The most important decision to make when building a diversified stock portfolio is:
a. individual security analysis.
b. asset allocation.
c. minimization of market risk.
d. maximization of expected return.
A change in the correlation coefficient of the returns of two securities in a portfolio
causes a change in
a. both the expected return and the risk of the portfolio
b. only the expected return of the portfolio
c. only the risk level of the portfolio
d. neither the expected return nor the risk level of the portfolio
The constant growth dividend model uses the:
a. historical growth rate in dividends.
b. historical growth rate in earnings.
c. estimated growth rate in dividends.
d. estimated growth rate in earnings.
A firm has net income of $1 million with 250,000 shares outstanding with a total
market value of $8 million. What is its P/E ratio?
a. 4
b. 8
c. 16
d. 32
Which of the following statements is true regarding asset-backed securities (ASB)?
a. They offer relatively high yields
b. They have relatively long maturities
c. They generally have low credit ratings
d. Each traunche has the same risk
The highest level of market efficiency is
a. weak form efficiency.
b. semi-strong form efficiency.
c. random walk efficiency.
d. strong form efficiency.
Examine Example 17-13. The basic data is repeated here, in financial calculator format:
FV = 1000, N=30, PMT=50
Why are the % changes different?
a) They are actually the same: the table includes an error.
b) The prices shown are rounded to the nearest penny, slightly moving the % changes.
c) The relationship between interest rates and price is not linear.
d) Other factors, including duration and coupon rate, will also affect the relationship
between interest rates and prices.
With the Single-index model, the difference between actual return and expected return
given a particular market index is referred to as the:
a. parameter
b. unique part
c. error term
c. beta
Merrill Lynch and UBS are examples of:
a. discount brokers
b. wholesale brokers
c. full-service brokers
d. blue-chip brokers
Select the CORRECT statement about the reward-to-variability ratio (RVAR).
a. RVAR is an absolute measure of performance.
b. RVAR measures the slope of the line from RF to the portfolio being evaluated.
c. The closer the RVAR to 0.0, the better is the performance.
d. RVAR does not take into account how well diversified a portfolio was.
The returns and risk measures on this chapter are calculated from historical dat
a. Are such measures good predictors of the future? What are some circumstances that
could change to change future return and risk? How can an investor use these return and
risk measures to help construct a portfolio?
__________ is the most important investment decision because it determines the
risk-return characteristics of the portfolio and determines as much as 98% of the
performance of a portfolio.
a. Hedging
b. Market timing
c. Performance measurement
d. Asset allocation
Contemporary Casuals, Inc., (CCI) has a beta of 1.15, an expected dividend of $2.30,
and an expected dividend growth rate of 5 percent for the foreseeable future. The
S&P500 expected return is 18 percent, and the Treasury bill rate is 6 percent. (a)
Calculate the required return on Contemporary stock.
(b) Calculate the price of Contemporary stock.
In the U.S., the largest component of GDP is:
a. government spending.
b. business investment.
c. consumer spending.
d. real estate.
The optimal portfolio for a risk-averse investor:
a. cannot be determined
b. occurs at the point of tangency between the highest indifference curve and the
highest expected return
c. occurs at the point of tangency between the highest indifference curve and the
efficient set of portfolios
d. occurs at the point of tangency between the highest expected return and lowest risk
efficient portfolios
Seaside Toys currently earns $2.00 per share and currently pays $1.00 per share in
dividends. It is expected to have a constant growth rate of 5 percent per year. The
required rate of return is 15 percent. What is the intrinsic value of this stock?
a. $6.67
b. $7.00
c. $10.00
d. $10.50
A type of trading involving a basket of 15 stocks or more and often used in conjunction
with arbitrage strategies is called:
a. swapping
b. program trading
c. day trading
d. insider trading
The rise of the Internet has:
a. greatly increased the cost of security trading.
b. significantly democratized the flow of investment information.
c. led to fewer number of discount brokers
d. led to large amounts of security fraud.
Investor expectations about expected returns from various asset classes should start
with:
a. historic rates of return of those asset classes, from sources such as
Morningstar/Ibbotson & Associates.
b. economic forecasts
c. inflation.
d. taxes.
Nike Inc. reports first quarter earnings of $2.00 per share. As an investor using the SUE
technique, you had estimated earnings to be $50 per share, with a standard error of
estimate (SEE) of 0.15. (a) Calculate the SUE for Nike.
(b) Would this stock be a good buy on the basis of this SUE?
Under the multiple growth model, at least —— different growth rates are used.
a. two
b. three
c. four
d. five
Under Jensen’s differential return approach to portfolio evaluation, superior market
timing is exhibited by a
a. statistically significant positive alpha.
b. statistically significant negative alpha.
c. zero alpha.
d. low positive alpha.
Risk factors in the APT must possess all of the following the characteristics except:
a. Factors must be readily observable in risk/return space.
b. Each factor must have a pervasive influence on stock returns
c. The factors must influence expected return.
d. Factors must be unpredictable.
Underlying all investments is the tradeoff between:
a. expected return and actual return
b. low risk and high risk
c. actual return and high risk
d. expected return and risk
Choose the portfolio from the following set that is not on the efficient frontier.
a. A: expected return of 10 percent; standard deviation of 8 percent
b. B: expected return of 18 percent; standard deviation of 13 percent
c. C: expected return of 38 percent; standard deviation of 38 percent
d. D: expected return of 15 percent; standard deviation of 14 percent
The market has an expected return of 13 percent and the risk-free rate is 5.5 percent. If
Merrill Lynch has a beta of 1.85, what is the required return for Merrill Lynch?
A daily accumulation of stocks advancing or declining is used in:
a. volume of trading analysis.
b. relative strength analysis.
c. breadth of market analysis.
d. short interest analysis.
AB Flex Inc. stock is currently trading at $38. The time left until expiration of a call
and put trading on AB Flex Inc.’s stock is 6 months and the strike price is $45. If the
call is currently trading at $96 and the Treasury bill rate is 10 percent per year, what
price should the put sell for?
Explain three specific buy signals using a moving average.
The higher the payout ratio, the higher the P/E is expected to be, other things being
equal. However, other things might not be equal. Give an example of something that
might not be equal and how it would affect the P/E.
What are the variables in the Black-Scholes option pricing model? How is each related
to the price of the call option?
The correlation coefficient explains the cause in the relative movement in returns
between two securities.