Question 1

The ____ is commonly used as a proxy for the risk-free rate in the capital asset pricing model.

Accepted Answer

A) Treasury bond rate 
B) prime rate 
C) discount rate 
D) federal funds rate 
A) Treasury bond rate 
B) prime rate 
C) discount rate 
D) federal funds rate A

Question 2

A stock's beta can be measured from the estimate of the ________ using regression analysis.

Accepted Answer

A) intercept 
B) market return 
C) risk-free rate 
D) slope coefficient 
A) intercept 
B) market return 
C) risk-free rate 
D) slope coefficient D

Question 3

Holding other factors constant, a stock portfolio has more volatility when its individual stock volatilities are ________ and its individual stock returns have _______ correlations.

Accepted Answer

A) high; low 
B) low; high 
C) low; low 
D) high; high 
A) high; low 
B) low; high 
C) low; low 
D) high; high D

Question 4

A weak dollar may enhance the value of a U.S. firm whose sales are dependent on the U.S. economy.

Accepted Answer

A) True 
 B)False

Question 5

The main source of uncertainty in computing the return of a stock is the dividend to be received next year.

Accepted Answer

A) True 
 B)False

Question 6

The general mood of investors represents

Accepted Answer

A) investor sentiment. 
B) beta. 
C) systematic risk. 
D) unsystematic risk. 
A) investor sentiment. 
B) beta. 
C) systematic risk. 
D) unsystematic risk.

Question 7

A stock's average return is 11 percent. The average risk-free rate is 9 percent. The stock's beta is 1, and the standard deviation of its returns is 10 percent. What is the Sharpe index?

Accepted Answer

A) .05 
B) .5 
C) .1 
D) .02 
E) .2 
A) .05 
B) .5 
C) .1 
D) .02 
E) .2

Question 8

When a firm's announced earnings are lower than expected, investors will increase their valuation of the firm's future cash flows and its stock.

Accepted Answer

A) True 
 B)False

Question 9

The market risk premium is stable over time and is not affected by stock market conditions.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is NOT a limitation of the PE method of valuing stocks?

Accepted Answer

A) Stock buybacks can distort a firm's earnings. 
B) Using previous earnings may not be useful for a firm that is restructuring. 
C) The earnings of firms in a cyclical industry may vary dramatically depending on whether the economy is strong or weak. 
D) Creative accounting may distort a firm's reported earnings. 
E) All of the above are limitations of the PE method. 
A) Stock buybacks can distort a firm's earnings. 
B) Using previous earnings may not be useful for a firm that is restructuring. 
C) The earnings of firms in a cyclical industry may vary dramatically depending on whether the economy is strong or weak. 
D) Creative accounting may distort a firm's reported earnings. 
E) All of the above are limitations of the PE method.

Question 11

The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta.

Accepted Answer

A) Sharpe 
B) Treynor 
C) arbitrage 
D) margin 
A) Sharpe 
B) Treynor 
C) arbitrage 
D) margin

Question 12

Even though a foreign stock appears to be undervalued in its own country, the stock may not generate a reasonable return for a U.S. investor if the currency of that country depreciates against the U.S. dollar.

Accepted Answer

A) True 
 B)False

Question 13

The price-earnings valuation method applies the ____ price-earnings ratio to the ____ earnings per share in order to value the firm's stock.

Accepted Answer

A) firm's; industry 
B) firm's; firm's 
C) average industry; industry 
D) average industry; firm's 
A) firm's; industry 
B) firm's; firm's 
C) average industry; industry 
D) average industry; firm's

Question 14

Value at risk estimates the ____ a particular investment for a specified confidence level.

Accepted Answer

A) beta of 
B) risk-free rate of 
C) largest expected loss to 
D) standard deviation of 
A) beta of 
B) risk-free rate of 
C) largest expected loss to 
D) standard deviation of

Question 15

The Treynor index is similar to the Sharpe index, except that is uses beta rather than standard deviation to measure the stock's risk.

Accepted Answer

A) True 
 B)False

Question 16

When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock's returns.

Accepted Answer

A) beta; standard deviation 
B) standard deviation; beta 
C) intercept; beta 
D) beta; error term 
A) beta; standard deviation 
B) standard deviation; beta 
C) intercept; beta 
D) beta; error term

Question 17

Kandle Company paid a dividend of $4.76 per share this year and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kandle stock, according to the dividend discount model, is $____.

Accepted Answer

A) 39.67 
B) 41.67 
C) 33.33 
D) 31.73 
E) None of these are correct. 
A) 39.67 
B) 41.67 
C) 33.33 
D) 31.73 
E) None of these are correct.

Question 18

The dividend discount model can be adapted to assess the value of any firm, even those that retain most or all of their earnings.

Accepted Answer

A) True 
 B)False

Question 19

Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is

Accepted Answer

A) 0.35. 
B) 0.36. 
C) 0.45. 
D) 0.28. 
E) None of these are correct. 
A) 0.35. 
B) 0.36. 
C) 0.45. 
D) 0.28. 
E) None of these are correct.

Question 20

The U.S. government's budget deficit has a significant impact on the bond market but does not affect the stock market.

Accepted Answer

A) True 
 B)False

Exam 11: Stock Valuation and Risk

The ____ is commonly used as a proxy for the risk-free rate in the capital asset pricing model.

A stock's beta can be measured from the estimate of the ________ using regression analysis.

Holding other factors constant, a stock portfolio has more volatility when its individual stock volatilities are ________ and its individual stock returns have _______ correlations.

A weak dollar may enhance the value of a U.S. firm whose sales are dependent on the U.S. economy.

The main source of uncertainty in computing the return of a stock is the dividend to be received next year.

The general mood of investors represents

A stock's average return is 11 percent. The average risk-free rate is 9 percent. The stock's beta is 1, and the standard deviation of its returns is 10 percent. What is the Sharpe index?

When a firm's announced earnings are lower than expected, investors will increase their valuation of the firm's future cash flows and its stock.

The market risk premium is stable over time and is not affected by stock market conditions.

Which of the following is NOT a limitation of the PE method of valuing stocks?

The ____ index can be used to measure risk-adjusted performance of a stock while controlling for the stock's beta.

Even though a foreign stock appears to be undervalued in its own country, the stock may not generate a reasonable return for a U.S. investor if the currency of that country depreciates against the U.S. dollar.

The price-earnings valuation method applies the ____ price-earnings ratio to the ____ earnings per share in order to value the firm's stock.

Value at risk estimates the ____ a particular investment for a specified confidence level.

The Treynor index is similar to the Sharpe index, except that is uses beta rather than standard deviation to measure the stock's risk.

When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock's returns.

The dividend discount model can be adapted to assess the value of any firm, even those that retain most or all of their earnings.

Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is

The U.S. government's budget deficit has a significant impact on the bond market but does not affect the stock market.

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Bond Valuation and Risk

Mortgage Markets

Stock Offerings and Investor Monitoring

Market Microstructure and Strategies

Financial Futures Markets

Options Markets

Swap Markets

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance and Pension Fund Operations

Pension Fund Operations

Filters

Holding other factors constant, a stock portfolio has more volatility when its individual stock volatilities are __ and its individual stock returns have _ correlations.

The price-earnings valuation method applies the price-earnings ratio to the earnings per share in order to value the firm's stock.

When evaluating stock performance, measures variability that is systematically related to market returns; measures total variability of a stock's returns.