Question 1

Which of the following is NOT a necessary condition for an efficient market?

Accepted Answer

A) Many buyers and sellers 
B) No prohibitively high barriers to entry 
C) Free and readily available information available to all participants 
D) No trading or transaction costs 
A) Many buyers and sellers 
B) No prohibitively high barriers to entry 
C) Free and readily available information available to all participants 
D) No trading or transaction costs

Question 2

A company's current stock price is $22.00 and its most recent dividend was $0.75 per share. Since analysts estimate the company will have a 12 percent growth rate, what is its expected return?

Accepted Answer

A) 3.00 percent 
B) 3.48 percent 
C) 12.00 percent 
D) 15.82 percent 
A) 3.00 percent 
B) 3.48 percent 
C) 12.00 percent 
D) 15.82 percent

Question 3

Shares of stock issued to employees that have limitations on when they can be sold are known as:

Accepted Answer

A) executive stock options. 
B) privately held information. 
C) restricted stock. 
D) stock market bubble. 
A) executive stock options. 
B) privately held information. 
C) restricted stock. 
D) stock market bubble.

Question 4

Which of these is a theory that describes the types of information that are reflected in current stock prices?

Accepted Answer

A) Asset pricing 
B) Behavioral finance 
C) Efficient market hypothesis 
D) Public information 
A) Asset pricing 
B) Behavioral finance 
C) Efficient market hypothesis 
D) Public information

Question 5

The study of the cognitive processes and biases associated with making financial and economic decisions is known as:

Accepted Answer

A) efficient thinking hypothesis. 
B) financial cognition. 
C) financial leverage. 
D) behavioral finance. 
A) efficient thinking hypothesis. 
B) financial cognition. 
C) financial leverage. 
D) behavioral finance.

Question 6

Which of the following is most correct?

Accepted Answer

A) In an efficient market, investors will buy overvalued stock which will drive its price down. 
B) In an efficient market, investors will sell undervalued stock which will drive its price down. 
C) In an efficient market, investors will sell overvalued stock which will drive its price down. 
D) None of these statements are correct. 
A) In an efficient market, investors will buy overvalued stock which will drive its price down. 
B) In an efficient market, investors will sell undervalued stock which will drive its price down. 
C) In an efficient market, investors will sell overvalued stock which will drive its price down. 
D) None of these statements are correct.

Question 7

A company's current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10 percent growth rate, what is its expected return?

Accepted Answer

A) 4.14 percent 
B) 4.26 percent 
C) 10.00 percent 
D) 14.14 percent 
A) 4.14 percent 
B) 4.26 percent 
C) 10.00 percent 
D) 14.14 percent

Question 8

ABC Inc. has a dividend yield equal to 3 percent and is expected to grow at a 7 percent rate for the next seven years. What is ABC's required return?

Accepted Answer

A) 10 percent 
B) 11 percent 
C) 4 percent 
D) 5 percent 
A) 10 percent 
B) 11 percent 
C) 4 percent 
D) 5 percent

Question 9

Compute the expected return given these three economic states, their likelihoods, and the potential returns: $$\begin{array} { | l | c | r | } 
\hline \begin{array} { l } 
\text { Economic } \
\text { State }
\end{array} & \text { Probability } & \text { Return } \
\hline \text { Fast Growth } & 0.3 & 40 \% \
\hline \text { Slow Growth } & 0.4 & 15 \% \
\hline \text { Recession } & 0.3 & - 15 \% \
\hline
\end{array}$$

Accepted Answer

A) 13.5 percent 
B) 22.5 percent 
C) 18.3 percent 
D) 40.0 percent 
A) 13.5 percent 
B) 22.5 percent 
C) 18.3 percent 
D) 40.0 percent

Question 10

Which of the following is a model that includes an equation that relates a stock's required return to an appropriate risk premium?

