1. This is the average of the possible returns weighted by the likelihood of tho
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1. This is the average of the possible returns weighted by the likelihood of those returns occurring.
efficient return
expected return
market return
required return
This is the reward for taking systematic stock market risk.
required return
risk-free rate
risk premium
market risk premium
3.Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio?
Capital Asset Pricing Line
Capital Market Line
Efficient Market Line
Efficient Market Hypothesis
4.A theory that describes the types of information that are reflected in current stock prices.
asset pricing
behavioral finance
efficient market hypothesis
public information
5.This is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.
audited financial statements
generally accepted accounting principles
privately held information
public information
6.This has not been released to the public, but is known by few individuals, likely company insiders.
audited financial statements
restricted stock
privately held information
insider trading
7.Shares of stock issued to employees that have limitations on when they can be sold.
executive stock options
privately held information
restricted stock
stock market bubble
8.Special rights given to some employees to buy a specific number of shares of the company stock at a fixed price during a specific period of time.
executive stock options
privately held information
restricted stock
stock market bubble
9.The constant growth model assumes which of the following?
That there is privately held information.
That the stock is efficiently priced.
That there are executive stock options available to managers.
That there is no restricted stock.
10.Expected Return Compute the expected return given these three economic states, their likelihoods, and the potential returns:
6.8%
12.8%
16.0%
22.7%
11.Required Return If the risk-free rate is 8 percent and the market risk premium is 2 percent, what is the required return for the market?
2%
6%
8%
10%
12.Required Return If the risk-free rate is 10 percent and the market risk premium is 4 percent, what is the required return for the market?
4%
7%
10%
14%
13.Portfolio Beta You have a portfolio with a beta of 1.25. What will be the new portfolio beta if you keep 80 percent of your money in the old portfolio and 20 percent in a stock with a beta of 1.75?
1.00
1.35
1.50
3.00
14. Expected Return Risk Compute the standard deviation of the expected return given these three economic states, their likelihoods, and the potential returns:
6.8%
16.5%
21.5%
46.4%
15.Under/Over-Valued Stock A manager believes his firm will earn a 7.5 percent return next year. His firm has a beta of 2, the expected return on the market is 5 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 under-valued or over-valued.
8%, under-valued
8%, over-valued
12%, under-valued
12%, over-valued
16. Expected Return and Risk Compute the standard deviation given these four economic states, their likelihoods, and the potential returns:
12.19%
23.8%
38.65%
88.06%
17.Netflicks, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and the risk-free rate is 7 percent, what is Netflicks' risk premium?
20.91%
22.38%
25.72%
29.38%
18.Which of the following is incorrect?
Technical analysis is expected to work if markets are weak-form efficient.
If markets are strong-form efficient then they must also be weak-form efficient.
It is not likely that the market is strong-form efficient.
None of these statements are incorrect.
19.Stock A has a required return of 19%. Stock B has a required return of 11%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks?
Stock A is riskier.
Stock B is riskier.
The stocks have the same risk.
We would need to know if the markets are efficient to answer this question.
20.Stock A has a required return of 12%. Stock B has a required return of 15%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks?
Stock A is riskier.
Stock B is riskier.
The stocks have the same risk.
We would need to know if the markets are efficient to answer this question.
21.IBM's stock price is $22, it is expected to pay a $2 dividend, and analysts expect the firm to grow at 10% per year for the next 5 years. TDI's stock price is $10, it is expected to pay a $1 dividend, and analysts expect the firm to grow at 12% per year for the next 5 years. What is the difference in the two firms' required rate of returns?
2.91%
1.82%
2.03%
3.23%
22.In 2000, the S&P500 Index earned 11% while the T-bill yield was 4.4%. Given this information, which of the following statements is correct with respect to the market risk premium?
The market risk premium must have been negative.
The market risk premium must have been positive.
The market risk premium must have been zero.
Unable to answer without more information.
23.Which of the following statements is correct?
Penny stocks are the stocks of small companies that are priced below $1 per share.
Restricted stocks are shares of stock issued to executives that have limitations on voting rights.
The Capital Market Line graphs the relationship between return and risk (beta).
All of these statements are correct.
24.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?
One source used weekly data and another used monthly data.
One source used the S&P500 for a market proxy and the other used the Dow Jones Industrial Average.
One used regression analysis and the other used geometric analysis.
All of these are correct explanations for the difference.
25.You have a portfolio consisting of 20% Boeing (beta = 1.3) and 40% Hewlett-Packard (beta = 1.6) and 40% McDonald's stock (beta = 0.7). How much market risk does the portfolio have?
This portfolio has 18% less risk than the general market.
This portfolio has 28% more risk than the general market.
This portfolio has 18% more risk than the general market.
This portfolio has 28% less risk than the general market.
Explanation / Answer
1) expected return
2)market risk premium
3)capital market line
4)efficient market hypothesis
5) public information
6)privately held information
7)Restricted stock
8) executive stock option
9)That the stock is efficiently priced.
10) 6.8%
11)10%
12)14%
13)1.35
14)16.5%
15)8%, over-valued
16)38.65%
17)22.38%
18)Technical analysis is expected to work if markets are weak-form efficient
19)Stock A is riskier
20) We would need to know if the markets are efficient to answer this question
21)3.23%
22)The market risk premium must have been positive.
23)Restricted stocks are shares of stock issued to executives that have limitations on voting rights.
24)One used regression analysis and the other used geometric analysis
25)This portfolio has 18% more risk than the general market.
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