Question 1

Holding other factors constant, an increase in the capital gains tax rate will:

Accepted Answer

An increase in the capital gains tax rate will have less effect on the valuation of dividend-paying stocks than on stocks with high growth prospects. This is because dividend-paying stocks generate income through dividends and are less affected by changes in capital gains tax rates. On the other hand, high growth stocks are typically valued on their future earnings potential, and an increase in capital gains tax rates can make them less attractive to investors.

Question 2

The market risk premium is:

Accepted Answer

The market risk premium is the additional return that investors require to invest in the market as opposed to a risk-free asset. It is calculated as the difference between the return of the market and the risk-free rate. Therefore, option B is the correct choice as it defines the market risk premium correctly.

Question 3

____ is (are) not a firm-specific factor(s) that affect(s) stock prices.

Accepted Answer

Exchange rates are not firm-specific factors as they are impacted by various macroeconomic and global factors beyond the control of any individual company. The other options listed are firm-specific factors as they directly relate to the company's financial decisions and performance.

Question 4

Steam Corp. has a beta of 1.5. The prevailing risk-free rate is 5 percent and the annual market return in recent years has been 11 percent. Based on this information, the required rate of return on Steam Corp. stock is ____ percent.

Accepted Answer

The answer of Steam Corp. has a beta of 1.5....

Question 5

The market risk premium is stable over time and is not affected by stock market conditions.

Accepted Answer

The market risk premium can vary over time and is influenced by stock market conditions. It is calculated as the difference between the expected return of the market and the risk-free rate, and both of these variables can change based on economic and market conditions.

Question 6

Holding other factors constant, a stock portfolio has more volatility when its individual stock volatilities are ________ and its individual stock returns have _______ correlations.

Accepted Answer

The answer of Holding other factors constant, a stock portfolio...

Question 7

Even though a foreign stock that appears to be overvalued in its own country, the stock may not generate a reasonable return for a U.S. investor if the currency of that country appreciates against the U.S. dollar.

Accepted Answer

This statement is true. Currency exchange rate fluctuations can greatly impact the return on foreign investments for investors in other countries. If the local currency of the foreign stock appreciates against the U.S. dollar, then the return on the investment may be reduced for a U.S. investor, even if the valuation in the foreign country appears to be reasonable.

Question 8

The general mood of investors represents:

Accepted Answer

Investor sentiment refers to the overall attitude of investors toward the market or a particular stock. It is generally based on emotions, such as fear or optimism, rather than objective analysis.

Question 9

Investors can avoid unsystematic risk by:

Accepted Answer

Holding a diversified portfolio is the best way to avoid unsystematic risk because it involves investing in multiple stocks across different industries and sectors. This helps to reduce the impact of any negative events or news that may affect one particular company or sector, as the losses can be offset by gains in other areas of the portfolio. Using the capital asset pricing model or free cash flow model can help with investment decision-making, but they do not specifically address the issue of unsystematic risk. Investing in stocks with low PE ratios may be one strategy for minimizing risk, but it does not provide diversification benefits.

Question 10

The VIX (volatility index) indicates the volatility of the bond market in general.

Accepted Answer

The VIX actually indicates the volatility of the stock market, not the bond market.

Question 11

Emerging market stocks tend to exhibit all of the following except:

Accepted Answer

Emerging market stocks do not typically have a high correlation with stocks of more developed countries. They are often seen as a way to diversify a portfolio and add exposure to economies with different growth drivers than those of more developed countries.

Question 12

Which of the following is not a type of factor that drives stock prices, according to your text?

Accepted Answer

All of the choices (A, B, and C) are types of factors that can affect stock prices. Therefore, D is the correct answer.

Question 13

The U.S. government's budget deficit has a significant impact on the bond market but does not affect the stock market.

Accepted Answer

The U.S. government's budget deficit can affect both the bond and stock markets. A larger deficit may lead to an increase in Treasury bond yields, as investors demand higher returns to compensate for the risk of holding bonds issued by a government with high levels of debt. This can lead to a decrease in the price of existing bonds, which can impact bond funds and ETFs. Additionally, concerns about a large deficit may also lead to decreased confidence in the economy, which can affect the stock market.

Question 14

As a result of market integration, stock markets in emerging markets are likely to be as efficient as U.S. stock markets.

Accepted Answer

Market integration can improve efficiency in emerging markets, but they often still face challenges such as lower liquidity, less stringent regulatory environments, and less sophisticated market participants compared to U.S. stock markets, which can keep them from reaching the same level of efficiency.

Quiz 11: Stock Valuation and Risk