Accepted Answer

A) Asset pricing 
B) Behavioral finance 
C) Beta 
D) Efficient markets 
A) Asset pricing 
B) Behavioral finance 
C) Beta 
D) Efficient markets

Question 11

Which of these is the measurement of risk for a collection of stocks for an investor?

Accepted Answer

A) Beta 
B) Efficient market 
C) Expected return 
D) Portfolio beta 
A) Beta 
B) Efficient market 
C) Expected return 
D) Portfolio beta

Question 12

Which of the following statements is correct?

Accepted Answer

A) Penny stocks are the stocks of small companies that are priced below $1 per share. 
B) Restricted stocks are shares of stock issued to executives that have limitations on voting rights. 
C) The Capital Market Line graphs the relationship between return and risk (beta). 
D) All of these statements are correct. 
A) Penny stocks are the stocks of small companies that are priced below $1 per share. 
B) Restricted stocks are shares of stock issued to executives that have limitations on voting rights. 
C) The Capital Market Line graphs the relationship between return and risk (beta). 
D) All of these statements are correct.

Question 13

Compute the standard deviation given these four economic states, their likelihoods, and the potential returns: $$\begin{array} { | l | c | r | } 
\hline \begin{array} { l } 
\text { Economic } \
\text { State }
\end{array} & \text { Probability } & \text { Return } \
\hline \text { Fast Growth } & 0.20 & 100 \% \
\hline \text { Slow Growth } & 0.50 & 10 \% \
\hline \text { Recession } & 0.20 & - 1 \% \
\hline \text { Depression } & 0.10 & - 10 \% \
\hline
\end{array}$$

Accepted Answer

A) 12.19 percent 
B) 23.8 percent 
C) 38.65 percent 
D) 88.06 percent 
A) 12.19 percent 
B) 23.8 percent 
C) 38.65 percent 
D) 88.06 percent

Question 14

Which of the following is the average of the possible returns weighted by the likelihood of those returns occurring?

Accepted Answer

A) Efficient return 
B) Expected return 
C) Market return 
D) Required return 
A) Efficient return 
B) Expected return 
C) Market return 
D) Required return

Question 15

Which of the following is the reward investors require for taking risk?

Accepted Answer

A) Required return 
B) Risk-free rate 
C) Risk premium 
D) Market risk premium 
A) Required return 
B) Risk-free rate 
C) Risk premium 
D) Market risk premium

Question 16

A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company's required return?

Accepted Answer

A) 6.0 percent 
B) 8.5 percent 
C) 11.0 percent 
D) 13.5 percent 
A) 6.0 percent 
B) 8.5 percent 
C) 11.0 percent 
D) 13.5 percent

Question 17

You hold the positions in the following table. What is the beta of your portfolio? If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent, what is the required return of the portfolio? $$\begin{array} { | l | l | l | l | } 
\hline & \text { Price } & \text { Shares } & \text { Beta } \
\hline \text { Amazon.com } & \$ 40 & 100 & 3.8 \
\hline \text { Family Dollar Stores } & \$ 30 & 100 & 1.2 \
\hline \text { McKesson Corp } & \$ 50 & 100 & 0.4 \
\hline \text { Schering-Plough Corp } & \$ 20 & 100 & 0.5 \
\hline
\end{array}$$

Accepted Answer

A) 14.21 percent 
B) 16.76 percent 
C) 13.97 percent 
D) 15.38 percent 
A) 14.21 percent 
B) 16.76 percent 
C) 13.97 percent 
D) 15.38 percent

Question 18

Which of these is the reward for taking systematic stock market risk?

Accepted Answer

A) Required return 
B) Risk-free rate 
C) Risk premium 
D) Market risk premium 
A) Required return 
B) Risk-free rate 
C) Risk premium 
D) Market risk premium

Question 19

A manager believes his firm will earn a 16 percent return next year. His firm has a beta of 1.5, the expected return on the market is 14 percent, and the risk-free rate is 4 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.

