Question 1

Which of the following is NOT  commonly used as an estimate of a stock's volatility?

Accepted Answer

A) an estimate of its standard deviation of returns over a recent period 
B) a time-series trend of historical standard deviations of returns over recent periods 
C) the implied volatility derived from the stock option pricing model 
D) an estimate of its option premium derived from the stock option pricing model 
A) an estimate of its standard deviation of returns over a recent period 
B) a time-series trend of historical standard deviations of returns over recent periods 
C) the implied volatility derived from the stock option pricing model 
D) an estimate of its option premium derived from the stock option pricing model

Question 2

The limitations of the dividend discount model are more pronounced when valuing stocks

Accepted Answer

A) that pay most of their earnings as dividends. 
B) that retain most of their earnings. 
C) that have a long history of dividends. 
D) that have constant earnings growth 
A) that pay most of their earnings as dividends. 
B) that retain most of their earnings. 
C) that have a long history of dividends. 
D) that have constant earnings growth

Question 3

Holding other factors constant, an increase in the capital gains tax rate will have

Accepted Answer

A) more effect on the valuation of dividend-paying stocks than on stocks with high growth prospects. 
B) less effect on the valuation of dividend-paying stocks than on stocks with high growth prospects. 
C) no effect on the valuations of stocks. 
D) the same effect on the valuation of dividend-paying stocks and stocks with high growth prospects. 
A) more effect on the valuation of dividend-paying stocks than on stocks with high growth prospects. 
B) less effect on the valuation of dividend-paying stocks than on stocks with high growth prospects. 
C) no effect on the valuations of stocks. 
D) the same effect on the valuation of dividend-paying stocks and stocks with high growth prospects.

Question 4

Zilo stock has an average return minus the average risk-free rate of 5 percent, a beta of 1, and a standard deviation of returns of 20 percent. The Sharpe index of Zilo stock is

Accepted Answer

A) 0.05. 
B) 0.35. 
C) 0.25. 
D) 0.45. 
E) None of these are correct. 
A) 0.05. 
B) 0.35. 
C) 0.25. 
D) 0.45. 
E) None of these are correct.

Question 5

The standard deviation of a stock's returns is used to measure the stock's

Accepted Answer

A) volatility. 
B) beta. 
C) Treynor index. 
D) risk-free rate. 
A) volatility. 
B) beta. 
C) Treynor index. 
D) risk-free rate.

Question 6

The beta of a stock portfolio is equal to a weighted average of the

Accepted Answer

A) betas of stocks in the portfolio. 
B) betas of stocks in the portfolio, plus their correlation coefficients. 
C) standard deviations of stocks in the portfolio. 
D) correlation coefficients between stocks in the portfolio. 
A) betas of stocks in the portfolio. 
B) betas of stocks in the portfolio, plus their correlation coefficients. 
C) standard deviations of stocks in the portfolio. 
D) correlation coefficients between stocks in the portfolio.

Question 7

If an investor has a $50,000 investment in a stock and has used beta to measure the maximum daily percentage loss as −5 percent, the maximum daily loss in dollars would be $10,000.

Accepted Answer

A) True 
 B)False

Question 8

Vansel Inc. retains most of its earnings. The company currently has earnings per share of $11. Vansel expects its earnings to grow at a constant rate of 2 percent per year. Furthermore, the average PE ratio of all other firms in Vansel's industry is 12. Vansel is expected to pay dividends per share of $3.50 during each of the next three years. If investors require a 10 percent rate of return on Vansel stock, a fair price for Vansel stock today is $____.

Accepted Answer

A) 113.95 
B) 111.32 
C) 105.25 
D) 130.72 
A) 113.95 
B) 111.32 
C) 105.25 
D) 130.72

Question 9

A stock with a beta of 2.3 means that for every 1 percent change in the market overall, the stock tends to change by 2.3 percent in the same direction.

Accepted Answer

A) True 
 B)False

Question 10

The dividend discount model states that the price of a stock should reflect the present value of the stock's future dividends.

Accepted Answer

A) True 
 B)False

Question 11

The ____ index uses the standard deviation of a stock's return to measure the stock's risk-adjusted performance.

