Question 1

The expected acquisition of a firm typically results in ____ in the target's stock price.

Accepted Answer

A)  an increase 
B)  a decrease 
C)  no change 
D)  none of the above 
A)  an increase 
B)  a decrease 
C)  no change 
D)  none of the above

Question 2

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 the above 
A)  0.05. 
B)  0.35. 
C)  0.25. 
D)  0.45. 
E)  none of the above

Question 3

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 4

If the standard deviation of a stock's returns over the last 12 quarters is 4 percent, and if there is no perceived change in volatility, there is a ____ percent probability that the stock'sreturns will be within ____ percentage points of the expected outcome.

Accepted Answer

A)  68; 4 
B)  68; 8 
C)  95; 8 
D)  95; 6 
E)  none of the above 
A)  68; 4 
B)  68; 8 
C)  95; 8 
D)  95; 6 
E)  none of the above

Question 5

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 6

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 anticipatedvolatility level.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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 9

If the returns of two stocks are perfectly correlated, then

Accepted Answer

A)  their betas should each equal 1.0. 
B)  the sum of their betas should equal 1.0. 
C)  their correlation coefficient should equal 1.0. 
D)  their portfolio standard deviation should equal 1.0. 
A)  their betas should each equal 1.0. 
B)  the sum of their betas should equal 1.0. 
C)  their correlation coefficient should equal 1.0. 
D)  their portfolio standard deviation should equal 1.0.

Question 10

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

Accepted Answer

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

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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 theexpected 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 13

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 14

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

Question 15

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 givenconfidence level.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

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

Question 17

A higher beta for an asset reflects

Accepted Answer

A)  lower risk. 
B)  lower covariance between the asset's returns and market returns. 
C)  higher covariance between the asset's returns and the market returns. 
D)  none of the above 
A)  lower risk. 
B)  lower covariance between the asset's returns and market returns. 
C)  higher covariance between the asset's returns and the market returns. 
D)  none of the above

Question 18

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 19

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

Question 20

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

Exam 11: Stock Valuation and Risk

The expected acquisition of a firm typically results in ____ in the target's stock price.

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

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.

If the standard deviation of a stock's returns over the last 12 quarters is 4 percent, and if there is no perceived change in volatility, there is a ____ percent probability that the stock'sreturns will be within ____ percentage points of the expected outcome.

The Sharpe index measures the

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 anticipatedvolatility level.

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

The "January effect" refers to a large

If the returns of two stocks are perfectly correlated, then

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

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

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 theexpected outcome. The stock's expected daily return is .2 percent. The lower boundary is

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

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

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 givenconfidence level.

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

A higher beta for an asset reflects

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

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

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.

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 Operations

Pension Fund Operations

Filters

If the standard deviation of a stock's returns over the last 12 quarters is 4 percent, and if there is no perceived change in volatility, there is a percent probability that the stock'sreturns will be within percentage points of the expected outcome.

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

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.