Question 1

According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be ____ affected by a weak dollar. Stock prices of U.S. importing firms could be ____ affected by a weak dollar.

Accepted Answer

A weak dollar makes U.S. exports cheaper and more competitive abroad, potentially boosting sales and profits for exporting firms, hence favorably affecting their stock prices. Conversely, a weak dollar makes imports more expensive, which could hurt the profitability of importing firms, adversely affecting their stock prices.

Question 2

A stock's beta can be measured from the estimate of the ________ using regression analysis.

Accepted Answer

The beta of a stock is measured from the estimate of the slope coefficient in regression analysis, where the stock's returns are regressed against the market's returns to determine how much the stock moves relative to the market.

Question 3

The "January effect" refers to a large

Accepted Answer

The "January effect" is a phenomenon where small stocks tend to outperform the market in January, leading to a rise in their prices. This is often attributed to tax-related selling in December, followed by a rebound in January.

Question 4

A higher beta for an asset reflects

Accepted Answer

A higher beta for an asset indicates a higher covariance between the asset's returns and the market returns, meaning the asset's price movements are more closely related to the movements in the overall market.

Question 5

Zilo stock has an average return minus the average risk-free rate of 5 percent, a beta of 1, and a standard deviation of returns of 20 percent. The Sharpe index of Zilo stock is

Accepted Answer

The Sharpe index is calculated as (Average return - Risk-free rate) / Standard deviation. Here, it is 0.05 / 0.20 = 0.25.

Question 6

Sorvino Company is expected to offer a dividend of $3.20 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $____.

Accepted Answer

The answer of Sorvino Company is expected to offer a...

Question 7

Kandle Company paid a dividend of $4.76 per share this year and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kandle stock, according to the dividend discount model, is $____.

Accepted Answer

The value of the stock is calculated using the Gordon Growth Model: P = D1 / (r - g) = 5 / (0.15 - 0.03) = 41.67.

Question 8

Morgan stock has an average return minus the average risk-free rate of 12.5 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Treynor index of Morgan stock is

Accepted Answer

The Treynor index is calculated as (Average Return - Risk-Free Rate) / Beta. Here, it is 12.5% / 2.5 = 0.05.

Question 9

If the returns of two stocks are perfectly correlated, then

Accepted Answer

The correlation coefficient measures the degree to which two variables move in relation to each other. If two stocks are perfectly correlated, their correlation coefficient should equal 1.0, indicating that they move together perfectly in the same direction.

Question 10

Technical analysis relies on the use of ____ to make investment decisions.

Accepted Answer

Technical analysis primarily focuses on analyzing recent stock price trends and trading volumes to forecast future price movements, rather than on fundamental factors like interest rates, inflationary expectations, or industry conditions.

Question 11

Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent. The Sharpe index for Boris stock is

Accepted Answer

The answer of Boris stock has an average return of...

Question 12

The standard deviation of a stock's returns is used to measure the stock's

Accepted Answer

The standard deviation of a stock's returns is a measure of the stock's volatility, indicating how much the stock's returns can deviate from its average return.

Question 13

The demand by foreign investors for the stock of a U.S. firm sold on a U.S. exchange may be higher when the dollar is expected to ____, other things being equal. (Assume the firm's operations are unaffected by the value of the dollar.)

Accepted Answer

When the dollar is expected to strengthen, foreign investors may anticipate that their investment in U.S. stocks will be worth more in their home currency in the future, making U.S. stocks more attractive to them.

Question 14

Tarzak Inc. has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as Tarzak is 15. Tarzak is expected to pay a dividend of $3 per share over the next four years, and an investor in Tarzak requires a return of 12 percent. The estimated stock price of Tarzak today should be ____ using the adjusted dividend discount model.

Accepted Answer

The correct answer is A because the adjusted dividend discount model takes into account the expected growth rate of earnings per share, the required return, and the expected dividends. The formula for the adjusted dividend discount model is:Stock Price = (Dividend / (Required Return - Growth Rate)) + (Earnings per Share * (1 + Growth Rate) / (Required Return - Growth Rate))Plugging in the given values, we get:Stock Price = ($3 / (0.12 - 0.03)) + ($10 * (1 + 0.03) / (0.12 - 0.03))= $3 / 0.09 = $33.33 + $10 * 1.03 / 0.09= $33.33 + $10.61 / 0.09= $33.33 + $117.89= $151.22

Question 15

A beta of 1.1 means that for a given 1 percent change in the value of the market, the _______ is expected to change by 1.1 percent in the same direction.

Accepted Answer

A beta of 1.1 indicates that the stock's value is expected to move 1.1% in the same direction as the market for a given 1% change in the market. Beta measures the volatility of a stock relative to the overall market.

Question 16

The beta of a stock portfolio is equal to a weighted average of the

Accepted Answer

The beta of a stock portfolio is calculated as a weighted average of the betas of the individual stocks within the portfolio. This measure reflects the portfolio's sensitivity to market movements.

Question 17

According to the capital asset pricing model, the required return by investors on a security is

Accepted Answer

The Capital Asset Pricing Model (CAPM) posits that the required return on a security is directly related to its beta (which measures the security's volatility relative to the market), the risk-free rate, and the expected market return. It does not suggest an inverse relationship with any of these factors.

Question 18

LeBlanc Inc. currently has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as LeBlanc Inc. is 15. LeBlanc is expected to pay a dividend of $3 per share over the next four years, and an investor in LeBlanc requires a return of 12 percent. What is the forecasted stock price of LeBlanc in four years, using the adjusted dividend discount model?

Accepted Answer

The answer of LeBlanc Inc. currently has earnings of $10...

Question 19

The capital asset pricing model (CAPM)suggests that the required rate of return on a stock is directly influenced by the stock's

Accepted Answer

The CAPM indicates that the required rate of return on a stock is directly influenced by its beta, which measures the stock's volatility or risk relative to the overall market.

Question 20

The ____ is often used to estimate the required rate of return for any firm with public traded stock.

Accepted Answer

The Capital Asset Pricing Model (CAPM) is commonly used to estimate the required rate of return for any firm with publicly traded stock, as it considers the risk-free rate, the stock's beta, and the market risk premium.

Quiz 11: Stock Valuation and Risk

According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be affected by a weak dollar. Stock prices of U.S. importing firms could be affected by a weak dollar.