FIN 301 Midterm: FIN301 Exam 1 Study Guide

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yellowminnow102

16 Feb 2017

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Chapter 1 introduction and overview of the entire semester. Arguably the most famous measure of stock performance. 5,000 domestic and international stocks listed on the nasdaq. Chapter 2 the ten basic principles of finance. Considered to be one of the greatest investors of modern times: buffett has been able to generate consistent 20% annual returns on investments. A shares trade for over ,000: primary business is insurance berkshire hathaway owns 100% of geico. Berkshire hathaway was originally a textile company. Risk versus return if you want to earn a higher return, you must take more risk: risk: uncertainty of future outcomes. The risk of an investment is typically measured by its standard deviation. If you look at returns over a long enough timeframe, you will see up and down swings, but the returns tend to revert to their historical average in the long run. Calculating the return on a stock: stock return = ((pnew pold) + dividend) / pold.

Related Questions

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.

ultramarineguinea-pig196

Multiple Choice Quiz
PLS EXPLAIN ALL YOUR ANSWERS AND SHOW THE CALCULATIONS
1
A share of common stock represents:
A) A claim from a lender against a borrower.
B) A share in the company's debts.
C) A share of ownership of the company.
D) An unlimited liability to the owner of the stock.

2
The fact that common stockholders are residual claimant'smeans:
A) The stockholders have a claim against the revenue that remainsafter everyone else is paid.
B) The stockholders receive their dividends before any otherresiduals are paid.
C) The stockholders are paid any past due dividends before otherclaims are paid.
D) The stockholders are paid before the bondholders but after anytaxes are paid.

3
The concept of limited liability says a stockholder of acorporation:
A) Is liable for the corporation's liabilities, but nothingmore.
B) Cannot receive dividends that exceed his/her investment.
C) Cannot lose more than his/her investment.
D) Is only responsible for any taxes that the corporation may owebut not its other debts.

4
You have a portfolio valued at $1000. Over the next twelve monthsit loses 80% of its valuWhat return does the portfolio need to earnover the following twelve months to restore the portfolio to itsoriginal value?
A) 75%.
B) 200%.
C) 400%.
D) 25%.

5
The theory of efficient markets assumes that:
A) Prices of bonds, but not stocks, reflect all availableinformation.
B) The prices of all financial instruments reflect all availableinformation.
C) Stock prices are relatively rigid because it takes a while forinformation to efficiently move through the market.
D) The best approach to determining stock prices is to follow thechartists.

6
The notion that stock prices reflect all current availableinformation:
A) Makes the risk of holding stocks greater.
B) Indicates that mutual fund managers will not, on average,outperform market averages.
C) Says stock prices should be more rigid than they are.
D) Makes it easier to predict the movements in the price of astock.

7
Why are stock market bubbles costly for the economy?
A) They imply that the actual stock price is equal to thefundamental value of the stock.
B) They hurt consumers more than corporations.
C) They lead to a reduction in real investment in both theshort-term and long-term.
D) They lead to a misallocation of resources in both the short-termand long-term.

8
Stock market bubbles impact consumers by:
A) Encouraging greater consumption of luxury goods and greatersaving.
B) Encouraging greater consumption of luxury goods and lesssaving.
C) Encouraging more work and delaying retirement.
D) Resulting in less investment in home ownership and more intostocks.

9
If a public corporation goes bankrupt and does not have enoughassets to pay off all creditors:
A) The stockholders are personally liable for the balance.
B) The fact that stockholders are residual claimants means they mayhave to pay in additional capital to cover the obligations.
C) The stockholders receive any dividends due before the othercreditors are paid.
D) The stockholders cannot lose more than their investment.

10
The Dow Jones Industrial Average:
A) Gives equal weight to a change in the price of the stock of anycompany in the index.
B) Reflects that a 10% increase in a share of stock selling for $30will have the same affect on the index as a 10% increase in theprice of a stock selling for $60.
C) Is a value-weighted index.
D) Gives greater weight to shares with higher prices.

11
The Standard & Poor's 500 Index differs from the Dow JonesIndustrial Index because:
A) It takes into account the stock prices of 500 of the largestfirms, which is less than the DJIA.
B) It is a price-weighted index, where the DJIA is a value-weightedindex.
C) Larger firms are less important in the S&P 500 than in theDJIA.
D) It takes into account the prices of more stocks and it uses adifferent weighting scheme.

