Which one of the following statements is correct concerning market efficiency?
Real asset markets are more efficient than financial markets.
If a market is efficient, arbitrage opportunities should be common.
In an efficient market, some market participan
A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.
Which one of the following earned the highest risk premium over the period 1926-2013?
Long-term corporate bonds
U.S. Treasury bills
Small-company stocks
Large-company stocks
Long-term government bonds
small - company stocks
A news flash just appeared that caused about a dozen stocks to suddenly drop in value by 20 percent. What type of risk does this news flash best represent?
Portfolio
Non diversifiable
Market
Unsystematic
Total
unsystematic
The cost of preferred stock is computed the same as the __________ A. pre-tax cost of debt.
B. rate of return on an annuity.
C. after-tax cost of debt.
D. rate of return on a perpetuity.
E. cost of an irregular growth common stock.
D. rate of return on a perpetuity
Which one of the following statements concerning net present value (NPV) is most CORRECT? A. An investment should be accepted if, and only if, the NPV is exactly equal to zero.
B. An investment should be accepted only if the NPV is equal to the initial ca
C. An investment should be accepted if the NPV is positive and rejected if it is negative.
The internal rate of return is defined as them:
A. Maximum rate of return a firm expects to earn on a project.
B. Rate of return a project will generate if the project is financed solely with internal funds. C. Discount rate that equates the net cash infl
D. Discount rate which causes the net present value of a project to equal zero.
The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the ______
A. net present value period.
B. internal return period.
C. payback period.
D. discounted profitability period.
E.
E. discounted payback period.
You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?
A. Breakeven analysis graph
B. project risk profile
C. NPV profile
D. NPV route
E.
C. NPV profile
A project has a net present value (NPV) of zero. Which one of the following best describes this project? A. The project has a zero percent rate of return.
B. The project requires no initial cash investment.
C. The project has no cash flows.
D. The project
D. The project's cash inflows equal its cash outflows in present dollar terms.
Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?
A. Risk premium
B. Geometric return
C. Arithme
A. Risk premium
Which of the following statement is most CORRECT?
A. One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate.
B. One must know the discount rate to compute the IRR of a project but
A. One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate.
Standard deviation of stock returns measures the _____ risk of the stock.
A. nondiversifiable
B. total
C. unsystematic
D. economic
E. systematic
B. total
The slope of an asset's security market line (SML) is the ___________:
A. reward-to-risk ratio.
B. portfolio weight.
C. beta coefficient.
D. risk-free interest rate.
E. market risk premium.
E. market risk premium
Most people would readily agree that the stock market is NOT _________.
rational
weak-form efficient
Semi-strong-form efficient
strong-form efficient
efficient at all
strong-form efficient
Unsystematic risk ________
can be effectively eliminated by portfolio diversification.
is compensated for by the risk premium.
is measured by beta.
is best measured by the reward to risk ratio.
Represents the market risk.
can be effectively eliminated by portfolio diversification.
The U.S. Securities and Exchange Commission (SEC) periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, one would be most likely to suggest that the stocks markets are less than _____ form
D. strong
The internal rate of return is defined as the:
Maximum rate of return a firm expects to earn on a project.
Rate of return a project will generate if the project in financed solely with internal funds.
Discount rate that equates the net cash inflows of a p
Discount rate which causes the net present value of a project to equal zero.
You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?
Project tract.
Projected risk profile.
NPV profile.
NPV route.
Present value sequen
NPV profile
A project has a net present value of zero. Which one of the following best describes this project?
The project has a zero percent rate of return.
The project requires no initial cash investment.
The project has no cash flows.
The summation of all of the p
The project's cash inflows equal its cash outflows in current dollar terms.
Which one of the following will decrease the net present value of a project?
Increasing the value of each of the project's discounted cash inflows.
Moving each of the cash inflows forward to a sooner time period.
Decreasing the required discount rate.
Inc
Increasing the project's initial cost at time zero.
If a project has a net present value equal to zero, then:
The total of the cash inflows must equal the initial cost of the project.
The project earns a return exactly equal to the discount rate.
A decrease in the project's initial cost will cause the proj
The project earns a return exactly equal to the discount rate.
Net present value:
Is the best method of analyzing mutually exclusive projects.
Is less useful than the internal rate of return when comparing different sized projects.
Is the easiest method of evaluation for nonfinancial managers to use.
Cannot be applie
Is the best method of analyzing mutually exclusive projects.
Which of the following are advantages of the payback method of project analysis?
Considers time value of money, liquidity bias.
Liquidity bias, arbitrary cutoff point.
Liquidity bias, ease of use.
Ignores time value of money, ease of use.
Ease of use, arb
Liquidity bias, ease of use.
Which one of the following correctly applies to the average accounting rate of return?
It considers the time value of money.
It measures net income as a percentage of the sales generated by a project.
It is the best method of analyzing mutually exclusive
It can be compared to the return on assets ratio.
Which one of the following is an advantage of the average accounting return method of analysis?
Easy availability of information needed for the computation.
Inclusion of time value of money considerations.
The use of a cutoff rate as a benchmark.
The use
Easy availability of information needed for the computation.
Which one of the following statements related to the internal rate of return (IRR) is correct?
The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects.
A project with an IRR equal to the requir
The IRR is equal to the required return when the net present value is equal to zero.
