Question 1

A portfolio's beta is the sum of the individual forecasted betas, weighted by the market value of each stock.

Accepted Answer

A) True 
 B)False

Question 2

Morgan stock has an average return minus the average risk-free rate of 12.5 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Treynor index of Morgan stock is

Accepted Answer

A) 0.0625. 
B) 0.05. 
C) 0.35. 
D) 0.03. 
E) None of these are correct. 
A) 0.0625. 
B) 0.05. 
C) 0.35. 
D) 0.03. 
E) None of these are correct.

Question 3

The ____ is not a factor used in the capital asset pricing model (CAPM)to derive the return of an asset.

Accepted Answer

A) prevailing risk-free rate 
B) dividend growth rate 
C) market return 
D) covariance between the asset's return and the market return 
E) All of these are factors used in the CAPM. 
A) prevailing risk-free rate 
B) dividend growth rate 
C) market return 
D) covariance between the asset's return and the market return 
E) All of these are factors used in the CAPM.

Question 4

Sorvino Company is expected to offer a dividend of $3.20 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $____.

Accepted Answer

A) 4.06 
B) 4.16 
C) 40.63 
D) 24.62 
E) None of these are correct. 
A) 4.06 
B) 4.16 
C) 40.63 
D) 24.62 
E) None of these are correct.

Question 5

Which of the following is not a type of factor that drives stock prices, according to your text?

Accepted Answer

A) economic factors 
B) market-related factors 
C) firm-specific factors 
D) All of the above are factors that affect stock prices. 
A) economic factors 
B) market-related factors 
C) firm-specific factors 
D) All of the above are factors that affect stock prices.

Question 6

As a result of market integration, stock markets in emerging markets are likely to be as efficient as U.S. stock markets.

Accepted Answer

A) True 
 B)False

Question 7

The market risk premium is

Accepted Answer

A) the yield on newly issued Treasury bonds. 
B) the return of the market in excess of the risk-free rate. 
C) the covariance between the risk-free rate and the return of the market. 
D) the return of the market in excess of expected cash flows. 
A) the yield on newly issued Treasury bonds. 
B) the return of the market in excess of the risk-free rate. 
C) the covariance between the risk-free rate and the return of the market. 
D) the return of the market in excess of expected cash flows.

Question 8

Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.

Accepted Answer

A) 33.33 
B) 166.67 
C) 41.67 
D) 60.00 
A) 33.33 
B) 166.67 
C) 41.67 
D) 60.00

Question 9

The CBOE Volatility Index (VIX)indicates the volatility of the bond market in general.

Accepted Answer

A) True 
 B)False

Question 10

A stock has a standard deviation of daily returns of 1 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .2 percent. The lower boundary is

Accepted Answer

A) - 1.45 percent. 
B) - 1.85 percent 
C) 0 percent. 
D) - 1.65 percent. 
A) - 1.45 percent. 
B) - 1.85 percent 
C) 0 percent. 
D) - 1.65 percent.

Question 11

A stock has a standard deviation of daily returns of 3 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .1 percent. The lower boundary is

Accepted Answer

A) - 1.65 percent. 
B) - 3.00 percent 
C) - 4.85 percent. 
D) - 5.05 percent. 
A) - 1.65 percent. 
B) - 3.00 percent 
C) - 4.85 percent. 
D) - 5.05 percent.

Question 12

The January effect refers to the ____ pressure on ____ stocks in January of every year.

Accepted Answer

A) downward; large 
B) upward; large 
C) downward; small 
D) upward; small 
A) downward; large 
B) upward; large 
C) downward; small 
D) upward; small

Question 13

Stock prices of U.S. firms primarily involved in exporting are likely to be ____ affected by a weak dollar and ____ affected by a strong dollar.

Accepted Answer

A) favorably; adversely 
B) adversely; adversely 
C) favorably; favorably 
D) adversely; favorably 
A) favorably; adversely 
B) adversely; adversely 
C) favorably; favorably 
D) adversely; favorably

Question 14

If security markets are semistrong-form efficient, investors cannot solely use ____ to earn excess returns.

