Question 1

Compute the standard deviation of the expected return given these three economic states,their likelihoods,and the potential returns:

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

Question 2

Which of the following is a concern regarding beta?

Accepted Answer

A)  Using different market proxies will result in different estimates of beta. 
B)  A company can alter its risk level which may make the beta estimate obsolete. 
C)  Research indicates that a company's beta does not appear to predict its future return very well. 
D)  All of these choices are correct. 
A)  Using different market proxies will result in different estimates of beta. 
B)  A company can alter its risk level which may make the beta estimate obsolete. 
C)  Research indicates that a company's beta does not appear to predict its future return very well. 
D)  All of these choices are correct.

Question 3

You own $14,000 of Diner's Corp.stock that has a beta of 2.1.You also own $14,000 of Comm Corp.(beta = 1.3)and $12,000 of Airlines Corp.(beta = 0.6).Assume that the market return will be 15 percent and the risk-free rate is 6.5 percent.What is the total risk premium of the portfolio?

Accepted Answer

A)  11.645 percent 
B)  20.55 percent 
C)  23.905 percent 
D)  38.00 percent 
A)  11.645 percent 
B)  20.55 percent 
C)  23.905 percent 
D)  38.00 percent

Question 4

Which of the following is data that includes past stock prices and volume,financial statements,corporate news,analyst opinions,etc.?

Accepted Answer

A)  audited financial statements 
B)  generally accepted accounting principles 
C)  privately held information 
D)  public information 
A)  audited financial statements 
B)  generally accepted accounting principles 
C)  privately held information 
D)  public information

Question 5

All of the following are necessary conditions for an efficient market EXCEPT

Accepted Answer

A)  low trading or transaction costs. 
B)  many buyers and sellers. 
C)  free and readily available information to market participants. 
D)  low stock prices. 
A)  low trading or transaction costs. 
B)  many buyers and sellers. 
C)  free and readily available information to market participants. 
D)  low stock prices.

Question 6

Which of the following is correct?

Accepted Answer

A)  Hedge funds often sell stock they don't even own. 
B)  Hedge funds maintain secrecy about their holdings, trading, and strategies. 
C)  Hedge funds are limited to sophisticated investors. 
D)  All of these choices are correct. 
A)  Hedge funds often sell stock they don't even own. 
B)  Hedge funds maintain secrecy about their holdings, trading, and strategies. 
C)  Hedge funds are limited to sophisticated investors. 
D)  All of these choices are correct.

Question 7

Which of these is a measure of the sensitivity of a stock or portfolio to market risk?

Accepted Answer

A)  behavioral finance 
B)  beta 
C)  efficient market 
D)  hedge 
A)  behavioral finance 
B)  beta 
C)  efficient market 
D)  hedge

Question 8

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 9

Compute the standard deviation given these four economic states,their likelihoods,and the potential returns:

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 10

You own $7,000 of Diner's Corp.stock that has a beta of 1.75.You also own $13,000 of Comm Corp.(beta = 1.15)and $20,000 of Airlines Corp.(beta = 0.7).Assume that the market return will be 12 percent and the risk-free rate is 3.5 percent.What is the total risk premium of the portfolio?

Accepted Answer

A)  8.76 percent 
B)  8.86 percent 
C)  10.20 percent 
D)  12.36 percent 
A)  8.76 percent 
B)  8.86 percent 
C)  10.20 percent 
D)  12.36 percent

Question 11

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 12

A manager believes his firm will earn a 12 percent return next year.His firm has a beta of 1.2,the expected return on the market is 8 percent,and the risk-free rate is 3 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)  9 percent, undervalued 
B)  9 percent, overvalued 
C)  13.8 percent, undervalued 
D)  13.8 percent, overvalued 
A)  9 percent, undervalued 
B)  9 percent, overvalued 
C)  13.8 percent, undervalued 
D)  13.8 percent, overvalued

Question 13

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 14

A manager believes his firm will earn a 15 percent return next year.His firm has a beta of 2.1,the expected return on the market is 6 percent,and the risk-free rate is 2 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)  10.4 percent, undervalued 
B)  10.4 percent, overvalued 
C)  12.3 percent, undervalued 
D)  12.3 percent, overvalued 
A)  10.4 percent, undervalued 
B)  10.4 percent, overvalued 
C)  12.3 percent, undervalued 
D)  12.3 percent, overvalued

Question 15

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 choices are complete. 
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 choices are complete.

Question 16

A company has a beta of 4.5.If the market return is expected to be 14 percent and the risk-free rate is 7 percent,what is the company's risk premium?

Accepted Answer

A)  7.0 percent 
B)  25.5 percent 
C)  31.5 percent 
D)  38.5 percent 
A)  7.0 percent 
B)  25.5 percent 
C)  31.5 percent 
D)  38.5 percent

Question 17

The annual return on the S&P 500 Index was 18.1 percent.The annual T-bill yield during the same period was 6.2 percent.What was the market risk premium during that year?

Accepted Answer

A)  6.2 percent 
B)  11.9 percent 
C)  18.1 percent 
D)  24.3 percent 
A)  6.2 percent 
B)  11.9 percent 
C)  18.1 percent 
D)  24.3 percent

Question 18

You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different.Which of the following would NOT be a correct explanation for the difference?

