1.U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price continues to increase resulting in a total increase of $11. Given this information which of the following statements is correct?

This is an example of a market underreaction.

2. Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset?

 0

3. In theory, this is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate.

 market portfolio

4. How can we locate the market portfolio?

By starting from the risk-free rate on the vertical axis and drawing a tangent to the envelope consisting of all efficient portfolios.

5. Which of the following is the use of debt to increase an investment position?

Financial leverage

6. IBM has a beta of 1.0 and Apple Computer has a beta of 2.0. Which of the following statements must be correct?

None of these statements is correct.

7. Which of the following is a model that includes an equation that relates a stock’s required return to an appropriate risk premium?

Asset pricing

8. Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call

a stock market bubble.

9. a stock market bubble.

The risk premium on an average stock in the market.

10. The study of the cognitive processes and biases associated with making financial and economic decisions is known as:

behavioral finance.

11. 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 likely correct with respect to the market risk premium?

The market risk premium must have been positive.

12. U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price continues to increase resulting in a total increase of $11. Given this information which of the following statements is correct?

This is an example of a market underreaction.

13. 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 are known as:

executive stock options.

14. This is the average of the possible returns weighted by the likelihood of those returns occurring.

expected return

15. A stock with beta equal to 0.4 would most likely be considered

Less risky than the overall stock market.

16. In theory, this is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate.

market portfolio

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

 Public information

18. How might a large market risk premium impact people’s desire to buy stocks?

Investors with high risk aversion will be less willing to invest in stocks.

19. Investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices is known as:

stock market bubble.

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

 Privately held information

21. Which of the following are the stocks of small companies that are priced below $1 per share?

Penny stocks

22. Which of the following is the use of debt to increase an investment position?

Financial leverage

23. A stock with beta equal to 2.4 would most likely be considered

More risky than the overall stock market.

24. Which of the below is a measure of the sensitivity of a stock or portfolio to market risk?

 beta

25. Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call

 a stock market bubble.

26. Assume when plotting stock Z on a security market line diagram the stock would be found above the security market line. What would this position on the diagram imply about stock Z?

Stock Z is undervalued in the market.

27. Which of the following is most correct?

In an efficient market, investors will sell overvalued stock which will drive its price down.

28. Which of the following is a concern regarding beta?

 All of these statements are valid concerns regarding beta.

29. Stock A has a required return of 19%. Stock B has a required return of 26%. Assume a risk free rate of 4.75%. Which of the following is a correct statement about the two stocks? 

 Stock B is riskier.

30. Which of the following is a model that includes an equation that relates a stock’s required return to an appropriate risk premium?

Asset pricing

31. The annual return on the S&P 500 Index was 11.5 percent. The annual T-bill yield during the same period was 4.3 percent. What was the market risk premium during that year?

 7.2 percent

32. A company has a beta of 0.75. If the market return is expected to be 8 percent and the risk-free rate is 3 percent, what is the company’s required return?

 6.75 percent

33. A manager believes his firm will earn a 12 percent return next year. His firm has a beta of 1.6, the expected return on the market is 11 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.

 15.8 percent, undervalued, 15.8 percent, overvalued

34. You own $1,000 of City Steel stock that has a beta of 1. You also own $3,000 of Rent-N-Co (beta = 1.5) and $6,000 of Lincoln Corporation (beta = 2). What is the beta of your portfolio?

 1.75

35. A company has a beta of 0.75. If the market return is expected to be 8 percent and the risk-free rate is 3 percent, what is the company’s required return?

6.75 percent

36. You have a portfolio with a beta of 1.25. What will be the new portfolio beta if you keep 60 percent of your money in the old portfolio and 40 percent in a stock with a beta of 0.8?

1.07

37. You own $1,000 of City Steel stock that has a beta of 1. You also own $3,000 of Rent-N-Co (beta = 1.5) and $6,000 of Lincoln Corporation (beta = 2). What is the beta of your portfolio?

1.75

38. A manager believes his firm will earn a 12 percent return next year. His firm has a beta of 1.6, the expected return on the market is 11 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.

 15.8 percent, undervalued, 15.8 percent, overvalued

39. Which of the following is the use of debt to increase an investment position?

 Financial leverage

40. Bond prices are usually quoted

As a percentage of its par value.

41. IBM has a beta of 1.0 and Apple Computer has a beta of 2.0. Which of the following statements must be correct?

None of these statements is correct.

42. Stock valuation model dynamics make clear that lower dividend growth rates lead to

lower valuations.

43. Which of the following will only be executed if the order’s price conditions are met?

A limit order

44. The liquidity premium will be larger if

There is typically not much trading activity related to the security.

45. If the coupon rate equals 7% then a corresponding $1,000 face value bond

Will pay $35 every six months

46. Stock valuation model dynamics make clear that lower discount rates lead to

higher valuations.

47. Which of the following is a concern regarding beta?

All of these statements are valid concerns regarding beta.

48. The real interest rate is:

the rate that a security would pay if no inflation were expected over its holding period.

49. Which of the following statements is correct regarding diversification?

 None of these statements are correct.

50. This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments.

 default risk

51. According to the Fisher Effect equation the nominal rate of interest is equal to

The real rate of interest plus the inflation rate.

52. The size of the firm measured as the current stock price multiplied by the number of shares outstanding is referred to as the firm’s:

market capitalization.

53. Which of the below is a measure of the sensitivity of a stock or portfolio to market risk?

beta

54. Under which conditions will an investor demand a smaller return (yield) on a bond?

The bond issue is upgraded from A to AA.

55. Assume that a bond is quoted to be selling at a price equal to $93, per $100 of face value. This implies that

The bond is a discount bond.

56. To find the percentage return of an investment,

divide the dollar return by the investment’s value at the beginning of the period.

57. Which of the following statements is correct?

None of these statements is correct.

58. This is defined as the portion of total risk that is attributable to firm (or industry) factors and can be reduced through diversification.

firm specific risk

59. Why is it expected to be using higher discount rates to discount stock dividend payments compared to the discount rates used to discount bond coupon payments?

Because the cash flows resulting from owning a stock are typically more risky than the cash flows resulting from owning a bond.

60. When residual cash flows are high, stock values will be:

 high.

61. As residual claimants, these investors claim any cash flows to the firm that remain after the firm pays all other claims.

common stockholders

62. We can estimate a stock’s value by:

 discounting the future dividends and future stock price appreciation.

63. Stock valuation model dynamics make clear that higher discount rates lead to

lower valuations

64. If the management team of a company decides to increase the dividend payment for the current year

The stock price should not be impacted because nothing fundamental about the company has been changed, and as there will be less funds generated to pay out future dividends.

65. Which of the following will only be executed if the order’s price conditions are met?

 A limit order

66. Which of the following is an electronic stock market without a physical trading floor?

 Nasdaq Stock Market

67. GEN has 10 million shares outstanding and a stock price of $89.25. What is GEN’s market capitalization?

$892,500,000

68. Which of these investors earn returns from receiving dividends and from stock price appreciation?

 Stockholders

69. When residual cash flows are high, stock values will be:

 high.

70. Why is it expected to be using higher discount rates to discount stock dividend payments compared to the discount rates used to discount bond coupon payments?

Because the cash flows resulting from owning a stock are typically more risky than the cash flows resulting from owning a bond.

71. The size of the firm measured as the current stock price multiplied by the number of shares outstanding is referred to as the firm’s:

 market capitalization.

72. If the management team of a company decides to increase the dividend payment for the current year

The stock price should not be impacted because nothing fundamental about the company has been changed, and as there will be less funds generated to pay out future dividends.

73. Stock valuation model dynamics make clear that lower dividend growth rates lead to

lower valuations.

74. All of the following are stock market indices except _________________.

Mercantile 1000

75. We can estimate a stock’s value by:

 discounting the future dividends and future stock price appreciation.

76. Stock valuation model dynamics make clear that higher discount rates lead to

lower valuations.

77. Which of the following will only be executed if the order’s price conditions are met?

 A limit order

78. These are valued as a special zero-growth case of the constant growth rate model.

 preferred stock

79. Financial analysts forecast Best Buy Company (BBY) growth for the future to be 13 percent. Their recent dividend was $0.69. What is the value of their stock when the required rate of return is 15.13 percent?

$36.61

80. American Eagle Outfitters (AEO) recently paid a $0.38 dividend. The dividend is expected to grow at a 14.5 percent rate. At the current stock price of $26.07, what is the return shareholders are expecting?

16.17 percent

81. A firm recently paid a $1.00 annual dividend. The dividend is expected to increase by 15 percent in each of the next four years. In the fourth year, the stock price is expected to be $100. If the required rate for this stock is 16 percent, what is its value?