12
The theory of efficient markets implies:
A) Stock prices should be highly unpredictable.
B) The price at which stocks currently trade only reflects pastinformation.
C) Expectations do not play a role in stock prices because thisisn't real information.
D) The chartists are in fact correct that there are patterns instock prices.

13
The theory of efficient markets me
A) Professional fund managers should be able to consistently beatthe market average.
B) A professional fund manager should really not expect to beat themarket average consistently.
C) A professional fund manager who beats the market average oneyear should expected to beat the market average the nextyear.
D) A professional fund manager who beats the market average oneyear should be expected to not beat the market average the nextyear.

14
Stocks appear to present risk, yet many people have substantialparts of their wealth invested in them. This behavior could beexplained by the fact that:
A) People are irrational in their investment behavior, onlyfocusing on positive outcomes.
B) People are not very risk-averse and do not require a riskpremium for stocks.
C) Investing in stocks over the long run is not as risky asshort-term holdings.
D) People are not efficient users of information.

15
The price of a stock is currently $750 and the stock will pay a $43dividend. The interest rate is 7.5%. Based on the dividend-discountmodel, what is the expected price of this stock for nextyear?
A) $651.17.
B) $657.67.
C) $691.17.
D) $763.25.

Question 5

1. Which of the following does not have default risk?

	a.	Money market mutual funds.
	b.	Commercial paper.
	c.	Negotiable certificates of deposit.
	d.	U.S. Treasury bills.

2 points

Question 6

1. The spread is the:

	a.	Difference between the bid and ask prices.
	b.	Commission charged by the broker.
	c.	Difference between the purchase and sale prices.
	d.	Difference between the commissions charged by full-service and discount brokers.

3 points

Question 7

1. Securities regulations protect investors by:

	a.	Requiring disclosures of information by firms.
	b.	Stopping investors from buying overpriced stock.
	c.	Reducing competition among brokers.
	d.	Establishing commission schedules.

3 points

Question 8

1. If a stock is bought on margin:

	a.	The full amount of the cost of the investment is borrowed.
	b.	The commissions on the investment are increased.
	c.	The cost of the investment is reduced.
	d.	The interest on the borrowed funds is set by the SEC.

3 points

Question 9

1. Sarbanes-Oxley, the latest important securities law:

	a.	Reduces potential conflicts between securities analysts and investment bankers.
	b.	Legalizes the sale of securities by investment brokers.
	c.	Requires corporate boards of directors to own stock.
	d.	Mandates that security analysts file their recommendations with the SEC.

2 points

Question 10

1. Which of the following are true about the present value of a dollar?

1. It increases as the interest rate increases.

2. It decreases as the interest rate increases.

3. It increases as the time period increases.

4. It decreases as the time period increases.

	a.	1 and 3.
	b.	1 and 4.
	c.	2 and 3.
	d.	2 and 4.

3 points

Question 11

1. Time value concepts may not be used to determine:

	a.	The present value of an annuity.
	b.	The margin required on a stock purchase.
	c.	The future value of $100 deposited in a bank.
	d.	The present value of a lump sum.

2 points

Question 12

1. What is the marginal tax rate?

	a.	The tax rate paid on investment gains from items purchased on margin.
	b.	The tax rate paid on an additional dollar of taxable income.
	c.	The margin required on a stock purchase.
	d.	The present value of a lump sum.

2 points

Question 13

1. Examples of capital gains include sales of which of the following?

1. IRA accounts.

2. Stocks sold for a profit.

3. Real estate sold for a profit.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

Question 14

1. With a Roth IRA, the individual:

	a.	May deduct annual contributions.
	b.	Earns tax-free income.
	c.	Defers taxes.
	d.	Avoids estate taxes.

2 points

Question 15

1. Sources of unsystematic risk include which of the following?

1. A firms financing decisions.

2. A firms operations.

3. Fluctuating market prices.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

2 points

Question 16

1. For diversification to reduce risk:

	a.	The returns on the individual securities should be highly correlated.
	b.	The prices of the stocks should be stable.
	c.	The returns on the individual securities should be negatively correlated.
	d.	One firm should offer dividends and the other should offer capital gains.

2 points

Question 17

1. Which of the following are true about beta coefficients?

1. They are a measure of systematic risk.

2. They relate the return on an individual security to the return on the market.

3. They measure the variability of an assets return.

	a.	1 and 2.
	b.	1 and 3.
	c.	2 and 3.
	d.	All of these choices.

3 points

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.

ochrewalrus157

FIN 301 Midterm: FIN301 Exam 1 Study Guide

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