FIN 332 Lecture 2: Ch 2 Class
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Question 18
1. Which of the following does an efficient portfolio do?
1. Maximizes risk for a given return.
2. Minimizes risk for a given return.
3. Maximizes return for a given level of risk.
4. Minimizes return for a given level of risk.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
3 points
Question 19
1. The security market line does not:
a. | Indicate the relationship between risk and return. | |
b. | Relate the market return and beta to a stock's return. | |
c. | Identify the optimal portfolio for the investor. | |
d. | Use beta coefficients as a measure of risk. |
3 points
Question 20
1. Mutual funds ____ realized capital gains and income (for example, dividends received):
a. | Retain. | |
b. | Reinvest. | |
c. | Distribute. | |
d. | Distribute or reinvest. |
2 points
Question 21
1. An index fund limits its portfolio to:
a. | High quality securities. | |
b. | Stocks that respond to changes in the consumer price index. | |
c. | Stocks included in an aggregate measure of stock prices. | |
d. | Stocks of firms in a particular industry. |
2 points
Question 22
1. Mutual funds with beta coefficients greater than 1.0:
a. | Have outperformed the market. | |
b. | Have underperformed the market. | |
c. | Have more systematic risk than the market. | |
d. | Have less systematic risk than the market. |
3 points
Question 23
1. Which of the following will tend to cause a stock's price to fall?
1. The firms beta declines.
2. The firms beta increases.
3. The risk-free rate declines.
4. The risk-free rate increases.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
2 points
Question 24
1. The use of P/E ratios to select stocks suggests that:
a. | High P/E stocks should be purchased. | |
b. | Low P/E ratio stocks are overvalued. | |
c. | A stock should be purchased if it is selling near its historic low P/E. | |
d. | A stock should be purchased if it is selling near its historic high P/E. |
2 points
Question 25
1. What does the efficient market hypothesis require?
1. Financial markets to be competitive.
2. Prices to adjust rapidly.
3. Prices of undervalued securities to fall.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | All of these choices. |
3 points
Question 26
1. Which of the following does the strong form of the efficient market hypothesis suggest?
1. Inside information will not lead to superior investment results.
2. Inside information will lead to superior investment results.
3. Studying financial statements will not lead to superior investment results.
4. Studying financial statements will lead to superior investment results.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