 $59.14

82. A fast growing firm recently paid a dividend of $0.50 per share. The dividend is expected to increase at a 20 percent rate for the next 3 years. Afterwards, a more stable 10 percent growth rate can be assumed. If a 13 percent discount rate is appropriate for this stock, what is its value?

 $23.65

83. If a preferred stock from Pfizer Inc. (PFE) pays $3.00 in annual dividends, and the required return on the preferred stock is 17 percent, what’s the value of the stock?

$17.65

84. A fast growing firm recently paid a dividend of $0.50 per share. The dividend is expected to increase at a 20 percent rate for the next 3 years. Afterwards, a more stable 10 percent growth rate can be assumed. If a 13 percent discount rate is appropriate for this stock, what is its value?

$23.65

85. American Eagle Outfitters (AEO) recently paid a $0.38 dividend. The dividend is expected to grow at a 14.5 percent rate. At the current stock price of $26.07, what is the return shareholders are expecting?

16.17 percent

86. A firm does not pay a dividend. It is expected to pay its first dividend of $0.10 per share in three years. This dividend will grow at 11 percent indefinitely. Using a 13 percent discount rate, compute the value of this stock.

 $3.92

87. This is defined as the volatility of an investment, which includes firm specific risk as well as market risk.

total risk

88. Which of the following is correct?

 All of these statements are correct.

89. Determine which one of these three portfolios dominates another. Name the dominated portfolio and the portfolio that dominates it. Portfolio Blue has an expected return of 13 percent and risk of 17 percent. The expected return and risk of portfolio Yellow are 15 percent and 19 percent, and for the Purple portfolio are 12 percent and 18 percent.

Portfolio Blue dominates Portfolio Purple

90. This is another term for market risk.

 Non-diversifiable risk

91. Jenna receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. It also claims that this stock is a “safe bet” for the future. Which of the following statements is correct regarding this information?

The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a “safe bet.”

92. Which of the following statements is correct?

Most common stocks are positively correlated with each other because they are impacted by the same economic factors.

93. Which of the following statements is correct?

A single stock has a lot of diversifiable risk.

94. Which of the below is the best description of the effect of portfolio diversification?

 Risk is reduced without necessarily reducing the expected return.

95. Which of these is the term for portfolios with the highest return possible for each risk level?

Efficient portfolios

96. Assume a risk-averse investor holds a portfolio of bonds, because bonds are known to be less risky than stocks. Adding some stocks to the existing bond portfolio would most likely

 reduce the risk of the portfolio even though stocks are more risky than bonds.

97. Which of these is defined as a combination of investment assets held by an investor?

Portfolio

98. Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 8 percent and standard deviation of 10 percent. The average return and standard deviation of Idol Staff are 10 percent and 15 percent; and of Poker-R-Us are 6 percent and 20 percent.

 Poker-R-Us, Idol Staff, Rail Haul

99. Portfolio Weights An investor owns $10,000 of Adobe Systems stock, $15,000 of Dow Chemical, and $25,000 of Office Depot. What are the portfolio weights of each stock?

 Adobe System = 0.2, Dow Chemical = 0.3, Office Depot = 0.5

100. To find the percentage return of an investment,

divide the dollar return by the investment’s value at the beginning of the period.

101. This is a measurement of the co-movement between two variables that ranges between -1 and +1.

correlation

102. Sally wants to invest in only two stocks. Which pair of stocks should Sally select, provided they all offer similar returns?

 Stocks C and D, which move in opposite directions at the same time.

103. Consider the following correlations:
 
Given this data, which of the following is most preferable if an investor can only select one pair of companies?

Disney and Apple

104. Which statement is true?

The larger the standard deviation, the higher the total risk..

105. Jane Adams invests all her money in the stock of one firm. Which of the following will likely be true?

Her return will have more volatility than the return in the overall stock market.

106. From 1950 to 2007, the average return in the stock market, as measured by the S&P 500, was 13.2 percent and a standard deviation of 17 percent. Given this information, which of the following statements is correct?

With a standard deviation this high, it is likely that an investor will lose money in some years over a 25-year investment period.

107. Which of these is the portion of total risk that is attributable to overall economic factors?

Market risk

108. Sally wants to invest in only two stocks. Which pair of stocks should Sally select, provided they all offer similar returns?

 Stocks C and D, which move in opposite directions at the same time.

109. Stock A has a required return of 19%. Stock B has a required return of 26%. Assume a risk-free rate of 4.75%. Which of the following is most likely a correct statement about the two stocks?