The profitability index is most closely related to which one of the following?
Payback.
Discounted payback.
Average accounting return.
Net present value.
Modified internal rate of return.
net present value
In actual practice, managers most frequently use which two types of investment criteria?
NPV and payback.
AAR and IRR.
IRR and NPV.
IRR and payback.
NPV and PI.
IRR and NPV
Which two methods of project analysis are the most biased towards short-term projects?
Net present value and internal rate of return.
Internal rate of return and profitability index.
Payback and discounted payback.
Net present value and discounted payback
payback and discounted payback
Last year, T-bills returned 2 percent while your investment in large-company stocks earned an average of 5 percent. Which one of the following terms refers to the difference between these two rates of return?
Risk premium
Geometric return
Arithmetic
Stand
risk premium
The average compound return earned per year over a multiyear period is called the _____ average return.
Arithmetic
Standard
Variant
Geometric
Real
geometric
The return earned in an average year over a multiyear period is called the _____ average return.
Arithmetic
Standard
Variant
Geometric
Real
arithmetic
Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?
Riskless market
Evenly distributed market
Zero volatility market
Blume's market
efficent capital market
Small-company stocks, as the term is used in the textbook, are best defined as the:
500 newest corporations in the U.S.
Firms whose stock trades otc.
Smallest twenty percent of the firms listed on the NYSE.
Smallest twenty-five percent of the firms listed
Smallest twenty percent of the firms listed on the NYSE.
Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semi strong form efficient.
Company insiders were aware of the in
the information was expected
Which one of the following statements is correct concerning market efficiency?
Real asset markets are more efficient than financial markets.
If a market is efficient, arbitrage opportunities should be common.
In an efficient market, some market participan
A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.
Efficient financial markets fluctuate continuously because:
The markets are continually reacting to old information as that information is absorbed.
The markets are continually reacting to new information.
Arbitrage trading is limited.
Current trading sys
The markets are continually reacting to new information.
Inside information has the least value when financial markets are:
Weak form efficient.
Semi weak form efficient.
Semi strong form efficient.
Strong form efficient.
Inefficient.
strong form efficient
The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than _____ form efficient.
Weak
S
strong
Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?
Reward-to-risk matrix
Portfolio weight graph
Normal distribution
Security market line
Market real returns
security market line
Which one of the following is represented by the slope of the security market line?
Reward-to-risk ratio
Market standard deviation
Beta coefficient
Risk-free interest rate
Market risk premium
market risk premium
Which one of the following is the formula that explains the relationship between the expected return on a security and the level of that security's systematic risk?
Capital asset pricing model
Time value of money equation
Unsystematic risk equation
Market
capital asset pricing model
Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:
Average arithmetic return.
Expected return.
Market rate of return.
Internal rate of return.
Cost of capital.
cost of capital
The standard deviation of a portfolio:
Is a measure of that portfolio's systematic risk.
Is a weighted average of the standard deviations of the individual securities held in that portfolio.
Measures the amount of diversifiable risk inherent in the portfo
Can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.
Which one of the following statements related to unexpected returns is correct?
All announcements by a firm affect that firm's unexpected returns.
Unexpected returns over time have a negative effect on the total return of a firm.
Unexpected returns are re
Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.
Which one of the following is an example of systematic risk?
Investors panic causing security prices around the globe to fall precipitously.
A flood washes away a firm's warehouse.
A city imposes an additional one percent sales tax on all products.
A toym
Investors panic causing security prices around the globe to fall precipitously.
Unsystematic risk:
Can be effectively eliminated by portfolio diversification.
Is compensated for by the risk premium.
Is measured by beta.
Is measured by standard deviation.
Is related to the overall economy.
Can be effectively eliminated by portfolio diversification.
Which of the following statements concerning risk are correct?
I. Non diversifiable risk is measured by beta.
II. The risk premium increases as diversifiable risk increases.
III. Systematic risk is another name for non diversifiable risk.
IV. Diversifiabl
I and III only.
The intercept point of the security market line is the rate of return which corresponds to:
The risk-free rate.
The market rate.
A return of zero.
A return of 1.0 percent.
The market risk premium.
The risk-free rate.
A stock with an actual return that lies above the security market line has:
More systematic risk than the overall market.
More risk than that warranted by CAPM.
A higher return than expected for the level of risk assumed.
Less systematic risk than the ove
A higher return than expected for the level of risk assumed.
he _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.
Real return
Actual return
Nominal return
Risk premium
Expected return
risk premium
The cost of preferred stock is computed the same as the:
Pre-tax cost of debt.
Rate of return on an annuity.
Aftertax cost of debt.
Rate of return on a perpetuity.
Cost of an irregular growth common stock.
rate of return on a perpetuity
The weighted average cost of capital for a firm can depend on all of the following except the:
Firm's beta.
Coupon rate of the outstanding bonds.
Growth rate of the firm's dividends.
Firm's marginal tax rate.
Standard deviation of the firm's common stock.
standard deviation of the firms common stock
The dividend growth model cannot be used to compute the cost of equity for a firm that:
Pays an increasing dividend.
Reduces its dividend on a regular basis.
Has a dividend payout ratio of 100 percent.
Pays a constant dividend year after year.
Has a reten
has a retention ratio of 100 percent