ABED 2F02 Lecture Notes - Lecture 2: Financial Statement, Standard Deviation, Weighted Arithmetic Mean
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Question 5
1. Which of the following does not have default risk?
a. | Money market mutual funds. | |
b. | Commercial paper. | |
c. | Negotiable certificates of deposit. | |
d. | U.S. Treasury bills. |
2 points
Question 6
1. The spread is the:
a. | Difference between the bid and ask prices. | |
b. | Commission charged by the broker. | |
c. | Difference between the purchase and sale prices. | |
d. | Difference between the commissions charged by full-service and discount brokers. |
3 points
Question 7
1. Securities regulations protect investors by:
a. | Requiring disclosures of information by firms. | |
b. | Stopping investors from buying overpriced stock. | |
c. | Reducing competition among brokers. | |
d. | Establishing commission schedules. |
3 points
Question 8
1. If a stock is bought on margin:
a. | The full amount of the cost of the investment is borrowed. | |
b. | The commissions on the investment are increased. | |
c. | The cost of the investment is reduced. | |
d. | The interest on the borrowed funds is set by the SEC. |
3 points
Question 9
1. Sarbanes-Oxley, the latest important securities law:
a. | Reduces potential conflicts between securities analysts and investment bankers. | |
b. | Legalizes the sale of securities by investment brokers. | |
c. | Requires corporate boards of directors to own stock. | |
d. | Mandates that security analysts file their recommendations with the SEC. |
2 points
Question 10
1. Which of the following are true about the present value of a dollar?
1. It increases as the interest rate increases.
2. It decreases as the interest rate increases.
3. It increases as the time period increases.
4. It decreases as the time period increases.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
3 points
Question 11
1. Time value concepts may not be used to determine:
a. | The present value of an annuity. | |
b. | The margin required on a stock purchase. | |
c. | The future value of $100 deposited in a bank. | |
d. | The present value of a lump sum. |
2 points
Question 12
1. What is the marginal tax rate?
a. | The tax rate paid on investment gains from items purchased on margin. | |
b. | The tax rate paid on an additional dollar of taxable income. | |
c. | The margin required on a stock purchase. | |
d. | The present value of a lump sum. |
2 points
Question 13
1. Examples of capital gains include sales of which of the following?
1. IRA accounts.
2. Stocks sold for a profit.
3. Real estate sold for a profit.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | All of these choices. |
3 points
Question 14
1. With a Roth IRA, the individual:
a. | May deduct annual contributions. | |
b. | Earns tax-free income. | |
c. | Defers taxes. | |
d. | Avoids estate taxes. |
2 points
Question 15
1. Sources of unsystematic risk include which of the following?
1. A firms financing decisions.
2. A firms operations.
3. Fluctuating market prices.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | All of these choices. |
2 points
Question 16
1. For diversification to reduce risk:
a. | The returns on the individual securities should be highly correlated. | |
b. | The prices of the stocks should be stable. | |
c. | The returns on the individual securities should be negatively correlated. | |
d. | One firm should offer dividends and the other should offer capital gains. |
2 points
Question 17
1. Which of the following are true about beta coefficients?
1. They are a measure of systematic risk.
2. They relate the return on an individual security to the return on the market.
3. They measure the variability of an assets return.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | All of these choices. |
