1. Stephanie is an investor who believes that the real key to a company\'s futur

Question

1.

Stephanie is an investor who believes that the real key to a company's future stock price lies in its future earnings. When investing in a company, she carefully studies its future earnings potential, and sells a company's stock at the first sign of any trouble. This information indicates that Della would correctly be classified as

Select one:

a. a growth investor.

b. a value investor.

c. a buy-and-hold investor.

d. an index investor.

2.

All of the following are lessons for investors based on behavioral finance as discussed in Chapter 10 of the Random Walk book EXCEPT:

Select one:

a. Avoid herd behavior

b. Avoid overtrading

c. Sell winners, not losers

d. Be wary of new issues

3.

Winifred, Inc. paid $1.64 as an annual dividend per share last year. The company is expected to increase their annual dividends by 3% each year. How much should you pay to purchase one share of this stock if you require a 9% rate of return on this investment?

Select one:

a. $18.22

b. $18.77

c. $27.33

d. $28.15

4.

In Chapter 8 of the Random Walk book the author the author suggests that in a time of financial crisis, risk can be reduced by diversifying a portfolio with

Select one:

a. international stocks

b. emerging market stocks

c. bonds

d. options

5.

Two academicians Eugene Fama and Kenneth French researched the relationship between Beta and return. they concluded that:

Select one:

a. there was a positive relationship between betas and returns.( higher betas meant higher returns)

b. the relationship between betas and returns was flat. (there was no relationship between betas and returns)

6.

The last dividend paid by Abbot Labs was $1.00. Abbot's growth rate is expected to be a constant 8% for three years, after which the growth rate is expected to be 10%. Investors require a return of 16% on stocks like Abbot. What should the price of Abbot's stock be?

Select one:

a. $15.36

b. $16.36

c. $17.00

d. $17.40

e. $18.40

7.

In Chapter 10 of the Random Walk book, Behavioralists assert that there are four factors which   create irrational market behavior. Which of the following is NOT one of those factors?

Select one:

a. lack of confidence

b. biased judgements

c. herd mentality

d. loss aversion

Explanation / Answer

Question Answer 1 c. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. 2 b 3 28.15 =1.64 x (1+3/100)/(9%-3%) 4 d Option trading can help reduce risk. 5 a Re = rf + beta x rp so if beta is greater re is more and vice versa 6 a. dividend in 3rd years = 1 x 1.08^3=1.259712 dividend in 4th years = 1.259712 x 1.10=1.385683 Price at 4th year = 1.385683/(16-10)%= 34.64 pv factor Present Year Cashflows at 16% Value 1 1.08 0.862069 0.931034 2 1.1664 0.743163 0.866825 3 1.25971 0.640658 0.807044 4 23.0947 0.552291 12.75501 Total 15.35991 Stock price = 15.36 7 a.

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