Finance Chapter 10

Firms can quite possibly change their stocks’ risk level by substantially changing their business. correct
This is the average of the possible returns weighted by the likelihood of those returns occurring. expected return
The set of probabilities for all possible occurrences. probability distribution
This is typically considered the return on U.S. government bonds and bills and equals the real interest plus the expected inflation premium. risk-free rate
This is the reward investors require for taking risk. . risk premium
This is the reward for taking systematic stock market risk. market risk premium
This model includes an equation that relates a stock’s required return to an appropriate risk premium: asset pricing
The asset pricing theory based on a beta, a measure of market risk. Capital Asset Pricing Model
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
The use of debt to increase an investment position. financial leverage
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 Market Line
A measure of the sensitivity of a stock or portfolio to market risk. beta
Similar to the Capital Market Line except risk is characterized by beta instead of standard deviation. Security Market Line
Which of these is the measurement of risk for a collection of stocks for an investor? portfolio beta
Which of the following is NOT a necessary condition for an efficient market? No trading or transaction costs.
The stocks of small companies that are priced below $1 per share. penny stocks
A theory that describes the types of information that are reflected in current stock prices. efficient market hypothesis
This is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc. public information
This has not been released to the public, but is known by few individuals, likely company insiders. privately held information
Investor enthusiasm causes an inflated bull market that drives prices too high, ending in a dramatic collapse in prices. stock market bubble
The study of the cognitive processes and biases associated with making financial and economic decisions. behavioral finance
Shares of stock issued to employees that have limitations on when they can be sold. restricted stock
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
The constant growth model assumes which of the following? That the stock is efficiently priced.
US 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.
US 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 falls resulting in a net increase of only $4. Given this information which of the following statements is correct? This is an example of a market overreaction.
A. Technical analysis is expected to work if markets are weak-form efficient.B. If markets are strong-form efficient then they must also be weak-form efficient.C. It is not likely that the market is strong-form efficient. correct
A. Hedge funds often sell stock they don’t even own.B. Hedge funds maintain secrecy about their holdings, trading and strategies.C. Hedge funds are limited to sophisticated investors. correct
B. The Efficient Market Hypothesis states that security prices fully reflect all available information.C. The security market line shows the relationship between return and risk as measured by beta. correct
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 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 B is riskier.
If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient. correct
IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the following statements must be correct? If investors become more risk averse, the expected return of Apple will increase more than the expected return on IBM.
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 positive.
How might a small market risk premium impact people’s desire to buy stocks? Investors with high risk aversion will be less willing to invest in stocks.
How might a large market risk premium impact people’s desire to buy stocks? Investors with high risk aversion will be more willing to invest in stocks.
Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset? 0
Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call a(n) ___________________. Stock market bubble
All of the following are necessary conditions for an efficient market except _________. Low stock prices
In an efficient market, investors will sell overvalued stock which will drive its price down. correct
A. The Security Market Line shows the relationship between risk and return for any stock or portfolio.B. The y-intercept of the Security Market Line represents the return on the risk-free asset. correct
Penny stocks are the stocks of small companies that are priced below $1 per share. correct
The study of the cognitive processes and biases associated with making financial and economic decisions is known as _______________. Behavioral Finance
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 used regression analysis and the other used geometric analysis.
B. Most firms would not want to repurchase shares of common stock if they feel their stock is overvalued.C. It is important for financial managers to understand market efficiency because it helps them understand how their stock prices will react to different types of decisions and news announcements. correct
Which of the following is a concern regarding beta? A. Using different market proxies will result in different estimates of beta.B. A company can alter its risk level which may make the beta estimate obsolete.C. Research indicates that a company’s beta does not appear to predict its future return very well.
Which of the following statements is incorrect regarding how beta is calculated? A. The company return is the independent variable.B. The market portfolio return is the dependent variable.C. Using the oldest data possible will yield the most accurate results.

Leave a Reply

Your email address will not be published. Required fields are marked *