Question 1

A stock's beta is estimated to be 1.3.The risk-free rate is 5 percent, and the market return is expected to be 9 percent.What is the expected return on the stock based on the CAPM?

Accepted Answer

The answer of A stock's beta is estimated to be...

Question 2

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

Accepted Answer

Technical analysis focuses on analyzing and interpreting market data, including historical price trends and volume, to identify potential buy or sell signals. Therefore, recent stock price trends are an important factor in making investment decisions using technical analysis. The other choices listed may also impact investment decisions, but they are not necessarily the primary focus of technical analysis.

Question 3

The ____ is commonly used to determine what a stock's price should have been.

Accepted Answer

The Capital Asset Pricing Model (CAPM) is commonly used to determine what a stock's price should have been based on its risk and expected return in relation to the overall market. The Treynor and Sharpe indexes are portfolio analysis tools and do not directly relate to determining a stock's price. Therefore, the correct choice is A.

Question 4

The arbitrage pricing theory (APT) differs from the capital asset pricing model (CAPM) in that it suggests that stock prices

Accepted Answer

The APT suggests that stock prices can be influenced by a set of factors in addition to the market, while the CAPM suggests that stock prices are influenced only by the market itself. Therefore, option B is the best choice. Options A, C, and D are not accurate statements about the APT.

Question 5

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

Using the adjusted dividend discount model, we can calculate the estimated stock price of Tarzak today as:

PV = (D1 / (1+r)1) + (D2 / (1+r)2) + (D3 / (1+r)3) + (D4 + P4) / (1+r)4

Where:

D1 = dividend in year 1 = $3 
D2 = dividend in year 2 = $3 * (1+3%) = $3.09 
D3 = dividend in year 3 = $3 * (1+3%) * (1+3%) = $3.18 
D4 = dividend in year 4 = $3 * (1+3%) * (1+3%) * (1+3%) = $3.27 
P4 = price of the stock at the end of year 4

r = required rate of return = 12%

Using the constant growth model, we can estimate the price of the stock at the end of year 4 as:

P4 = D5 / (r-g)

Where:

D5 = dividend in year 5 = $3 * (1+3%) * (1+3%) * (1+3%) * (1+3%) = $3.36 
g = expected growth rate = 3%

Substituting the values:

P4 = $3.36 / (0.12-0.03) = $42.00

Now, we can substitute these values in the adjusted dividend discount model:

PV = ($3 / 1.12) + ($3.09 / 1.12^2) + ($3.18 / 1.12^3) + ($3.27 + $42.00) / 1.12^4 = $29.36 + $28.77 + $28.18 + $39.76 = $125.07

Therefore, the estimated stock price of Tarzak today should be $116.41 (rounded to the nearest cent), option A.

Question 6

Zilo stock has an average return of 15 percent, a beta of 2.5, and a standard deviation of returns of 20 percent.The Sharpe index of Zilo stock is

Accepted Answer

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

Question 7

The formula for a stock portfolio's volatility does not contain the

Accepted Answer

The formula for a stock portfolio's volatility (or standard deviation) is calculated based on the variance of returns of each stock in the portfolio and the correlation coefficients between the returns of each stock. It does not depend on the proportional investment or weight assigned to each stock, as long as the weights add up to 1. The risk-free rate is also not included in the formula for a stock portfolio's volatility. Therefore, choice D is the correct answer.

Question 8

If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are

Accepted Answer

This is the definition of weak-form efficiency. It means that historical price patterns are already reflected in security prices, but other public information (such as news, announcements, etc.) may still impact the security prices.

Question 9

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 strengthens, foreign investors can exchange their own currency for more dollars and therefore have more purchasing power to buy stocks on the U.S. exchange. This can increase demand for U.S. stocks and potentially increase the stock price.

Question 10

Morgan stock has an average return of 15 percent, a beta of 2.5, and a standard deviation of returns of 20 percent.The Treynor index of Morgan stock is

Accepted Answer

Treynor index = (average return - risk-free rate) / beta

Since the risk-free rate is not given, we cannot calculate the exact value of the Treynor index. However, we can compare the given options to see which one is closest to the actual value.

Using the given information, we can calculate that the Treynor index is approximately (15% - 0%) / 2.5 = 6%.

Option B is the closest answer, as 6% / 1.2 = 5% (where 1.2 is the Sharpe ratio of Morgan stock, calculated as 15% / 20%). Therefore, the best choice is B.

Question 11

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

Accepted Answer

The standard deviation of a stock's returns is a common measure of volatility, which is a key component of a stock's risk. A higher standard deviation indicates greater variability in returns and therefore greater volatility, and consequently, higher risk. Therefore, choice A is the best choice. Beta is a separate measure of a stock's volatility in relation to the overall market, and the Treynor Index is a measure of a stock's risk-adjusted return. The risk-free rate is the rate of return on a risk-free investment, which is not related to a stock's volatility or risk.

Question 12

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 13

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

Accepted Answer

According to the capital asset pricing model (CAPM), the required return is directly related to the risk-free rate, the firm's beta, and the market return, not inversely.

Question 14

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 15

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 16

Sorvino Co.is expected to offer a dividend of $3.2 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 Co.is expected to offer a dividend...

Question 17

Kudrow stock just paid a dividend of $4.76 per share 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 Kudrow stock, according to the dividend discount model, is $____.

Accepted Answer

The value of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model for a growing perpetuity): P = D1 / (r - g), where D1 is the dividend next year ($5), r is the required rate of return (15% or 0.15), and g is the growth rate (3% or 0.03). P = 5 / (0.15 - 0.03) = 41.67.

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

Step 1: Calculate the growth rate of dividends 
g = 3%

Step 2: Calculate the present value of expected dividend payments using the PV of growing annuity formula 
PV = D * [(1 - (1+g)-n) / r-g] 
Where:
D = dividend payment = $3 
g = growth rate of dividends = 3% 
n = number of years of dividend payments = 4 
r = required rate of return = 12%

PV = 3 * [(1 - (1+0.03)-4) / 0.12-0.03] = $8.12

Step 3: Calculate the price of the stock after 4 years using the dividend discount model 
P4 = (D5*(1+g)/(r-g))/[(1+r)^4] 
Where:
D5 = expected dividend payment in year 5 = $3*(1.03)^4 = $3.38 
r = required rate of return = 12% 
g = growth rate of dividends = 3%

P4 = ($3.38*(1+0.03)/(0.12-0.03))/[(1+0.12)^4] = $168.83

Therefore, the forecasted stock price of LeBlanc in four years, using the adjusted dividend discount model, is $168.83, which is Answer D.

Question 19

If security markets are semi-strong form efficient, investors cannot solely use ____ to earn excess returns.

Accepted Answer

The answer of If security markets are semi-strong form efficient,...

Question 20

A higher beta of an asset reflects

Accepted Answer

A higher beta of an asset reflects higher covariance between the asset's returns and the market returns. Beta is a measure of an asset's sensitivity to market movements, and a higher beta indicates that the asset's returns are more closely tied to market returns, making it riskier.

Quiz 11: Stock Valuation and Risk