Deck 7: Stocks and Other Assets

Question 1

Which of the following statements correctly identifies a difference between a stock exchange and a stock index?

A)A stock exchange refers to a market where stocks of government-owned enterprises are traded, while a stock index refers to a market where the stocks of privately-owned enterprises are traded.
B)A stock index refers to a market where stocks of government-owned enterprises are traded, while a stock exchange refers to a market where the stocks of privately-owned enterprises are traded.
C)A stock exchange refers to a market where stocks are traded, while a stock index reflects the average price of a collection of stocks.
D)A stock index refers to a market where stocks are traded, while a stock exchange reflects the average price of a collection of stocks.

Answer 1

A

Question 2

The Wilshire 5000 stock index is

A)an index of the 2000 largest industrial companies whose shares trade in U.S.markets.
B)an index of all the companies with U.S.headquarters whose shares trade in the U.S.
C)an index of 5000 major companies whose shares trade in U.S.markets.
D)an index of the average stock prices of many small firms operating in the U.S.

Answer 2

B

Question 3

An index of thirty major U.S.industrial companies is the

A)NASDAQ index.
B)NYSE index.
C)Dow Jones Industrial Average.
D)S&P 500.

Answer 3

C

Question 4

A mutual fund is

A)a hedge fund that only wealthy people may invest in.
B)a company that buys a share of each stock in the entire stock market.
C)an investment company that buys stocks in companies that are not growing strongly.
D)an investment company that pools the funds of many investors and buys a large number of different stocks.

Question 5

An investor buys a stock for $10,000 and earns dividends of $250 during the course of the year.At the end of the year, the stock is worth $9,300.The capital-gains yield for the year is

A)2.5 percent.
B)−2.5 percent.
C)−4.5 percent.
D)−7.0 percent.

Question 6

An index that measures the average stock prices of small firms in the United States is the

A)Russell 2000 index.
B)NYSE index.
C)Dow Jones Industrial Average.
D)S&P 500.

Question 7

An index fund is

A)a mutual fund that mimics a stock index.
B)an investment company that pools the funds of many investors and buys government bonds.
C)a mutual fund that buys mortgage-backed securities (MBSs).
D)a company that rates companies in terms of their financial strength.

Question 8

​Which of the following statements is true?

A)​Dividend payments of firms are independent of how much profit the firm is making.
B)​Stock prices of firms are independent of how much profit the firm is making.
C)​​A share of stock gives an investor complete ownership of the corporation that issued the stock.
D)​A share of stock gives an investor partial ownership of the corporation that issued the stock.

Question 9

An investor earns dividends of $450 on a stock during the course of the year.At the end of the year, the stock is worth $10,142.Over the year, the total return on the stock was 12 percent.At the beginning of the year, the stock must have been approximately worth

A)$9,007.
B)$9,457.
C)$9,907.
D)$10,357.

Question 10

The S&P 500 stock index is an index of

A)all the companies whose shares trade at a price more than $500.
B)all the companies whose shares trade on the New York Stock Exchange.
C)500 major companies whose shares trade in U.S.markets.
D)the largest 500 companies in the world.

Question 11

An investor buys a stock for $10,000 and earns dividends of $250 during the course of the year.At the end of the year, the stock is worth $9,300.The total return for the year is

A)2.5 percent.
B)−2.5 percent.
C)−4.5 percent.
D)−7.0 percent.

Question 12

An investor buys a stock for $10,000 and earns dividends of $250 during the course of the year.At the end of the year, the stock is worth $9,300.The dividend yield for the year is

A)−2.5 percent.
B)2.5 percent.
C)4.5 percent.
D)−7.0 percent.

Question 13

Shareholders are also called

A)bondholders.
B)brokers.
C)stockholders.
D)debt-holders.

Question 14

A place where people buy or sell stocks is known as a stock

A)exchange.
B)index.
C)fund.
D)holding.

Question 15

​Which of the following statements is true?

A)Stockholders benefit when ​the price of the stocks they hold rises and lose when the price of the stocks they hold falls.
B)​Stockholders benefit when ​the price of the stocks they hold falls and lose when the price of the stocks they hold rises.
C)​Stockholders have the right to participate in the decision making of a company but are not entitled to dividend payments.
D)​Stockholders are entitled to dividend payments but do not have the right to participate in the decision making of a company.

Question 16

An investor earns dividends of $360.27 during the course of the year.At the end of the year, the stock is worth $10,700.If the dividend yield on the stock over the year was calculated at 4%, the approximate worth of the stock at the beginning of the year was

A)$9,007.
B)$9,457.
C)$9,907.
D)$10,357.

Question 17

An investor earns dividends of $450 during the course of a year.At the end of the year, the stock is worth $10,700. If the capital-gains yield on the stock over the year is calculated at 8 percent the approximate worth of the stock at the beginning of the year was

A)$9,007.
B)$9,457.
C)$9,907.
D)$10,357.

Question 18

A stock index tells you

A)the average price of a collection of stocks.
B)the expected changes in the prices of select stocks over a year.
C)where to buy or sell stocks.
D)what stocks to buy or sell.

Question 19

Which of the following statements is true?

A)Different stock indexes normally show the same total returns.
B)Stock indexes do not provide information on dividends.
C)Mutual funds encourage investors to invest in the same security instead of diversifying.
D)The S&P 500 is an example of a mutual fund.

Question 20

A stock which was bought for $1,000 pays annual dividends of $250.The first quarter dividend yield of the stock can be calculated at

A)1.75 percent.
B)3 percent.
C)5.25 percent.
D)6.25 percent.

Question 21

Identify the correct statement from the following.

A)Dividend payments are subject to taxes while realized capital gains are not.
B)​Realized capital gains are subject to taxes while dividend payments are not.
C)​Both dividend payments and realized capital gains are subject to taxes.
D)​Neither dividend payments nor realized capital gains are subject to taxes.

Question 22

Which of the following statements is true?

A)When an investor diversifies his investments, the total risk involved reduces.
B)Dividends paid on stocks are legally not liable to attract taxes.
C)When a company increases its retained earnings, the dividends paid by it increases.
D)As a company increases its retained earnings, the stock price of the company is expected to reduce.

Question 23

A benefit of mutual funds that mainly buy stocks and hold them is that

A)the price of the stocks they hold always appreciate.
B)dividend payments on such stocks are not taxed.
C)they help avoid taxes as the capital gains on these stocks are implicit.
D)​they promise annual returns of more than 50% of the principal amount.

Question 24

An investor buys a stock for $1,200 at the beginning of a year.The stock pays him a dividend of $150 over the year, and the worth of the stock appreciates by $300 at the end of the year.If the annual rate of inflation is 6%, what is the loss in principal value due to inflation?

A)$18
B)$27
C)$72
D)$247.5

Question 25

The idea that stock prices fully reflect all available information is called

A)asymmetric information.
B)random walk theory.
C)volatile markets hypothesis.
D)the efficient markets hypothesis.

Question 26

Which of the following statements is true?

A)Both realized and implicit capital gains are taxed.
B)Realized capital gains are taxed, while implicit capital gains are not taxed.
C)Implicit capital gains are taxed, while realized capital gains are not taxed.
D)Neither realized capital gains, nor implicit capital gains are taxed.

Question 27

An investor buys stock for $10,000 at the beginning of the year.She earns dividends of $300 during the course of the year.At the end of the year, the stock is worth $10,800.The tax rate on dividends and capital gains is 15 percent.The inflation rate is 3 percent.What is the real return accrued on the stock at the end of the year, provided the investor does not sell the stock?

A)6.35 percent.
B)6.95 percent.
C)7.55 percent.
D)8 percent.

Question 28

Realized capital gains are

A)increases in the value of a firm that occur because a firm has retained earnings that are exempt from corporate profits taxes.
B)capital gains that are owned by foreigners.
C)capital gains that an investor receives from actually selling stock.
D)capital gains that have been accrued but not yet received because the stock has not been sold.

Question 29

Which of the following statements is true?

A)If a company retains profits instead of paying dividends, the price of their stock is expected to rise.
B)Investors need not pay taxes on dividend earnings.
C)Dividend earnings are legally not allowed to be invested and can only be used for consumption.
D)The annual dividend yield on a stock is always greater than the annual capital-gains yield on the same stock.

Question 30

An investor earns $400 in dividends and $800 in capital gains over a year.If the tax rate on these earnings is 15%, what is the total tax that the investor is liable to pay on these earnings?

A)$0.
B)$60.
C)$120.
D)$180.

Question 31

The efficient market hypothesis assumes that

A)there are only a few buyers and sellers in a stock market and stocks are illiquid.
B)there are many buyers and sellers in a stock market and stocks are illiquid.
C)there are only a few buyers and sellers in a stock market and stocks are liquid.
D)there are many buyers and sellers in a stock market and stocks are liquid.

Question 32

In the United States, an investor who bought the average stock in 1929 and sold it in 1959 would have had a

A)negative or zero real capital gain on his stock.
B)50 percent real capital gain on his stock.
C)100 percent real capital gain on his stock.
D)1000 percent real capital gain on his stock.

Question 33

The lock­in effect

A)​allows stocks to be priced efficiently.
B)will be smaller in magnitude if tax rates are lower.
C)​is likely to reduce the volume of stocks being traded in a market.
D)​states that when stock prices rise, they will continue to do so for prolonged time periods.

Question 34

In the second half of the 1990s, the average annual real return to the stock market was about each year.

A)23 percent.
B)10 percent.
C)5 percent.
D)2 percent.

Question 35

​If sales of a firm exactly equals investor expectations, stock price of the firm

A)is expected to increase.
B)is expected to decrease.
C)is expected to remain the same.
D)​can increase or decrease depending on the volume of stocks being traded.

Question 36

Implicit capital gains are

A)increases in the capital stock required to operate stock markets.
B)capital gains realized by foreign investors.
C)capital gains that have been realized by domestic investors.
D)capital gains that have been accrued but not yet realized.

Question 37

In recessions, the average real return to the stock market is often

A)negative.
B)between 0% to 5%.
C)between 5% to 10%.
D)between 10% to 20%.

Question 38

An investor buys stock for $10,000 at the beginning of the year.She earns dividends of $300 during the course of the year.At the end of the year, the stock is worth $10,800.The tax rate on dividends and capital gains is 15 percent. The inflation rate is 3 percent.What is the investor's after tax real return if she sells the stock at the end of the year?

A)6.35 percent.
B)6.95 percent.
C)7.55 percent.
D)8.15 percent.

Question 39

The lock-in effect occurs when

A)the price of all stocks traded in an exchange appreciates.
B)short selling of stocks is not allowed.
C)stock prices decline more than 5 percent in one day.
D)an investor doesn't sell a stock so she can avoid paying capital-gains taxes.

Question 40

When stock prices are unpredictable, they are said to

A)be riskless.
B)follow a random walk.
C)lack a martingale.
D)be ex-dividend.

Question 41

In the CAPM, if a stock has a large beta coefficient, then

A)the stock's return is less volatile than the market's average return.
B)the stock's return is about as volatile as the market's average return.
C)the stock's return is more volatile than the market's average return.
D)the stock's risk is greater than its expected return.

Question 42

Which of the following statements is true?

A)Systematic risk is also referred to as idiosyncratic risk, while unsystematic risk is also referred to as implicit risk.
B)Unsystematic risk is also referred to as implicit risk, while systematic risk is also referred to as idiosyncratic risk.
C)Systematic risk can be reduced by diversification, while unsystematic risk cannot be reduced by diversification.
D)Unsystematic risk can be reduced by diversification, while systematic risk cannot be reduced by diversification.

Question 43

An observation that does not fit a model is called

A)a martingale.
B)an anomaly.
C)a random walk.
D)a beta coefficient.

Question 44

The arbitrage-pricing theory was developed as an alternative to the

A)the efficient market hypothesis.
B)the random walk theory.
C)capital asset pricing model.
D)rational expectations theory.

Question 45

If the stock market is efficient and investors are risk neutral, then

A)capital gains are always positive.
B)stock prices are predictable.
C)the CAPM model works perfectly.
D)stock prices follow a random walk.

Question 46

According to the capital asset pricing model (CAPM), the return to a stock

A)follows a random walk.
B)depends on oil prices, interest rates, and economic growth.
C)depends on how risky the stock is compared with the market average.
D)depends on the stock's risk and the risk to bonds.

Question 47

You are planning to buy a stock, the risk on which is dependent on two factors: (1) the change over the last year in the inflation rate and (2) the spread between ten-year Treasury bonds and three-month Treasury bills.Suppose the average risk-free interest rate is 1 percent.The beta coefficients of the stock associated with the change in inflation rate and spread between ten-year Treasury bonds and three-month Treasury bills are -2 and 5 respectively.If you expect the inflation rate to rise 1 percentage point and you think the spread will be 3 percentage points.What is the expected return to this stock? Use the arbitrage-pricing theory.

A)11 percent
B)12 percent
C)14 percent
D)18 percent

Question 48

In the CAPM, the risk to a stock's return that is not attributable to the fluctuations in the overall stock market is referred to as

A)idiosyncratic risk.
B)explicit risk.
C)systematic risk.
D)market risk.

Question 49

In the CAPM, systematic risk

A)is also known as idiosyncratic risk.
B)can be diversified away.
C)is also known as market risk.
D)is the risk to a stock's return that is not attributable to the fluctuations in the overall stock market.

Question 50

In the CAPM, if a stock has a beta coefficient near one, then

A)the stock's return is less volatile than the market's average return.
B)the stock's return is about as volatile as the market's average return.
C)the stock's return is more volatile than the market's average return.
D)the stock's risk is greater than its expected return.

Question 51

In the CAPM, a stock has a beta coefficient of 0.5.The average returns to all stocks in the market is 8%.If the interest rate on three-month T-bills is at around 3 percent, what is the expected return to this stock? Assume that unsystematic risk is zero.

A)2.5 percent
B)3.5 percent
C)5.5 percent
D)7.0 percent

Question 52

In the CAPM,

A)larger the value of β for a stock, larger is the unsystematic risk involved in investing in the stock.
B)larger the value of β for a stock, smaller is the unsystematic risk involved in investing in the stock.
C)larger the value of β for a stock, larger is the systematic risk involved in investing in the stock.
D)larger the value of β for a stock, smaller is the systematic risk involved in investing in the stock.

Question 53

In the CAPM, unsystematic risk

A)is also known as market risk.
B)can be diversified away.
C)is the risk to a stock's return that is attributable to the fluctuations in the overall stock market.
D)is assumed to be zero.

Question 54

Which of the following is an example of an anomaly?

A)The discovery that stock prices fully reflect all available information.
B)The discovery that stock prices follow a random walk.
C)The discovery that returns to stock tend to be negative in periods of recessions.
D)The discovery that stocks have a higher than average return in early January.

Question 55

A model of stock prices that allows for more sources of risk than just the stock market's excess return is the ________ theory.

A)excess-return
B)random-walk
C)arbitrage-pricing
D)idiosyncratic-risk

Question 56

An anomaly is

A)a stock that has greater than average risk.
B)a mutual fund that only invests in government securities.
C)an odd lot of stock.
D)an incident of predictable patterns to stock prices, that investors could exploit.

Question 57

In the CAPM, the risk to a stock's return that is attributable to the fluctuations in the overall stock market is referred to as

A)idiosyncratic risk.
B)explicit risk.
C)systematic risk.
D)unsystematic risk.

Question 58

In the CAPM, a stock has a beta coefficient of 0.1.The average returns to all stocks in the market is 10%.If the interest rate on three-month T-bills is at around 2 percent, what is the expected return to this stock? Assume that unsystematic risk is zero.

A)2.5 percent
B)5.0 percent
C)7.5 percent
D)10.0 percent

Question 59

In the CAPM, the only source of systematic risk is

A)changes in government policy.
B)changes in inflation rates.
C)fluctuations in the foreign exchange rate.
D)overall movement of the stock model.

Question 60

In the CAPM, if a stock has a beta coefficient near zero, then

A)the stock's return is less volatile than the market's average return.
B)the stock's return is about as volatile as the market's average return.
C)the stock's return is more volatile than the market's average return.
D)the stock's risk is greater than its expected return.

Question 61

Suppose the following version of the APT is a good model of risk in the stock market.There are three factors: (1) the stock market's excess return, in percentage points; (2) the unemployment rate minus its natural rate (the level the unemployment rate would be if the economy were at full employment), in percentage points; and (3) the real federal funds rate minus its long-run equilibrium value.Suppose the natural rate of unemployment is 4.5 percent and the long-run equilibrium value of the real federal funds rate is 3.0 percent.Each of the following stocks has the beta coefficients shown in the table below: $$\begin{array} { l l l l } & \beta ^ { 1 i } & \beta ^ { 2 i } & \beta ^ { 3 i } \\\text { Microsoft } & 2 & - 1 & 1\end{array}$$
$$\begin{array} { l l l l } \text { Goldcrafters } & 3 & 2 & - 1 \\\text { State Farm } & 0 & - 2 & 0\end{array}$$
If your forecast for next year is that the risk-free interest rate next year will be 1.0 percent,
a.the overall stock market will return 10.0 percent, the unemployment rate will be 5.0 percent, and the real federal funds rate will be 2.0 percent, what is the expected return (in percent,
with two decimals) to each of the three stocks? Show your calculations.
If your forecast for next year is that the risk-free interest rate next year will be 2.0 percent,
b.the overall stock market will return 20.0 percent, the unemployment rate will be 4.0 percent, and the real federal funds rate will be 4.0 percent, what is the expected return (in percent,
with two decimals) to each of the three stocks? Show your calculations.

Question 62

The fundamental value of a stock varies

A)directly with the rate of discount.
B)inversely with the growth rate of earnings on the stock.
C)directly with previous year's actual earnings on the stock.
D)inversely with the time frame for which a stock is held.

Question 63

If stock prices exceed their fundamental values,

A)the stock market is overvalued.
B)the stock market is undervalued.
C)the stock market is rightly valued.
D)investors have rational expectations.

Question 64

Consider two stocks: A and B.The price of stock A is $400, while the price of stock B is $600.If the fundamental value of both stocks is $500,

A)stock A is overvalued and stock B is undervalued.
B)stock A is undervalued and stock B is overvalued.
C)both stocks are undervalued.
D)both stocks are overvalued.

Question 65

Which of the following is the best example of a nonfinancial security?

A)Coupon bonds
B)Stocks
C)Human capital
D)Foreign exchange

Question 66

An investor expects earnings from a stock to grow at a constant rate of 2% over time and the investors' rate of discount is constant at 5%.If earnings last year were $37, then the fundamental value of the stock would be

A)$74.
B)$111.
C)$1,258.
D)$11,100.

Question 67

One of the advantages of holding real estate over stocks is that

A)real estate assets are more liquid than stocks.
B)monetary return on real estate is always greater than the monetary return on stocks.
C)​part of the returns on real estate are not subject to tax payments, while all returns on stocks are subject to tax payments.
D)principal amount required for investing in real estate is often smaller than the principal amount required to invest in stocks.

Question 68

An investor expects earnings from a stock to grow at a constant rate of 3% over time and the investors' rate of discount is constant at 4%.If earnings last year were $152, then the fundamental value of the stock would be

A)$152.
B)$190.
C)$1,520.
D)$15,656.

Question 69

If people have rational expectations,

A)the stock market may be overvalued.
B)the stock market may be undervalued.
C)stock prices are nonvolatile.
D)stock prices always equal their fundamental value.

Question 70

If stock prices are below their fundamental values,

A)the stock market is overvalued.
B)the stock market is undervalued.
C)investors have rational expectations.
D)mutual funds will be worth more than their price.

Question 71

The______ theory states that the stock market goes through periods in which stock prices rise higher than theirFundamental value and other periods where stock prices fall below their fundamental value.

A)rational expectations
B)adaptive expectations
C)irrational expectations
D)realized expectations

Question 72

The average amount by which the returns on stocks exceeds the return on debt securities is referred to as

A)beta coefficient.
B)gamma coefficient.
C)return spread.
D)equity premium.

Question 73

Suppose an investor purchased 100 shares of JDSU stock at a price of $50 per share on December 31, 2011.On December 31, 2012, JDSU paid dividends of $1.50 per share, and the investor received the dividends, then sold the stock at a price of $65 per share.
a.If there were no taxes or inflation, what was the total return?
b.If there were no taxes, but inflation was 3.5 percent, what was the real return?
c.If the tax rate was 15 percent on dividends and capital gains, what was the after-tax real return?

Question 74

You are planning to buy a stock, the risk on which is dependent on two factors: (1) the change in the inflation rate over the last year and (2) the spread between ten-year Treasury bonds and three-month Treasury bills.Suppose the average risk-free interest rate is 3 percent.The beta coefficients of the stock associated with the change in inflation rate and the spread between ten-year Treasury bonds and three-month Treasury bills are -2 and 4 respectively.If you expect the inflation rate to rise 6 percentage point and you think the spread will be 8 percentage points.What is the expected return to this stock? Use the arbitrage-pricing theory.

A)11 percent
B)12 percent
C)18 percent
D)23 percent

Question 75

A theory that investors use all the information available to them about companies future prospects in determining their buying and selling decisions is called ______expectations.

A)rational
B)irrational
C)adaptive
D)realized

Question 76

The equity-premium puzzle refers to the surprising result that

A)stock prices are inversely related to interest rates.
B)the transactions costs for buying stocks may be as high as 5 percent of the total value of those stocks, greatly reducing the net returns to stocks.
C)equity prices are much too high when compared with the fundamental value of the stock market, as determined by using the present-value formula.
D)people will not pay to avoid risk in everyday situations, but when it comes to the stock market, people are willing to give up large potential returns to stocks in order to buy safer Treasury securities.

Question 77

An investor buys stock for $5,000 at the beginning of the year.She earns dividends of $200 during the course of the year.At the end of the year, the stock is worth $5,150.The tax rate on dividends and capital gains is 15 percent.The inflation rate is 2 percent.
a.Calculate the investor's after-tax real return if she does not sell the stock at the end of the year.
b.Calculate the investor's after-tax real return if she sells the stock at the end of the year.

Question 78

In the United States, the average annual real return on stocks from 1960 to 2012 has been approximately

A)1 percent.
B)2 percent.
C)7 percent.
D)10 percent.

Question 79

Fundamental value is the _____value of expected earnings of a company or of all companies in the stock market as a whole.

A)past
B)future
C)expected
D)present

Question 80

In the United States, the average annual real return on short-term Treasury securities since 1960 to 2012 has been approximately

A)1.5 percent.
B)4 percent.
C)7.25 percent.
D)10 percent.