3 points
Question 18
1. Which of the following does an efficient portfolio do?
1. Maximizes risk for a given return.
2. Minimizes risk for a given return.
3. Maximizes return for a given level of risk.
4. Minimizes return for a given level of risk.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
3 points
Question 19
1. The security market line does not:
a. | Indicate the relationship between risk and return. | |
b. | Relate the market return and beta to a stock's return. | |
c. | Identify the optimal portfolio for the investor. | |
d. | Use beta coefficients as a measure of risk. |
3 points
Question 20
1. Mutual funds ____ realized capital gains and income (for example, dividends received):
a. | Retain. | |
b. | Reinvest. | |
c. | Distribute. | |
d. | Distribute or reinvest. |
2 points
Question 21
1. An index fund limits its portfolio to:
a. | High quality securities. | |
b. | Stocks that respond to changes in the consumer price index. | |
c. | Stocks included in an aggregate measure of stock prices. | |
d. | Stocks of firms in a particular industry. |
2 points
Question 22
1. Mutual funds with beta coefficients greater than 1.0:
a. | Have outperformed the market. | |
b. | Have underperformed the market. | |
c. | Have more systematic risk than the market. | |
d. | Have less systematic risk than the market. |
3 points
Question 23
1. Which of the following will tend to cause a stock's price to fall?
1. The firms beta declines.
2. The firms beta increases.
3. The risk-free rate declines.
4. The risk-free rate increases.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
2 points
Question 24
1. The use of P/E ratios to select stocks suggests that:
a. | High P/E stocks should be purchased. | |
b. | Low P/E ratio stocks are overvalued. | |
c. | A stock should be purchased if it is selling near its historic low P/E. | |
d. | A stock should be purchased if it is selling near its historic high P/E. |
2 points
Question 25
1. What does the efficient market hypothesis require?
1. Financial markets to be competitive.
2. Prices to adjust rapidly.
3. Prices of undervalued securities to fall.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | All of these choices. |
3 points
Question 26
1. Which of the following does the strong form of the efficient market hypothesis suggest?
1. Inside information will not lead to superior investment results.
2. Inside information will lead to superior investment results.
3. Studying financial statements will not lead to superior investment results.
4. Studying financial statements will lead to superior investment results.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
3 points
Question 27
1. Which of the following is the least broad-based measure of stock prices?
a. | NASDAQ market index. | |
b. | Dow Jones industrial average. | |
c. | S&P 500 stock index. | |
d. | AMEX market value index. |
3 points
Question 28
1. What is dollar-cost averaging?
a. | Periodically buying a round lot of stock. | |
b. | Periodically investing a specified dollar amount in a stock. | |
c. | A means to increase the average cost basis. | |
d. | A means to ensure a positive return. |
2 points
Question 29
1. Stock dividends cause:
a. | The price of a share of stock to rise. | |
b. | The price of a share of stock to fall. | |
c. | The value of the firm to rise. | |
d. | The value of the firm to fall. |
2 points
Question 30
1. Which of the following occurs when a stock has a two-for-one split?
a. | The price of the stock doubles. | |
b. | The firm's assets increase. | |
c. | The firm's liabilities decrease. | |
d. | The par value of the stock is reduced. |
3 points
Question 31
1. Dividend reinvestment plans offer which of the following advantages?
1. Deferment of federal income taxes.
2. A convenient means to accumulate shares.
3. Dollar-cost averaging.
a. | 1 and 2. | |
b. | 1 and 3. | |
c. | 2 and 3. | |
d. | 2. |
3 points
Question 32
1. When the Federal Reserve seeks to expand the money supply, it:
a. | Sells securities. | |
b. | Buy securities. | |
c. | Runs a deficit. | |
d. | Runs a surplus. |
2 points
Question 33
1. The sum of cash, currency, and demand deposits is:
a. | M1. | |
b. | M2. | |
c. | M3. | |
d. | M4. |
3 points
Question 34
1. If the Federal Reserve lowers the target federal funds rate:
a. | The discount rate rises. | |
b. | Liquidity in the banking system is increased. | |
c. | Security prices fall. | |
d. | Required reserves are also decreased. |
3 points
Question 35
1. The anticipation of inflation suggests that the investor should:
a. | Buy bonds. | |
b. | Anticipate higher interest rates. | |
c. | Avoid real estate investments. | |
d. | Sell stocks of gold companies. |
3 points
Question 36
1. The current ratio is unaffected by:
a. | Using cash to pay a dividend. | |
b. | The collection of an account receivable. | |
c. | Selling inventory for a profit. | |
d. | Selling bonds and using the funds to finance inventory. |
2 points
Question 37
1. Which of the following are true as the debt ratio increases?
1. