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FIN 325 > Chapters 12 & 13 > Flashcards

Chapters 12 & 13 Flashcards

1
Q

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

A

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

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2
Q

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

A

beginning stock price

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3
Q

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

A

initial stock price

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4
Q

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

A

risk

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5
Q

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

A

strong

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6
Q

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

are more accurate than dollar returns

apply to any amount invested

A

apply to any amount invested

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7
Q

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

A

greater

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8
Q

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

A

yield

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9
Q

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.

A

capital

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10
Q

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

handsomely rewarded

largely ignored

to be avoided altogether

always detrimental to returns

A

handsomely rewarded

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11
Q

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

A

Percentage

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12
Q

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

A

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

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13
Q

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.

A

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

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14
Q

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

A

B. Volatility

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15
Q

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

A

A. Weak

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16
Q

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

A

D. strong

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17
Q

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%

A

D. 9.68%

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

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

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18
Q

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%

A

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

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19
Q

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%

A

C. 3.82%

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

1.75/45.82

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20
Q

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%

A

D. 9.80%

Total return = risk premium + risk free rate

7.14 + 2.66 = 9.80%

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21
Q

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%

A

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

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22
Q

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

A
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23
Q

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.

A

B. portfolio weight.

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24
Q

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

A

A. .5652

C=21039=8190
D=17536=6300

8190+6300=14490

portfolio weight = 8190/14490 = .5652

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25
Q

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%

A

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 +…..

(.267.7) + (.239.1) + (.51*11.4) = 9.91%

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26
Q

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.

A

A. It can be effectively eliminated by portfolio diversification.

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27
Q

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

A

C. systematic

28
Q
  1. 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
A

B. unsystematic risk

29
Q

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

A

D. 1.34

(.18.77) + (.421.32) + (40*1.61) =

30
Q

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%

A

E. 13.52%

expected return = beta * ( market expected return (%) - risk free rate%) + risk free rate

.034 + (1.19(.119-.034))

31
Q

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.

A

E. market risk premium.

32
Q

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

A

B. risk-free rate

33
Q

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

A

Small-company stocks

34
Q

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

A

Treasury bills

35
Q

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.

A

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

36
Q

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.

A

strong form efficient.

37
Q

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

A

semistrong

38
Q

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%

A

10.16%

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

39
Q

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%

A

12.33%

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

40
Q

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%

A

4.05%

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

41
Q

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%

A

8.96%

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

42
Q

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%

A

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%

43
Q

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.

A

market value of the investment in each stock.

44
Q

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

A

unsystematic

45
Q

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

A

Beta

46
Q

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.

A

risk-free rate.

47
Q

________ measures total risk, and ________ measures systematic risk.

Beta; alpha

Beta; standard deviation

Alpha; beta

Standard deviation; beta

Standard deviation; variance

A

Standard deviation; beta

48
Q

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.

A

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

49
Q

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

A

.5175

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

50
Q

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%

A

10.69%

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

51
Q

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

A

1.25

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

52
Q

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%

A

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

53
Q

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

A

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

54
Q

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

A

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

55
Q

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.

A

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

56
Q

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

systematic

Treasury

unsystematic

inflation

A

unsystematic

57
Q

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

A

some

58
Q

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.

A

You must invest in stocks of more than one corporation.

59
Q

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

A

weights

60
Q

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

A

beta

61
Q

Systematic risk will impact all securities in every portfolio equally.

True
False

A

False

62
Q

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.

A

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

63
Q

A well-diversified portfolio will eliminate all risks.

True
False

A

False

64
Q

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

Between 0 and 1

2

1

0

A

1

65
Q

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

A

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