Accepted Answer

A) 19 percent, undervalued 
B) 19 percent, overvalued 
C) 22 percent, undervalued 
D) 22 percent, overvalued 
A) 19 percent, undervalued 
B) 19 percent, overvalued 
C) 22 percent, undervalued 
D) 22 percent, overvalued

Question 20

Compute the standard deviation of the expected return given these three economic states, their likelihoods, and the potential returns: $$\begin{array} { | l | c | r | } 
\hline \begin{array} { l } 
\text { Economic } \
\text { State }
\end{array} & \text { Probability } & \text { Return } \
\hline \text { Fast Growth } & 0.2 & 30 \% \
\hline \text { Slow Growth } & 0.5 & 6 \% \
\hline \text { Recession } & 0.3 & - 2 \% \
\hline
\end{array}$$

Accepted Answer

A) 8.4 percent 
B) 10.87 percent 
C) 11.34 percent 
D) 24.09 percent 
A) 8.4 percent 
B) 10.87 percent 
C) 11.34 percent 
D) 24.09 percent

Which of the following is NOT a necessary condition for an efficient market?

A company's current stock price is $22.00 and its most recent dividend was $0.75 per share. Since analysts estimate the company will have a 12 percent growth rate, what is its expected return?

Shares of stock issued to employees that have limitations on when they can be sold are known as:

Which of these is a theory that describes the types of information that are reflected in current stock prices?

The study of the cognitive processes and biases associated with making financial and economic decisions is known as:

Which of the following is most correct?

A company's current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10 percent growth rate, what is its expected return?

ABC Inc. has a dividend yield equal to 3 percent and is expected to grow at a 7 percent rate for the next seven years. What is ABC's required return?

Compute the expected return given these three economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.3 40\% Slow Growth 0.4 15\% Recession 0.3 -15\%

Which of the following is a model that includes an equation that relates a stock's required return to an appropriate risk premium?

Which of these is the measurement of risk for a collection of stocks for an investor?

Which of the following statements is correct?

Compute the standard deviation given these four economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.20 100\% Slow Growth 0.50 10\% Recession 0.20 -1\% Depression 0.10 -10\%

Which of the following is the average of the possible returns weighted by the likelihood of those returns occurring?

Which of the following is the reward investors require for taking risk?

A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company's required return?

Which of these is the reward for taking systematic stock market risk?

Compute the standard deviation of the expected return given these three economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.2 30\% Slow Growth 0.5 6\% Recession 0.3 -2\%

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Filters

Exam 10: Estimating Risk and Return

Which of the following is NOT a necessary condition for an efficient market?

A company's current stock price is $22.00 and its most recent dividend was $0.75 per share. Since analysts estimate the company will have a 12 percent growth rate, what is its expected return?

Shares of stock issued to employees that have limitations on when they can be sold are known as:

Which of these is a theory that describes the types of information that are reflected in current stock prices?

The study of the cognitive processes and biases associated with making financial and economic decisions is known as:

Which of the following is most correct?

A company's current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10 percent growth rate, what is its expected return?

ABC Inc. has a dividend yield equal to 3 percent and is expected to grow at a 7 percent rate for the next seven years. What is ABC's required return?

Compute the expected return given these three economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.3 40\% Slow Growth 0.4 15\% Recession 0.3 -15\%

Which of the following is a model that includes an equation that relates a stock's required return to an appropriate risk premium?

Which of these is the measurement of risk for a collection of stocks for an investor?

Which of the following statements is correct?

Compute the standard deviation given these four economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.20 100\% Slow Growth 0.50 10\% Recession 0.20 -1\% Depression 0.10 -10\%

Which of the following is the average of the possible returns weighted by the likelihood of those returns occurring?

Which of the following is the reward investors require for taking risk?

A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company's required return?

Which of these is the reward for taking systematic stock market risk?

Compute the standard deviation of the expected return given these three economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.2 30\% Slow Growth 0.5 6\% Recession 0.3 -2\%

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Filters