3 points
Question 27
1. Which of the following is the least broad-based measure of stock prices?
a. | NASDAQ market index. | |
b. | Dow Jones industrial average. | |
c. | S&P 500 stock index. | |
d. | AMEX market value index. |
3 points
Question 28
1. What is dollar-cost averaging?
a. | Periodically buying a round lot of stock. | |
b. | Periodically investing a specified dollar amount in a stock. | |
c. | A means to increase the average cost basis. | |
d. | A means to ensure a positive return. |
2 points
Question 29
1. Stock dividends cause:
a. | The price of a share of stock to rise. | |
b. | The price of a share of stock to fall. | |
c. | The value of the firm to rise. | |
d. | The value of the firm to fall. |
2 points
Question 30
1. Which of the following occurs when a stock has a two-for-one split?
a. | The price of the stock doubles. | |
b. | The firm's assets increase. | |
c. | The firm's liabilities decrease. | |
d. | The par value of the stock is reduced. |
3 points
Question 31
1. Dividend reinvestment plans offer which of the following advantages?
1. Deferment of federal income taxes.
2. A convenient means to accumulate shares.
3. Dollar-cost averaging.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | 2. |
3 points
Question 32
1. When the Federal Reserve seeks to expand the money supply, it:
a. | Sells securities. | |
b. | Buy securities. | |
c. | Runs a deficit. | |
d. | Runs a surplus. |
2 points
Question 33
1. The sum of cash, currency, and demand deposits is:
a. | M1. | |
b. | M2. | |
c. | M3. | |
d. | M4. |
3 points
Question 34
1. If the Federal Reserve lowers the target federal funds rate:
a. | The discount rate rises. | |
b. | Liquidity in the banking system is increased. | |
c. | Security prices fall. | |
d. | Required reserves are also decreased. |
3 points
Question 35
1. The anticipation of inflation suggests that the investor should:
a. | Buy bonds. | |
b. | Anticipate higher interest rates. | |
c. | Avoid real estate investments. | |
d. | Sell stocks of gold companies. |
3 points
Question 36
1. The current ratio is unaffected by:
a. | Using cash to pay a dividend. | |
b. | The collection of an account receivable. | |
c. | Selling inventory for a profit. | |
d. | Selling bonds and using the funds to finance inventory. |
2 points
Question 37
1. Which of the following are true as the debt ratio increases?
1. Fewer assets are debt financed.
2. More assets are debt financed.
3. The ratio of debt equity increases.
4. The ratio of debt equity decreases.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
2 points
Question 38
1. The technical approach suggests that future stock prices are forecasted by:
a. | Past stock rates. | |
b. | Financial ratios. | |
c. | Accounting statements. | |
d. | Monetary policy. |
2 points
Question 39
1. The Dogs of the Dow strategy:
a. | Forecasts the direction of the Dow Jones averages. | |
b. | Suggests buying the Dow stocks with the highest dividend yields. | |
c. | Outperforms the S&P 500. | |
d. | Suggests buying the lowest-priced Dow stocks. |
3 points
Question 40
1. Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?
a. | Accounting and finance. | |
b. | Finance and psychology. | |
c. | Physics and finance. | |
d. | Finance and marketing. |
The discounted dividend model can be used to value divisions and firms that do not pay dividends. For the discounted dividend model, a firm's weighted average cost of capital is used as the discount rate. For the corporate valuation model, a firm's cost of equity is used as the discount rate. |
For the constant growth model to hold, a firm's cost of equity needs to be greater than its constant dividend growth rate (i.e., rs > g). From the constant growth model, if the constant dividend growth rate is equal to zero, a firm's share price is equal to the constant dividend divided by the cost of equity (i.e., g=0). If a company's constant dividend growth rate is negative, the formula for the constant growth model cannot be applied. |
The internal rate of return method (IRR) assumes that cash flows are reinvested at the internal rate of return. The modified internal rate of return method (MIRR) assumes that cash flows are reinvested at the weighted average cost of cpaital. For mutually exclusive projects, if there is a conflict between NPV and IRR, the project with the highest IRR is chosen. The IRR is independent of a firm's weighted average cost of capital. |
The WACC only represents the "hurdle rate" for a typical project with average risk. Therefore, the project's WACC should be adjusted to reflect the project's risk. Firms with riskier projects generally have a lower WACC. Holding all else constant, an increase in the target debt ratio tends to lower the WACC. |
Short-term bond prices are less sensitive than long-term bond prices to interest rate changes. Companies are not likely to call bonds unless interest rates have declined significantly. Thus, the call provision is valuable to firms but detrimental to long term investors. On balance, bonds that have a sinking fund are regarded as being safer than those without such a provision. |
If beta < 1.0, the security is less risky than average. According to the Security Market Line (SML), in general, a companyâs expected return will double when its beta doubles. According to the Security Market Line (SML), if a portfolio of real world stocks has a beta of zero, the required rate of return for the portfolio is equal to the risk-free rate. |
7.37%. 11.05%. 8.32%. |
It ignores cash flows occurring after the payback period. It ignores the time value of money, that is, dollars received in different years are all given the same weight. |
1.82. 2.00. 1.94 |
undervalued. overvalued. |
13.92%. 16.34%. 12.17%. |
$221.86. $195.23. $257.35. |
10.82%. 11.76%. 9.64%. |
10 years. 4.58 years. 6.12 years. |
12.04%. 14.93%. 9.15%. |
1.24 years. 1.62 years. 1.15 years.
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