Chapter 11: Stock Valuation and Risk
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daily return is .1 percent. The lower boundary is
a.
−1.65 percent.
b.
−3.00 percent
c.
−4.85 percent.
d.
−5.05 percent.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
44. Which of the following is not commonly used as an estimate of a stock’s volatility?
a.
the estimate of its standard deviation of returns over a recent period
b.
the trend of historical standard deviations of returns over recent periods
c.
the implied volatility derived from an option pricing model
d.
the estimate of its option premium derived from an option pricing model
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
45. The credit crisis caused major problems in the mortgage market but had no impact on the stock market.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
46. When a firm’s announced earnings are lower than expected, investors will increase their valuation of the firm’s future
cash flows and its stock.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
Chapter 11: Stock Valuation and Risk
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ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
51. The dividend discount model can be adapted to assess the value of any firm, even those that retain most or all of their
earnings.
a.
b.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
52. For firms that do not pay dividends, the free cash flow model may be more suitable than the dividend discount model.
a.
b.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
53. The capital asset pricing model (CAPM) is based on the premise that the only important risk of a firm is unsystematic
risk.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.11.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
54. The prime rate is commonly used as a proxy for the risk-free rate in the capital asset pricing model (CAPM).
a.
Chapter 11: Stock Valuation and Risk
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b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
55. A stock with a beta of 2.3 means that for every 1 percent change in the market overall, the stock tends to change by
2.3 percent in the same direction.
a.
b.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.11.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
56. Stocks that have relatively little trading are normally subject to less price volatility.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
57. A firm’s stock price is affected not only by macroeconomic and market conditions but also by firm-specific conditions.
a.
b.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
58. Divestitures are commonly viewed as a favorable signal about a firm if the divested assets are unrelated to the firm’s
core business.
Chapter 11: Stock Valuation and Risk
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a.
b.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.06
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
59. The main source of uncertainty in computing the return of a stock is the dividend to be received next year.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
60. A stock portfolio has more volatility when its individual stock returns are uncorrelated.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
61. Beta serves as a measure of risk because it can be used to derive a probability distribution of returns based on a set of
market returns.
a.
b.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
62. The value-at-risk method is intended to warn investors about the potential maximum loss that could occur.
Chapter 11: Stock Valuation and Risk
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a.
b.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
63. Regarding the value-at-risk method, the same methods used to derive the maximum expected loss of one stock can be
applied to derive the maximum expected loss of a stock portfolio for a given confidence level.
a.
b.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
64. Portfolio managers who monitor systematic risk rather than total risk are more concerned about stock volatility than
about beta.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
65. Regarding the implied standard deviation, by plugging in the actual option premium paid by investors for a specific
stock in the option-pricing model, it is possible to derive the anticipated volatility level.
a.
b.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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66. A portfolio’s beta is the sum of the individual forecasted betas, weighted by the market value of each stock.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
67. If beta is thought to be the appropriate measure of risk, a stock’s risk-adjusted returns should be determined by the
Sharpe index.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.11.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
68. The Treynor index is similar to the Sharpe index, except that is uses beta rather than standard deviation to measure the
stock’s risk.
a.
b.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.05
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
69. Fabrizio, Inc. is expected to generate earnings of $1.50 per share this year. If the mean ratio of share price to expected
earnings of competitors in the same industry is 20, then the stock price per share is $____.
a.
13.33
b.
3.00
c.
20.00
d.
30.00
e.
none of the above
ANSWER:
d
POINTS:
1
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70. The ____ is not a measure of a stock’s risk.
a.
stock’s price volatility
b.
stock’s return
c.
stock’s beta
d.
value-at-risk method
e.
All of the above are measures of a stock’s risk.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
71. If the standard deviation of a stock’s returns over the last 12 quarters is 4 percent, and if there is no perceived change
in volatility, there is a ____ percent probability that the stock’s returns will be within ____ percentage points of the
expected outcome.
a.
68; 4
b.
68; 8
c.
95; 8
d.
95; 6
e.
none of the above
ANSWER:
a
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Analysis
72. The limitations of the dividend discount model are most pronounced for a firm that
a.
has a high beta.
b.
has high expected future earnings.
c.
distributes most of its earnings as dividends.
d.
retains all of its earnings.
e.
none of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
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73. Which of the following is incorrect regarding the capital asset pricing model (CAPM)?
a.
It is sometimes used to estimate the required rate of return for any firm with publicly traded stock.
b.
It is based on the premise that the only important risk of a firm is systematic risk.
c.
It is concerned with unsystematic risk.
d.
All of the above are true.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.11.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
74. The ____ is not a factor used in the capital asset pricing model (CAPM) to derive the return of an asset.
a.
prevailing risk-free rate
b.
dividend growth rate
c.
market return
d.
covariance between the asset’s returns and market returns
e.
All of the above are factors used in the CAPM.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
75. 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.
a.
21.5
b.
6.5
c.
16.5
d.
14.0
e.
none of the above
ANSWER:
d
POINTS:
1
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.11.02
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
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76. Which of the following is not a type of factor that drives stock prices, according to your text?
a.
economic factors
b.
market-related factors
c.
firm-specific factors
d.
All of the above are factors that affect stock prices.
ANSWER:
d
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
77. The general mood of investors represents:
a.
investor sentiment.
b.
beta.
c.
systematic risk.
d.
unsystematic risk.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
78. ____ are not a firm-specific factor that affect stock prices.
a.
Exchange rates
b.
Dividend policy changes
c.
Acquisitions and divestitures
d.
Earnings surprises
e.
All of the above are firm-specific factors that affect stock prices.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
Chapter 11: Stock Valuation and Risk
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79. The U.S. government’s budget deficit has a significant impact on the bond market but does not affect the stock
market.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
80. Investors can avoid unsystematic risk by:
a.
using the capital asset pricing model.
b.
investing in stocks with low PE ratios.
c.
holding diversified portfolios.
d.
using the free cash flow model.
ANSWER:
c
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.04
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
81. The market risk premium is:
a.
the yield on newly issued Treasury bonds.
b.
the return of the market in excess of the risk-free rate.
c.
the covariance between the risk-free rate and the return of the market.
d.
the return of the market in excess of expected cash flows.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
82. The market risk premium is stable over time and is not affected by stock market conditions.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
Chapter 11: Stock Valuation and Risk
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a.
b.
ANSWER:
a
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.07
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
87. As a result of market integration, stock markets in emerging markets are likely to be as efficient as U.S. stock markets.
a.
b.
ANSWER:
b
POINTS:
1
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.11.07
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge