B. risk-free rate
C. inflation rate
D. standard deviation
E. variance

Question 23

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):
A. portfolio return.
B. portfolio weight.
C. degree of risk.
D. price-earnings ratio.
E. index value.

Answer 23

B. portfolio weight.

Question 24

A portfolio consists of 210 shares of Stock C that sells for $39 and 175 shares of Stock D that sells for $36. What is the portfolio weight of Stock C?
A. .5652
B. .6123
C. .4348
D. .6359
E. .3727

Answer 24

A. .5652

C=21039=8190
D=17536=6300

8190+6300=14490

portfolio weight = 8190/14490 = .5652

Question 25

You have a portfolio that is 26 percent invested in Stock R, 23 percent invested in Stock S, with the remainder in Stock T. The expected return on these stocks is 7.7 percent, 9.1 percent, and 11.4 percent, respectively. What is the expected return on the portfolio? A. 9.65% B. 9.40% C. 8.62% D. 9.91% E. 10.43%

Answer 25

D. 9.91% get third stock % = 51% Expected Return on portfolio = weight of 1st asset * expected rate of return for 1st asset + weight of 2nd asset * expected rate of return for 2nd asset +..... (.26*7.7) + (.23*9.1) + (.51*11.4) = 9.91%

Question 26

Which of the following statements regarding unsystematic risk is accurate? A. It can be effectively eliminated by portfolio diversification. B. It is compensated for by the risk premium. C. It is measured by beta. D. It is measured by standard deviation. E. It is related to the overall economy.

Answer 26

A. It can be effectively eliminated by portfolio diversification.

Question 27

Most financial securities have some level of ________ risk. A. unsystematic B. diversifiable C. systematic D. asset-specific E. industry

Answer 27

C. systematic

Question 28

5. An investor who owns a well-diversified portfolio would consider ________ to be irrelevant. A. systematic risk B. unsystematic risk C. market risk D. nondiversifiable risk E. the systematic portion of a surprise

Answer 28

B. unsystematic risk

Question 29

You have a portfolio that is invested 18 percent in Stock A, 42 percent in Stock B, and 40 percent in Stock C. The betas of the stocks are .77, 1.32, and 1.61, respectively. What is the beta of the portfolio? A. 1.10 B. 1.23 C. 1.29 D. 1.34 E. 1.50

Answer 29

D. 1.34 (.18*.77) + (.42*1.32) + (40*1.61) =

Question 30

The risk-free rate is 3.4 percent and the market expected return is 11.9 percent. What is the expected return of a stock that has a beta of 1.19? A. 19.02% B. 12.01% C. 15.54% D. 17.56% E. 13.52%

Answer 30

E. 13.52% expected return = beta * ( market expected return (%) - risk free rate%) + risk free rate .034 + (1.19(.119-.034))

Question 31

The slope of the security market line is the: A. expected return of the market. B. market standard deviation. C. beta coefficient. D. risk-free interest rate. E. market risk premium.

Answer 31

E. market risk premium.

Question 32

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock’s expected return. A. expected market rate of return B. risk-free rate C. inflation rate D. standard deviation E. variance

Answer 32

B. risk-free rate

Question 33

Which one of the following categories of securities had the highest average annual return for the period 1926–2019? U.S. Treasury bills Large-company stocks Small-company stocks Long-term corporate bonds Long-term government bonds

Answer 33

Small-company stocks

Question 34

The rate of return on which type of security is normally used as the risk-free rate of return? Long-term Treasury bonds Long-term corporate bonds Treasury bills Intermediate-term Treasury bonds Intermediate-term corporate bonds

Answer 34

Treasury bills

Question 35

The excess return is computed as the: return on a security minus the inflation rate. return on a risky security minus the risk-free rate. risk premium on a risky security minus the risk-free rate. risk-free rate plus the inflation rate. risk-free rate minus the inflation rate.

Answer 35

return on a risky security minus the risk-free rate.

Question 36

Inside information has the least value when financial markets are: Multiple Choice weak form efficient. semiweak form efficient. semistrong form efficient. strong form efficient. inefficient.

Answer 36

strong form efficient.

Question 37

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor often comments on the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient. weak semiweak semistrong strong perfect

Answer 37

semistrong

Question 38

You own a stock that had returns of 13.56 percent, −16.82 percent, 22.88 percent, and 21.02 percent over the past four years. What was the arithmetic average return for this stock? 10.16% 9.51% 10.57% 11.01% 8.87%

Answer 38

10.16% Explanation Arithmetic return = (.1356 − .1682 + .2288 + .2102)/4 Arithmetic return = .1016, or 10.16%

Question 39

You purchased a stock at a price of $49.47. The stock paid a dividend of $1.95 per share and the stock price at the end of the year is $55.57. What is the capital gains yield? 12.33% 3.94% 10.43% 16.27% 10.98%

Answer 39

12.33% Explanation Capital gains yield = ($55.57 − 49.47)/$49.47 Capital gains yield = .1233, or 12.33%

Question 40

You purchased a stock at a price of $53.12. The stock paid a dividend of $2.15 per share and the stock price at the end of the year is $59.47. What was the dividend yield? 11.95% 4.86% 16.00% 4.05% 4.45%

Answer 40

4.05% Explanation Dividend yield = $2.15/$53.12 Dividend yield = .0405, or 4.05%

Question 41

If the risk premium on the stock market was 6.51 percent and the risk-free rate was 2.45 percent, what was the stock market return? 4.06% 8.96% 6.51% 7.17% 9.77%

Answer 41

8.96% Explanation Market return = 6.51% + 2.45% Market return = 8.96%

Question 42

A stock had returns of 18.42 percent, 21.67 percent, −14.81 percent, 8.99 percent, and 28.06 percent for the past five years. What is the standard deviation of the returns? 13.38% 16.73% 27.98% 20.91% 2.80%

Answer 42

16.73% Explanation Average return = (.1842 + .2167 − .1481 + .0899 + .2806)/5 Average return = .1247, or 12.47% Variance = 1/4[(.1842 − .1247)2 + (.2167 − .1247)2 + (−.1481 − .1247)2 + (.0899 − .1247)2 + (.2806 − .1247)2] Variance = .02798 Standard deviation = .027981/2 Standard deviation = .1673, or 16.73%

Question 43

When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the: number of shares owned of each stock. market price per share of each stock. market value of the investment in each stock. original amount invested in each stock. cost per share of each stock held.

Answer 43

market value of the investment in each stock.

Question 44

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. portfolio nondiversifiable market unsystematic Correct expected

Answer 44

unsystematic

Question 45

Of the options listed below, which is the best measure of systematic risk? The weighted average standard deviation Beta The geometric average The standard deviation The arithmetic average

Answer 45

Beta

Question 46

The security market line intercepts the vertical axis at the: risk-free rate. market rate. return of zero. return of 1.0 percent. market risk premium.

Answer 46

risk-free rate.

Question 47

________ measures total risk, and ________ measures systematic risk. Beta; alpha Beta; standard deviation Alpha; beta Standard deviation; beta Standard deviation; variance

Answer 47

Standard deviation; beta

Question 48

The market risk premium equals the: risk-free rate of return plus the inflation rate. risk-free rate of return plus the market rate of return. inflation rate minus the risk-free rate of return. market rate of return minus the risk-free rate of return. risk-free rate of return multiplied by the market beta.

Answer 48

market rate of return minus the risk-free rate of return.

Question 49

A portfolio consists of 190 shares of Stock C that sells for $35 and 155 shares of Stock D that sells for $40. What is the portfolio weight of Stock C? .5606 .5175 .4136 .4825 .5822

Answer 49

.5175 Explanation Weight of C = 190($35)/[190($35) + 155($40)] Weight of C = .5175

Question 50

You have a portfolio that is 37 percent invested in Stock R, 19 percent invested in Stock S, with the remainder in Stock T. The expected return on these stocks is 8.8 percent, 10.2 percent, and 12.5 percent, respectively. What is the expected return on the portfolio? 10.60% 11.33% 9.63% 10.69% 10.50%

Answer 50

10.69% Explanation Portfolio expected return = .37(8.8%) + .19(10.2%) + (1 – .37 − .19)(12.5%) Portfolio expected return = 10.69%

Question 51

You have a portfolio that is invested 23 percent in Stock A, 40 percent in Stock B, and 37 percent in Stock C. The betas of the stocks are .72, 1.27, and 1.56, respectively. What is the beta of the portfolio? 1.25 1.22 1.18 1.05 1.41

Answer 51

1.25 Explanation βPortfolio = .23(.72) + .40(1.27) + .37(1.56) βPortfolio = 1.25

Question 52

The risk-free rate is 3.8 percent and the market expected return is 11.5 percent. What is the expected return of a stock that has a beta of 1.23? 15.61% 13.27% 17.95% 11.80% 19.44%

Answer 52

13.27% Explanation E(R) = .038 + 1.23(.115 − .038) E(R) = .1327, or 13.27% Make sure to multiply beta by the market risk premium (market expected return-risk free rate) before adding the risk free rate to it. really the formula should be 1.23(.115-.038) + .038

Question 53

Which of the following are examples of a portfolio? Investing $100,000 in a combination of U.S. and Asian stocks Holding $100,000 in cash to buy after five years 100 shares of the best performing stock on the NYSE Holding $100,000 investment in a combination of stocks and bonds Investing $100,000 in the stocks of 50 publicly traded corporations

Answer 53

Holding $100,000 investment in a combination of stocks and bonds Investing $100,000 in the stocks of 50 publicly traded corporations Investing $100,000 in a combination of U.S. and Asian stocks

Question 54

The portfolio weight is _____. always equal to 10 the percentage of the total value that is invested in an asset the amount of return versus the overall market the square root of the standard deviation

Answer 54

the percentage of the total value that is invested in an asset

Question 55

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

Answer 55

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

Question 56

The risk that affects a single asset or a small group of assets is ______ risk. systematic Treasury unsystematic inflation

Answer 56

unsystematic

Question 57

The principle of diversification tells us that spreading an investment across a number of assets will eliminate Blank______ of the risk. almost none some all an insignificant portion

Answer 57

some

Question 58

If you wish to create a portfolio of stocks, what is the required minimum number of stocks? You must invest in stocks of more than one corporation. You must invest in stocks of at least 10 corporations. You must invest in the stocks of at least 30 corporations. You must invest in at least 2 stocks of 1 corporation.

Answer 58

You must invest in stocks of more than one corporation.

Question 59

The percentage of a portfolio's total value that is invested in a particular asset is the portfolio _________________.

Answer 59

weights

Question 60

The _______________ coefficient is the amount of systematic risk present in a particular risky asset relative to that in an average asset.

Answer 60

beta

Question 61

Systematic risk will impact all securities in every portfolio equally. True False

Answer 61

False

Question 62

What is unsystematic risk? It is a risk that is always caused by external factors. It is a risk that affects all the assets in a diversified portfolio. It is a risk that affects a single asset or a small group of assets. It is a risk that is unavoidable.

Answer 62

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

Question 63

A well-diversified portfolio will eliminate all risks. True False

Answer 63

False

Question 64

By definition, what is the beta of the average asset equal to? Between 0 and 1 2 1 0

Answer 64

1

Question 65

The principle of diversification tells us that spreading an investment across a number of assets will eliminate Blank______ of the risk. almost none some an insignificant portion all