Fin 534 quiz 10 (30 questions with answers) 99,99 % scored
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Fin 534 quiz 10 (30 questions with answers) 99,99 % scored Document Transcript

  • 1. FIN 534 Quiz 10 (30 questions with answers) 99,99 % Scored PLEASE DOWNLOAD HEREQuestion 1Which of the following statements is CORRECT? (Assume that the risk-free rateis a constant.)AnswerIf the market risk premium increases by 1%, then the required return will increasefor stocks that have a beta greater than 1.0, but it will decrease for stocks thathave a beta less than 1.0.The effect of a change in the market risk premium depends on the slope of theyield curve.If the market risk premium increases by 1%, then the required return on all stockswill rise by 1%.If the market risk premium increases by 1%, then the required return will increaseby 1% for a stock that has a beta of 1.0.The effect of a change in the market risk premium depends on the level of therisk-free rate.2 pointsQuestion 2Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of20%. Stock B also has a beta of 1.2, but its expected return is 10% and itsstandard deviation is 15%. Portfolio AB has $900,000 invested in Stock A and$300,000 invested in Stock B. The correlation between the two stocks returns iszero (that is, rA,). Which of the following statements is CORRECT?AnswerPortfolio ABs standard deviation is 17.5%.The stocks are not in equilibrium based on the CAPM; if A is valued correctly,then B is overvalued.The stocks are not in equilibrium based
  • 2. on the CAPM; if A is valued correctly, then B is undervalued.Portfolio ABs expected return is 11.0%.Portfolio ABs beta is less than 1.2.2 pointsQuestion 3Which of the following statements is CORRECT?AnswerIf a company with a high beta merges with a low-beta company, the best estimateof the new merged companys beta is 1.0.Logically, it is easier to estimate the betas associated with capital budgetingprojects than the betas associated with stocks, especially if the projects areclosely associated with research and development activities.The beta of an "average stock," which is also "the market beta," can change overtime, sometimes drastically.If a newly issued stock does not have a past history that can be used forcalculating beta, then we should alwaysestimate that its beta will turn out to be 1.0. This is especially true if the companyfinances with more debt than the average firm.During a period when a company is undergoing a change such as increasing itsuse of leverage or taking on riskier projects, the calculated historical beta may bedrastically different from the beta that will exist in the future.2 pointsQuestion 4Which of the following statements isCORRECT?AnswerA large portfolio of randomly selected stocks will always have a standarddeviation of returns that is less than the standard deviation of a portfolio withfewer stocks, regardless of how the stocks in the smaller portfolio are selected.
  • 3. Diversifiable risk can be reduced by forming a large portfolio, but normally evenhighly-diversified portfolios are subject to market (or systematic) risk.A large portfolio of randomly selected stocks willhave a standard deviation of returns that is greater than the standard deviation ofa 1-stock portfolio if that one stock has a beta less than 1.0.A large portfolio of stocks whose betas are greaterthan 1.0 will have less market risk than a single stock with aIf you add enough randomly selected stocks to a portfolio, you can completelyeliminate all of the market risk from the portfolio.2 pointsQuestion 5Which of the following statements is CORRECT?AnswerA stocks beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock.If an investor buys enough stocks, he or she can, through diversification,eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if aportfolio contained all publicly traded stocks, it would be essentially riskless.The required return on a firms commonstock is, in theory, determined solely by its market risk. If the market risk isknown, and if that risk is expected to remain constant, then no other information isrequired to specify the firms required return.Portfolio diversification reduces the variability of returns (as measured by thestandard deviation) of each individual stock held in a portfolio.A securitys beta measures its non-diversifiable, or market, risk relative to that ofan average stock.2 pointsQuestion 6For a portfolio of 40 randomly selected stocks, which of the following is most likelyto be true?
  • 4. AnswerThe riskiness of the portfolio is greaterthan the riskiness of each of the stocks if each was held in isolation.The riskiness of the portfolio is thesame as the riskiness of each stock if it was held in isolation.The beta of the portfolio is less thanthe average of the betas of the individual stocks.The beta of the portfolio is equal to the average of the betas of the individualstocks.The beta of the portfolio is larger than the average of the betas of the individualstocks.2 pointsQuestion 7Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the followingstatements must be true, according to the CAPM?AnswerIf you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfoliowould have a beta significantly lower than 1.0, provided the returns on the twostocks are not perfectly correlated.Stock Ys realized return during the coming year will be higher than Stock Xsreturn.If the expected rate of inflation increasesbut the market risk premium is unchanged, the required returns on the two stocksshould increase by the same amount.Stock Ys return has a higher standarddeviation than Stock X.If the market risk premium declines, but the risk-free rate is unchanged, Stock Xwill have a larger decline in its required return than will Stock Y.
  • 5. 2 pointsQuestion 8Which of the following statements is CORRECT?AnswerAn investor can eliminate virtually all market risk if he or she holds a very largeand well diversified portfolio of stocks.The higher the correlation between the stocks in a portfolio, the lower the riskinherent in the portfolio.It is impossible to have a situation where the market risk of a single stock is lessthan that of a portfolio that includes the stock.Once a portfolio has about 40 stocks, adding additional stocks will not reduce itsrisk by even a small amount.An investor can eliminate virtually all diversifiable risk if he or she holds a verylarge, well diversified portfolio of stocks.2 pointsQuestion 9Which of the following is NOT a potential problem when estimating and usingbetas, i.e., which statement is FALSE?AnswerThe fact that a security or project may not have a past history that can be used asthe basis for calculating beta.Sometimes, during a period when the company is undergoing a change such astoward more leverage or riskier assets, the calculated beta will be drasticallydifferent from the "true" or "expected future" beta.The beta of an "average stock," or "the market," can change over time,sometimes drastically.Sometimes the past data used to calculate beta do not reflect the likely risk of thefirm for the future because conditions have changed.All of the statements above are true.2 points
  • 6. Question 10Inflation, recession, and high interest rates are economic events that are bestcharacterized as beingAnswersystematic risk factors that can be diversified away.company-specific risk factors that can be diversified away.among the factors that are responsible for market risk.risks that are beyond the control of investors and thus should not be consideredby security analysts or portfolio managers.irrelevant except to governmental authorities like the Federal Reserve.2 pointsQuestion 11Stock As beta is 1.5 and Stock Bs beta is 0.5. Which of the following statementsmust be true about these securities? (Assume market equilibrium.)AnswerWhen held in isolation, Stock A has more risk than Stock B.Stock B must be a more desirable addition to a portfolio than A.Stock A must be a more desirable addition to a portfolio than B.The expected return on Stock A should be greater than that on B.The expected return on Stock B should be greater than that on A.2 pointsQuestion 12Assume that the risk-free rate is 5%. Which of the following statements isCORRECT?AnswerIf a stock has a negative beta, its required return under the CAPM would be lessthan 5%.
  • 7. If a stocks beta doubled, its required return under the CAPM would also double.If a stocks beta doubled, its required return under the CAPM would more thandouble.If a stocks beta were 1.0, its required return under the CAPM would be 5%.If a stocks beta were less than 1.0, its required return under the CAPM would beless than 5%.2 pointsQuestion 13Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5. The market is inequilibrium, with required returns equaling expected returns. Which of thefollowing statements is CORRECT?AnswerIf expected inflation remains constant but the market risk premium (rM− rRF) declines, the required return of Stock LB will decline but the requiredreturn of Stock HB will increase.If both expected inflation and the market risk premium (rM − rRF) increase, therequired return on Stock HB will increase by more than that on Stock LB.If both expected inflation and the market risk premium(rM − rRF) increase, the required returns of both stocks will increase by the sameamount.Since the market is in equilibrium, the requiredreturns of the two stocks should be the same.If expected inflation remains constant but the market risk premium (rM− rRF) declines, the required return of Stock HB will decline but the requiredreturn of Stock LB will increase.2 pointsQuestion 14Which of the following statements is CORRECT?
  • 8. AnswerA two-stock portfolio will always have a lower standard deviation than a one-stockportfolio.A portfolio that consists of 40 stocks that are not highly correlated with "themarket" will probably be less risky than a portfolio of 40 stocks that are highlycorrelated with the market, assuming the stocks all have the same standarddeviations.A two-stock portfolio will always have a lower beta than a one-stock portfolio.If portfolios are formed by randomly selecting stocks, a 10-stock portfolio willalways have a lower beta than a one-stock portfolio.A stock with an above-average standard deviation must also have an above-average beta.2 pointsQuestion 15Your portfolio consists of $50,000 invested in Stock X and $50,000 invested inStock Y. Both stocks have an expected return of 15%, betas of 1.6, and standarddeviations of 30%. The returns of the two stocks are independent, so thecorrelation coefficient between them, rXY, is zero. Which of the followingstatements best describes the characteristics of your 2-stock portfolio?AnswerYour portfolio has a standard deviation of 30%, and its expected return is 15%.Your portfolio has a standard deviation less than 30%, and its beta is greater than1.6.Your portfolio has a beta equal to 1.6, andits expected return is 15%.Your portfolio has a beta greater than 1.6, and its expected return is greater than15%.Your portfolio has a standard deviation greaterthan 30% and a beta equal to 1.6.2 points
  • 9. Question 16Stocks A and B have the same price and are in equilibrium, but Stock A has thehigher required rate of return. Which of the following statements is CORRECT?AnswerIf Stock A has a lower dividend yield than Stock B, its expected capital gains yieldmust be higher than Stock B’s.Stock B must have a higher dividend yield than Stock A.Stock A must have a higher dividend yield than Stock B.If Stock A has a higher dividend yield than Stock B, its expected capital gainsyield must be lower than Stock B’s.Stock A must have both a higher dividendyield and a higher capital gains yield than Stock B.2 pointsQuestion 17If in the opinion of a given investor a stock’s expected return exceeds its requiredreturn, this suggests that the investor thinksAnswerthe stock is experiencing supernormal growth.the stock should be sold.the stock is a good buy.management is probably not trying to maximize the price per share.dividends are not likely to be declared.2 pointsQuestion 18Stock X has the following data. Assuming the stock market is efficient and thestock is in equilibrium, which of the following statements is CORRECT?Expected dividend, D1 $3.00
  • 10. Current Price, P0 $50Expected constant growth rate 6.0%AnswerThe stock’s required return is 10%.The stock’s expected dividend yield and growth rate are equal.The stock’s expected dividend yield is 5%.The stock’s expected capital gains yield is 5%.The stock’s expected price 10 years from now is $100.00.2 pointsQuestion 19Which of the following statements is CORRECT, assuming stocks are inequilibrium?AnswerThe dividend yield on a constant growth stock must equal its expected total returnminus its expected capital gains yield.Assume that the required return on a given stock is 13%. If the stock’s dividend isgrowing at a constant rate of 5%, its expected dividend yield is 5% as well.A stock’s dividend yield cannever exceed its expected growth rate.A required condition for one to use the constant growth model is that the stock’sexpected growth rate exceeds its required rate of return.Other things held constant, the higher a company’s beta coefficient, the lower itsrequired rate of return.2 pointsQuestion 20An increase in a firm’s expected growth rate would cause its required rate ofreturn to
  • 11. Answerincrease.decrease.fluctuate less than before.fluctuate more than before.possibly increase, possibly decrease, or possibly remain constant.2 pointsQuestion 21Which of the following statements is CORRECT?AnswerIf a company has two classes of common stock, Class A and Class B, the stocksmay pay different dividends, but under all state charters the two classes musthave the same voting rights.The preemptive right gives stockholders the right to approve or disapprove of amerger between their company and some other company.The preemptive right is a provision in the corporate charter that gives commonstockholders the right to purchase (on a pro rata basis) new issues of the firmscommon stock.The stock valuation model, P0= D1/(rs - g), cannot be used for firms that have negative growth rates.The stock valuation model, P0= D1/(rs - g), can be used only for firms whose growth rates exceed their requiredreturns.2 pointsQuestion 22A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. Thedividend is expected to decline at a rate of 5% a year forever (%). If the companyis in equilibrium and its expected and required rate of return is 15%, which of thefollowing statements is CORRECT?