An investor is most likely to consider stock B to be riskier than stock A

110. Which of the following statements is correct?

Most common stocks are positively correlated with each other because they are impacted by the same economic factors.

111. From 1950 to 2007, the average return in the stock market, as measured by the S&P 500, was 13.2 percent and a standard deviation of 17 percent. Given this information, which of the following statements is correct?

 With a standard deviation this high, it is likely that an investor will lose money in some years over a 25-year investment period

112. Diversification works better when

Stock returns are less correlated with each other.

113. This is another term for market risk.

Non-diversifiable risk

114. Which of these is the term for portfolios with the highest return possible for each risk level?

Efficient portfolios

115. Which of the following is correct?

All of these statements are correct

116. Given this data, which of the following is most preferable if an investor can only select one pair of companies?

Disney and Apple

117. The past four monthly returns for K and Company are 2.50 percent, 1.20 percent, – 0.40 percent, and 0.80 percent. What is the average monthly return?

1.03 percent

118. FedEx Corp. stock ended the previous year at $165.30 per share. It paid a $1.20 per share dividend last year. It ended last year at $173.90. If you owned 600 shares of FedEx, what was your percent return?

 5.93%

119. FedEx Corp. stock ended the previous year at $165.30 per share. It paid a $1.20 per share dividend last year. It ended last year at $173.90. If you owned 600 shares of FedEx, what was your dollar return?

$5,880

120. The past four monthly returns for K and Company are 1.50 percent, 0.40 percent, – 0.60 percent, and 1.20 percent. What is the standard deviation of monthly returns?

 0.94 percent

121. Year-to-date, Company O had earned a 2.10 percent return. During the same time period, Company V earned – 0.80 percent and Company M earned 3.70 percent. If you have a portfolio made up of 30 percent Company O, 20 percent Company V, and 50 percent Company M, what is your portfolio return?

 2.32 percent

122. FedEx Corp. stock ended the previous year at $89.60 per share. It paid a $0.50 per share dividend last year. It ended last year at $95.40. If you owned 300 shares of FedEx, what was your dollar return?

$1,890

123. The past four monthly returns for K and Company are 1.50 percent, 0.40 percent, – 0.60 percent, and 1.20 percent. What is the average monthly return?

 0.63 percent

124. Year-to-date, Company O had earned a 2.10 percent return. During the same time period, Company V earned – 0.80 percent and Company M earned 3.70 percent. If you have a portfolio made up of 30 percent Company O, 20 percent Company V, and 50 percent Company M, what is your portfolio return?

2.32 percent

125. FedEx Corp. stock ended the previous year at $118.30 per share. It paid a $1.30 per share dividend last year. It ended last year at $131.70. If you owned 500 shares of FedEx, what was your percent return?

12.43%

126. The past four monthly returns for K and Company are 1.50 percent, 0.40 percent, – 0.60 percent, and 1.20 percent. What is the standard deviation of monthly returns?

 0.94 percent

127. Stock A has a required return of 15%. Stock B has a required return of 8%. Assume a risk free rate of 4.75%. Which of the following is a correct statement about the two stocks? 

Stock A is riskier.

128. Which of the following is a true statement?
 Firms can quite possibly change their stocks’ risk level by substantially changing their business.

129. Which of these is the reward for taking systematic stock market risk?
 Market risk premium

130. Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call

a stock market bubble.

131. Assume when plotting stock Z on a security market line diagram the stock would be found above the security market line. What would this position on the diagram imply about stock Z?

 Stock Z is undervalued in the market.

132. Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation?

Security market line

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

Public information

134. Shares of stock issued to employees that have limitations on when they can be sold are known as:

restricted stock.

135. How might a small market risk premium impact people’s desire to buy stocks?

Investors with high risk aversion will be more willing to invest in stocks.

136. A stock with beta equal to 1 would most likely be considered

To be of about the same risk as the overall stock market.

137. Which of these is a theory that describes the types of information that are reflected in current stock prices?

 Efficient market hypothesis

138. Market risk premium refers to

The risk premium on an average stock in the market.

139. Which of the following is incorrect?

Technical analysis is expected to work if markets are weak-form efficient.

140. Which of the following is most correct?

In an efficient market, investors will sell overvalued stock which will drive its price down.

141. Investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices is known as:

stock market bubble.

142. This is the average of the possible returns weighted by the likelihood of those returns occurring.

expected return

143. A stock with beta equal to 0.4 would most likely be considered

Less risky than the overall stock market.

144. Which of the following is the reward investors require for taking risk?