Accepted Answer

A) previous price movements 
B) insider information 
C) publicly available information 
D) previous price movements AND publicly available information 
A) previous price movements 
B) insider information 
C) publicly available information 
D) previous price movements AND publicly available information

Question 15

A beta of 1.1 means that for a given 1 percent change in the value of the market, the _______ is expected to change by 1.1 percent in the same direction.

Accepted Answer

A) risk-free rate 
B) stock's value 
C) stock's standard deviation 
D) correlation coefficient 
A) risk-free rate 
B) stock's value 
C) stock's standard deviation 
D) correlation coefficient

Question 16

The Sharpe index measures the

Accepted Answer

A) average return on a stock. 
B) variability of stock returns per unit of return. 
C) stock's beta adjusted for risk. 
D) excess return above the risk-free rate per unit of risk. 
A) average return on a stock. 
B) variability of stock returns per unit of return. 
C) stock's beta adjusted for risk. 
D) excess return above the risk-free rate per unit of risk.

Question 17

Beta serves as a measure of risk because it can be used to derive a probability distribution of returns based on a set of market returns.

Accepted Answer

A) True 
 B)False

Question 18

The "January effect" refers to a large

Accepted Answer

A) rise in the price of small stocks in January. 
B) decline in the price of small stocks in January. 
C) decline in the price of large stocks in January. 
D) rise in the price of large stocks in January. 
A) rise in the price of small stocks in January. 
B) decline in the price of small stocks in January. 
C) decline in the price of large stocks in January. 
D) rise in the price of large stocks in January.

Question 19

If security prices fully reflect all market-related information (such as historical price patterns)but do not fully reflect all other public information, security markets are

Accepted Answer

A) weak-form efficient. 
B) semistrong-form efficient. 
C) strong-form efficient. 
D) semistrong-form efficient AND strong-form efficient. 
E) None of these are correct. 
A) weak-form efficient. 
B) semistrong-form efficient. 
C) strong-form efficient. 
D) semistrong-form efficient AND strong-form efficient. 
E) None of these are correct.

Question 20

Steam Corp. has a beta of 1.5. The prevailing risk-free rate is 5 percent, and the annual market return in recent years has been 11 percent. Based on this information, the required rate of return on Steam Corp. stock is ____ percent.

Accepted Answer

A) 21.5 
B) 6.5 
C) 16.5 
D) 14.0 
E) None of these are correct. 
A) 21.5 
B) 6.5 
C) 16.5 
D) 14.0 
E) None of these are correct.

Exam 11: Stock Valuation and Risk

A portfolio's beta is the sum of the individual forecasted betas, weighted by the market value of each stock.

Morgan stock has an average return minus the average risk-free rate of 12.5 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Treynor index of Morgan stock is

The ____ is not a factor used in the capital asset pricing model (CAPM)to derive the return of an asset.

Sorvino Company is expected to offer a dividend of $3.20 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $____.

Which of the following is not a type of factor that drives stock prices, according to your text?

As a result of market integration, stock markets in emerging markets are likely to be as efficient as U.S. stock markets.

The market risk premium is

Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.

The CBOE Volatility Index (VIX)indicates the volatility of the bond market in general.

A stock has a standard deviation of daily returns of 1 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .2 percent. The lower boundary is

A stock has a standard deviation of daily returns of 3 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .1 percent. The lower boundary is

The January effect refers to the ____ pressure on ____ stocks in January of every year.

Stock prices of U.S. firms primarily involved in exporting are likely to be ____ affected by a weak dollar and ____ affected by a strong dollar.

If security markets are semistrong-form efficient, investors cannot solely use ____ to earn excess returns.

A beta of 1.1 means that for a given 1 percent change in the value of the market, the _______ is expected to change by 1.1 percent in the same direction.

The Sharpe index measures the

Beta serves as a measure of risk because it can be used to derive a probability distribution of returns based on a set of market returns.

The "January effect" refers to a large

If security prices fully reflect all market-related information (such as historical price patterns)but do not fully reflect all other public information, security markets are

Steam Corp. has a beta of 1.5. The prevailing risk-free rate is 5 percent, and the annual market return in recent years has been 11 percent. Based on this information, the required rate of return on Steam Corp. stock is ____ percent.

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

The January effect refers to the pressure on stocks in January of every year.

Stock prices of U.S. firms primarily involved in exporting are likely to be affected by a weak dollar and affected by a strong dollar.