Accepted Answer

A)  One source used weekly data and another used monthly data. 
B)  One source used the S&P 500 for a market proxy and the other used the Dow Jones Industrial Average. 
C)  One used regression analysis and the other used geometric analysis. 
D)  All of these choices are correct. 
A)  One source used weekly data and another used monthly data. 
B)  One source used the S&P 500 for a market proxy and the other used the Dow Jones Industrial Average. 
C)  One used regression analysis and the other used geometric analysis. 
D)  All of these choices are correct.

Question 19

Which of these refers to something that has not been released to the public,but is known by few individuals,likely company insiders?

Accepted Answer

A)  audited financial statements 
B)  restricted stock 
C)  privately held information 
D)  insider trading 
A)  audited financial statements 
B)  restricted stock 
C)  privately held information 
D)  insider trading

Question 20

Esteé Lauder's upcoming dividend is expected to be $0.65 and its stock is selling at $45.The firm has a beta of 1.1 and is expected to grow at 10 percent for the foreseeable future.Compute Esteé Lauder's required return using both CAPM and the constant growth model.Assume that the market portfolio will earn 11 percent and the risk-free rate is 4 percent.

Accepted Answer

A)  CAPM: 11.2 percent; Constant Growth Model: 10.97 percent 
B)  CAPM: 11.7 percent; Constant Growth Model: 11.44 percent 
C)  CAPM: 10.1 percent; Constant Growth Model: 11.46 percent 
D)  CAPM: 9.2 percent; Constant Growth Model: 9.56 percent 
A)  CAPM: 11.2 percent; Constant Growth Model: 10.97 percent 
B)  CAPM: 11.7 percent; Constant Growth Model: 11.44 percent 
C)  CAPM: 10.1 percent; Constant Growth Model: 11.46 percent 
D)  CAPM: 9.2 percent; Constant Growth Model: 9.56 percent

Compute the standard deviation of the expected return given these three economic states,their likelihoods,and the potential returns:

Which of the following is a concern regarding beta?

You own $14,000 of Diner's Corp.stock that has a beta of 2.1.You also own $14,000 of Comm Corp.(beta = 1.3)and $12,000 of Airlines Corp.(beta = 0.6).Assume that the market return will be 15 percent and the risk-free rate is 6.5 percent.What is the total risk premium of the portfolio?

Which of the following is data that includes past stock prices and volume,financial statements,corporate news,analyst opinions,etc.?

All of the following are necessary conditions for an efficient market EXCEPT

Which of the following is correct?

Which of these is a measure of the sensitivity of a stock or portfolio to market risk?

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?

Compute the standard deviation given these four economic states,their likelihoods,and the potential returns:

You own $7,000 of Diner's Corp.stock that has a beta of 1.75.You also own $13,000 of Comm Corp.(beta = 1.15)and $20,000 of Airlines Corp.(beta = 0.7).Assume that the market return will be 12 percent and the risk-free rate is 3.5 percent.What is the total risk premium of the portfolio?

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

Which of the following is most correct?

A company has a beta of 4.5.If the market return is expected to be 14 percent and the risk-free rate is 7 percent,what is the company's risk premium?

The annual return on the S&P 500 Index was 18.1 percent.The annual T-bill yield during the same period was 6.2 percent.What was the market risk premium during that year?

You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different.Which of the following would NOT be a correct explanation for the difference?

Which of these refers to something that has not been released to the public,but is known by few individuals,likely company insiders?

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

Compute the standard deviation of the expected return given these three economic states,their likelihoods,and the potential returns:

Which of the following is a concern regarding beta?

You own $14,000 of Diner's Corp.stock that has a beta of 2.1.You also own $14,000 of Comm Corp.(beta = 1.3)and $12,000 of Airlines Corp.(beta = 0.6).Assume that the market return will be 15 percent and the risk-free rate is 6.5 percent.What is the total risk premium of the portfolio?

Which of the following is data that includes past stock prices and volume,financial statements,corporate news,analyst opinions,etc.?

All of the following are necessary conditions for an efficient market EXCEPT

Which of the following is correct?

Which of these is a measure of the sensitivity of a stock or portfolio to market risk?

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?

Compute the standard deviation given these four economic states,their likelihoods,and the potential returns:

You own $7,000 of Diner's Corp.stock that has a beta of 1.75.You also own $13,000 of Comm Corp.(beta = 1.15)and $20,000 of Airlines Corp.(beta = 0.7).Assume that the market return will be 12 percent and the risk-free rate is 3.5 percent.What is the total risk premium of the portfolio?

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

Which of the following is most correct?

A company has a beta of 4.5.If the market return is expected to be 14 percent and the risk-free rate is 7 percent,what is the company's risk premium?

The annual return on the S&P 500 Index was 18.1 percent.The annual T-bill yield during the same period was 6.2 percent.What was the market risk premium during that year?

You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different.Which of the following would NOT be a correct explanation for the difference?

Which of these refers to something that has not been released to the public,but is known by few individuals,likely company insiders?

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