Chapters 12 & 13 Flashcards
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
on average, investors will earn a reward for bearing risk
the greater the potential reward is, the greater the risk
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
beginning stock price
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
initial stock price
The second lesson from capital market history is that there is a direct link between ____________ and reward.
risk
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
strong
Percentage returns are more convenient than dollar returns because they ____.
are more accurate than dollar returns
apply to any amount invested
apply to any amount invested
The _________________ (greater/lower) the risk, the greater the required return.
greater
The dividend ______________ is defined as the annual dividend amount divided by the beginning stock price.
yield
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.
capital
The second lesson from studying capital market history is that risk is _____.
handsomely rewarded
largely ignored
to be avoided altogether
always detrimental to returns
handsomely rewarded
__________________ returns tell how much was received for each dollar invested, so they can be applied to any initial investment amount.
Percentage
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. Next year’s annual dividend divided by today’s stock price
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.
C. smallest 20 percent of the companies listed on the NYSE.
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
B. Volatility
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. Weak
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
D. strong
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%
D. 9.68%
Arithmetic average return = add all returns together and divide by # of years
12.78 + (-16.46) + 22.04 + 20.36 / 4
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%
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
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%
C. 3.82%
Dividend yield = D (t+1)/P(t)
1.75/45.82
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%
D. 9.80%
Total return = risk premium + risk free rate
7.14 + 2.66 = 9.80%
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%
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
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
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.
B. portfolio weight.
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. .5652
C=21039=8190
D=17536=6300
8190+6300=14490
portfolio weight = 8190/14490 = .5652
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%
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%
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. It can be effectively eliminated by portfolio diversification.
Most financial securities have some level of ________ risk.
A. unsystematic
B. diversifiable
C. systematic
D. asset-specific
E. industry
C. systematic
- 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
B. unsystematic risk
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
D. 1.34
(.18.77) + (.421.32) + (40*1.61) =
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%
E. 13.52%
expected return = beta * ( market expected return (%) - risk free rate%) + risk free rate
.034 + (1.19(.119-.034))
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.
E. market risk premium.
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
B. risk-free rate
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
Small-company stocks
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
Treasury bills
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.
return on a risky security minus the risk-free rate.
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.
strong form efficient.
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
semistrong
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%
10.16%
Explanation
Arithmetic return = (.1356 − .1682 + .2288 + .2102)/4
Arithmetic return = .1016, or 10.16%
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%
12.33%
Explanation
Capital gains yield = ($55.57 − 49.47)/$49.47
Capital gains yield = .1233, or 12.33%
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%
4.05%
Explanation
Dividend yield = $2.15/$53.12
Dividend yield = .0405, or 4.05%
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%
8.96%
Explanation
Market return = 6.51% + 2.45%
Market return = 8.96%
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%
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%
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.
market value of the investment in each stock.
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
unsystematic
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
Beta
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.
risk-free rate.
________ measures total risk, and ________ measures systematic risk.
Beta; alpha
Beta; standard deviation
Alpha; beta
Standard deviation; beta
Standard deviation; variance
Standard deviation; beta
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.
market rate of return minus the risk-free rate of return.
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
.5175
Explanation
Weight of C = 190($35)/[190($35) + 155($40)]
Weight of C = .5175
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%
10.69%
Explanation
Portfolio expected return = .37(8.8%) + .19(10.2%) + (1 – .37 − .19)(12.5%)
Portfolio expected return = 10.69%
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
1.25
Explanation
βPortfolio = .23(.72) + .40(1.27) + .37(1.56)
βPortfolio = 1.25
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%
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
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
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
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
the percentage of the total value that is invested in an asset
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.
It is a risk that pertains to a large number of assets.
The risk that affects a single asset or a small group of assets is ______ risk.
systematic
Treasury
unsystematic
inflation
unsystematic
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
some
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.
You must invest in stocks of more than one corporation.
The percentage of a portfolio’s total value that is invested in a particular asset is the portfolio _________________.
weights
The _______________ coefficient is the amount of systematic risk present in a particular risky asset relative to that in an average asset.
beta
Systematic risk will impact all securities in every portfolio equally.
True
False
False
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.
It is a risk that affects a single asset or a small group of assets.
A well-diversified portfolio will eliminate all risks.
True
False
False
By definition, what is the beta of the average asset equal to?
Between 0 and 1
2
1
0
1
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
