Investments

The normality of a distribution

Skewness is a measure of _______.
A) How fat the tails of a distribution are
B) The downside risk of a distribution
C) The normality of a distribution
D) The dividend yield of the distribution
E) A and C

Standard deviation overestimates risk

When a distribution is positively skewed, _________.
A) Standard deviation overestimates risk
B) Standard deviation correctly estimates risk
C) Standard deviation underestimates risk
D) The tails are fatter than in a normal distribution
E) none of the abo

3% (6 - 3)

A year ago, you invested $2,000 in a savings account that pays an annual interest rate of 6%. What is your approximate annual real rate of return if the rate of inflation was 3% over the year?
A) 4%
B) 10%
C) 7%
D) 3%
E) None of the above

50% ((29 + 1 - 20)/20)

You purchased a share of stock for $20. One year later you received $1 as dividend and sold the share for $29. What was your holding period return?
A) 45%
B) 5%
C) 50%
D) 40%
E) None of the above

Does not guarantee the future purchasing power of its cash flows as it is insured by the U.S. Treasury

A risk-free intermediate or long-term investment
A) Is free of all types of risk
B) Does guarantee the future purchasing power of its cash flows
C) Does not guarantee the future purchasing power of its cash flows as it is insured by the U.S. Treasury
D) A

The nominal rate minus the inflation rate

In words, the real rate of interest is approximately equal to
A) The nominal rate times the inflation rate
B) The inflation rate minus the nominal rate
C) The nominal rate minus the inflation rate
D) The inflation rate divided by the nominal rate
E) The n

1.12% ((893 + 12 - 895)/895)

An investor purchased a bond 45 days ago for $895. He received $12 in interest and sold the bond for $893. What is the holding period return on his investment?
A) 1.52%
B) 0.50%
C) 1.12%
D) 0.08%
E) 0.01%

6.09% ((1.03)2 - 1)

An investment provides a 3% return semi-annually, its effective annual rate is
A) 3%
B) 6%
C) 6.06%
D) 6.09%
E) None of the above

Semistrong

If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information including historical stock prices and current public information about the firm, but not information that is available only to insiders.
A) Semi

B and C

Proponents of the EMH typically advocate
A) an active trading strategy
B) investing in an index fund
C) a passive investment strategy
D) A and B
E) B and C

Technical analysts

_________ focus more on past price movements of a firm's stock than on the underlying determinants of future profitability.
A) Credit analysts
B) Fundamental analysts
C) Systems analysts
D) Technical analysts
E) All of the above

Resistance level is a value

________ above which it is difficult for the market to rise.
A) Book value is a value
B) Resistance level is a value
C) Support level is a value
D) A and B
E) A and C

All of the above

The debate over whether markets are efficient will probably never be resolved because of ________.
A) the lucky event issue
B) the magnitude issue
C) the selections bias issue
D) all of the above
E) none of the above

Earned higher average returns than firms with high P/E ratios

Basu (1977, 1983) found that firms with low P/E ratios
A) Earned higher average returns than firms with high P/E ratios
B) Earned the same average returns as firms with high P/E ratios
C) Earned lower average returns than firms with high P/E ratios
D) Had

Both A and B are true

Studies of positive earnings surprises have shown that there is
A) a positivie abnormal return on the day positive earnings surprises are announced
B) a positive drift in the stock price on the days following the earnings surprise announcement
C) a negati

A, B, and C

In an efficient market, __________.
A) security prices react quickly to new information
B) security prices are seldom far above or below their justified level
C) security analysts will not enable investors to realize superior returns consistently
D) one c

Good news about Google was announced yesterday

Google has a beta of 1.0. The annualized market return yesterday was 11%, and the risk-free rate is currently 5%. You observe that Google had an annualized return yesterday of 14%. Assuming that markets are efficient, this suggests that
A) Bad news about

Technical analysis

Chartists practice
A) Technical analysis
B) Fundamental analysis
C) Regression analysis
D) Insider analysis
E) Psychoanalysis

Liquidation Value Per Share

_______ is the amount of money per common share that could be realized by breaking up the firm, selling the assets, repaying the debt, and distributing the remainder to shareholders.
A) Book Value Per Share
B) Liquidation Value Per Share
C) Market Value P

Will be less than the intrinsic value of stock D

You wish to earn a return of 10% on each of two stocks, C and D. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock C and 10% for stock D. The intrinsic value of stock C _____

8.25% (11% x 0.75)

A company has an expected ROE of 11%. The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.
A) 3.0%
B) 4.8%
C) 8.25%
D) 9.0%
E) None of the above

Lower when inflation has been high

Historically, P/E ratios have tended to be
A) Lower when inflation has been high
B) Higher when inflation has been high
C) Uncorrelated with inflation rates but correlated with other macroeconomic variables
D) Uncorrelated with any macroeconomic variable

The level of uncertainty surrounding the forecast will always be quite high

One of the problems with attempting to forecast stock market values is that
A) There are no variables that seem to predict market return
B) The earnings multiplier approach can only be used at the firm level
C) Dividend payout ratios are highly variable
D

$25.00 ($2.50/0.10)

A preferred stock will pay a dividend of $2.50 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this prefe

The amount of earnings retained by the firm does not affect market price or the P/E

If a firm has a required rate of return equal to the ROE
A) The amount of earnings retained by the firm does not affect market price or the P/E
B) The firm can increase market price and P/E by increasing the growth rate
C) The firm can increase market pri

Intrinsic value exceeds market price

The goal of fundamental analysts is to find securities whose ____________.