Accepted Answer

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

Question 12

Portfolio managers who monitor systematic risk rather than total risk are more concerned about stock volatility than about beta.

Accepted Answer

A) True 
 B)False

Question 13

Technical analysis relies on the use of ____ to make investment decisions.

Accepted Answer

A) interest rates 
B) inflationary expectations 
C) industry conditions 
D) recent stock price trends 
A) interest rates 
B) inflationary expectations 
C) industry conditions 
D) recent stock price trends

Question 14

Which of the following is NOT correct regarding the capital asset pricing model (CAPM)?

Accepted Answer

A) It is sometimes used to estimate the required rate of return for any firm with publicly traded stock. 
B) It is based on the premise that the only important risk of a firm is systematic risk. 
C) It is concerned with unsystematic risk. 
D) All of these are correct. 
A) It is sometimes used to estimate the required rate of return for any firm with publicly traded stock. 
B) It is based on the premise that the only important risk of a firm is systematic risk. 
C) It is concerned with unsystematic risk. 
D) All of these are correct.

Question 15

Regarding the implied standard deviation, by plugging in the actual option premium paid by investors for a specific stock in the option pricing model, it is possible to derive the anticipated volatility level.

Accepted Answer

A) True 
 B)False

Question 16

The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm's future earnings or in choosing the industry composite used to derive the PE ratio.

Accepted Answer

A) True 
 B)False

Question 17

When there is a sharp decline in the CBOE Volatility Index (VIX), stock prices also tend to decline.

Accepted Answer

A) True 
 B)False

Question 18

Regarding the value-at-risk method, the same methods used to derive the maximum expected loss of one stock can be applied to derive the maximum expected loss of a stock portfolio for a given confidence level.

Accepted Answer

A) True 
 B)False

Question 19

The capital asset pricing model (CAPM)suggests that the required rate of return on a stock is directly influenced by the stock's

Accepted Answer

A) prevailing level of industry competition. 
B) beta. 
C) liquidity. 
D) size (market capitalization). 
A) prevailing level of industry competition. 
B) beta. 
C) liquidity. 
D) size (market capitalization).

Question 20

The value-at-risk method is intended to warn investors about the potential maximum loss that could occur.

Accepted Answer

A) True 
 B)False

Exam 11: Stock Valuation and Risk

Which of the following is NOT commonly used as an estimate of a stock's volatility?

The limitations of the dividend discount model are more pronounced when valuing stocks

Holding other factors constant, an increase in the capital gains tax rate will have

Zilo stock has an average return minus the average risk-free rate of 5 percent, a beta of 1, and a standard deviation of returns of 20 percent. The Sharpe index of Zilo stock is

The standard deviation of a stock's returns is used to measure the stock's

The beta of a stock portfolio is equal to a weighted average of the

If an investor has a $50,000 investment in a stock and has used beta to measure the maximum daily percentage loss as −5 percent, the maximum daily loss in dollars would be $10,000.

A stock with a beta of 2.3 means that for every 1 percent change in the market overall, the stock tends to change by 2.3 percent in the same direction.

The dividend discount model states that the price of a stock should reflect the present value of the stock's future dividends.

The ____ index uses the standard deviation of a stock's return to measure the stock's risk-adjusted performance.

Portfolio managers who monitor systematic risk rather than total risk are more concerned about stock volatility than about beta.

Technical analysis relies on the use of ____ to make investment decisions.

Which of the following is NOT correct regarding the capital asset pricing model (CAPM)?

Regarding the implied standard deviation, by plugging in the actual option premium paid by investors for a specific stock in the option pricing model, it is possible to derive the anticipated volatility level.

The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firm's future earnings or in choosing the industry composite used to derive the PE ratio.

When there is a sharp decline in the CBOE Volatility Index (VIX), stock prices also tend to decline.

Regarding the value-at-risk method, the same methods used to derive the maximum expected loss of one stock can be applied to derive the maximum expected loss of a stock portfolio for a given confidence level.

The capital asset pricing model (CAPM)suggests that the required rate of return on a stock is directly influenced by the stock's

The value-at-risk method is intended to warn investors about the potential maximum loss that could occur.

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