Exam 11: Stock Valuation and Risk

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 $____.

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

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

Stocks that have relatively little trading are normally subject to less price volatility.

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

The ____ is often used to estimate the required rate of return for any firm with public traded stock.

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

While the previous year's earnings are often used as a base for forecasting future earnings, the recent year's earnings do not always provide an accurate forecast of the future.

The general mood of investors represents:

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

Investors can avoid unsystematic risk by:

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

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?

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

Divestitures are commonly viewed as a favorable signal about a firm if the divested assets are unrelated to the firm's core business.

According to the capital asset pricing model, the required return by investors on a security is

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.

____ are not a firm-specific factor that affect stock prices.

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

The demand by foreign investors for the stock of a U.S. firm sold on a U.S. exchange may be higher when the dollar is expected to ____, other things being equal. (Assume the firm's operationsareunaffected by the value of the dollar.)