Gradually approach its intrinsic value over several years

Many stock analysts assume that a mispriced stock will
A) Immediately return to its intrinsic value
B) Gradually approach its intrinsic value over several years
C) Never return to its intrinsic value
D) Return to its intrinsic value within a few days
E) N

A and C

Because the DDM requires multiple estimates, investors should
A) Carefully examine inputs to the model
B) Not use this model without expert assistance
C) Perform sensitivity analysis on price estimates
D) Feel confident that DDM estimates are correct
E) A

Open market operations

The most widely used monetary tool is...

Board of Governors

Monetary policy is determined by the ____________ of the Federal Reserve System.

A and C

Fiscal policy is difficult to implement quickly because
A) It requires political negotiations
B) Increases in tax rates affect consumer spending gradually
C) Much of government spending is non-discretionary and cannot be changed
D) A and B
E) A and C

Tax rate

Supply-side economists wishing to stimulate the economy are most likely to recommend a decrease in the __________.

Fundamental analysis

The process of estimating the dividends and earnings that can be expected from the firm based on determinants of value is called ________.

Consolidation

During which stage of the industry cycle would a firm experience stable growth in sales?

Increase and increase

If interest rates decrease, business investment expenditures are likely to ______ and consumer durable expenditures are likely to _________.

Smaller profits

If the economy is growing, firms with low operating leverage will experience __________ than firms with high operating leverage.

Pressure from Substitute Products

According to Michael Porter, there are five determinants of competition. An example of _____ is when the availability limits the prices that can be charged to customers.

Global Economy

A top down analysis of a firm starts with the __________.

Are rational: may not be rational

Conventional theories presume that investors ________ and behavioral finance presumes that they __________.

Overconfidence

__________ may be responsible for the prevalence of active versus passive investments management.

Forecasting

If a person gives too much weight to recent information compared to prior beliefs, they would make _______ errors.

Mental Accounting

Statman argues that _______ is consistent with some investors' irrational preference for stocks with high cash dividends and with a tendency to hold losing positions too long.

I, II, and III

Arbitrageurs may be unable to exploit behavioral biases due to ___________.
I) fundamental risk
II) implementation costs
III) model risk
IV) conservatism
V) regret avoidance

Charles Dow

__________ was the grandfather of technical analysis.

Primary trend

A long-term movement of prices, lasting from several months to years is called a _________.

Bullish or bearish

The put/call ratio is used to compute the number of outstanding put options divided by outstanding call options and higher values are considered __________ signals.

Households

Factor influencing supply....

Businesses

Factor influencing demand.....

Federal Reserve

Factor influencing government's net supply and/or demand....

Nominal

This type of interest rate is the growth rate of your money.

Real

This type of interest rate is the growth of your purchasing power.

Equilibrium Real Rate of Interest

This is determined by supply, demand, government actions, and expected rate of inflation.

Weak, semi-strong, strong

The three versions of efficient market hypothesis are.....

Technical Analysis

This uses prices and volume information to predict future prices.

Fundamental Analysis

This uses economic and accounting information to predict stock prices.

Active

Security Analysis and timing are traits of this type of management..

Passive

Buying and holding along with index funds are traits of this type of management..

Equity Valuation

Balance Sheet Models, Dividend Discount Models, and Price/Earnings Ratios are three different models of _________.

Required return

If the stock is priced correctly this should equal the expected return.

Buy

Intrinsic Value > Market Price = ?

Sell (or short sell)

Intrinsic Value < Market Price = ?

Hold (or fairly priced)

Intrinsic Value = Market Price = ?

Price/Earnings Ratio

This is a function of two factors: Required rates of return and expected growth in dividends. This is used in relative valuation and extensive use in industry.

Free cash flow

After tax EBIT, Depreciation, Capital Expenditures, and Increase in net working capital are components of _______.

Demand Shock

This is an event that affects demand for goods and services in the economy.

Supply Shock

This is an event that influences production capacity or production costs.

Leading

This is a type of indicator that tends to rise and fall in advance of the economy. Examples of this: average weekly hours of production workers and stock prices.

Coincident

This is a type of indicator that tends to change directly with the economy. Examples of this: industrial productions and manufacturing and trade sales.

Lagging

This is a type of indicator that tends to follow the lag economic performance. Examples of this: ratio of trade investors to sales and ratio of consumer installment credit outstanding to personal income.

Rapid

In the industry start-up life cycle sales growth is ________.

Stable

In the industry consolidation life cycle sales growth is _______.

Slowing

In the industry maturity life cycle sales growth is __________.

Minimal

In the industry relative decline life cycle sales growth is ________.