  • 12. AnswerThe company’s current stock price is $20.The company’s dividend yield 5 years from now is expected to be 10%.The constant growth model cannot be used because the growth rate is negative.The company’s expected capital gains yield is 5%.The company’s expected stock price at the beginning of next year is $9.50.2 pointsQuestion 23Stocks A and B have the following data. The market risk premium is 6.0% and therisk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are inequilibrium, which of the following statements is CORRECT?ABBeta 1.10 0.90Constant growth rate 7.00% 7.00%AnswerStock A must have a higher stock price than Stock B.Stock A must have a higher dividend yield than Stock B.Stock B’s dividend yield equals its expected dividend growth rate.Stock B must have the higher required return.Stock B could have the higher expected return.2 pointsQuestion 24The expected return on Natter Corporation’s stock is 14%. The stock’s dividend isexpected to grow at a constant rate of 8%, and it currently sells for $50 a share.Which of the following statements is CORRECT?AnswerThe stock’s dividend yield is 7%.
  • 13. The stock’s dividend yield is 8%.The current dividend per share is $4.00.The stock price is expected to be $54 a share one year from now.The stock price is expected to be $57 a share one year from now.2 pointsQuestion 25For a stock to be in equilibrium, that is, for there to be no long-term pressure forits price to depart from its current level, thenAnswerthe expected future return must be less than the most recent past realized return.The past realized return must be equal to the expected return during the sameperiod.the required return must equal the realized return in all periods.the expected return must be equal to both the required future return and the pastrealized return.the expected future returns must be equal to the required return.2 pointsQuestion 26Two constant growth stocks are in equilibrium, have the same price, and have thesame required rate of return. Which of the following statements is CORRECT?AnswerThe two stocks must have the same dividend per share.If one stock has a higher dividend yield, it must also have a lower dividend growthrate.If one stock has a higher dividend yield, it must also have a higher dividendgrowth rate.The two stocks must have the same dividend growth rate.
  • 14. The two stocks must have the same dividend yield.2 pointsQuestion 27If a stock’s dividend is expected to grow at a constant rate of 5% a year, which ofthe following statements is CORRECT? The stock is in equilibrium.AnswerThe expected return on the stock is 5% a year.The stock’s dividend yield is 5%.The price of the stock is expected to decline in the future.The stock’s required return must be equal to or less than 5%.The stock’s price one year from now is expected to be 5% above the currentprice.2 pointsQuestion 28Stocks X and Y have the following data. Assuming the stock market is efficientand the stocks are in equilibrium, which of the following statements isCORRECT?XYPrice $30 $30Expected growth (constant) 6% 4%Required return 12% 10%AnswerStock X has a higher dividend yield than Stock Y.Stock Y has a higher dividend yield than Stock X.One year from now, Stock X’s price is expected to be higher than Stock Y’s price.Stock X has the higher expected year-end dividend.Stock Y has a higher capital gains yield.
  • 15. 2 pointsQuestion 29Which of the following statements is CORRECT?AnswerPreferred stockholders have a priority over bondholders in the event ofbankruptcy to the income, but not to the proceeds in a liquidation.The preferred stock of a given firm is generally less risky to investors than thesame firm’s common stock.Corporations cannot buy the preferred stocks of other corporations.Preferred dividends are not generally cumulative.A big advantage of preferred stock is that dividends on preferred stocks are taxdeductible by the issuing corporation.2 pointsQuestion 30Stocks X and Y have the following data. Assuming the stock market is efficientand the stocks are in equilibrium, which of the following statements isCORRECT?XYPrice $25 $25Expected dividend yield 5% 3%Required return 12% 10%AnswerStock Y pays a higher dividend per share than Stock X.Stock X pays a higher dividend per share than Stock Y.One year from now, Stock X should have the higher price.Stock Y has a lower expected growth rate than Stock X.Stock Y has the higher expected capital gains yield.
  • 16. 2 points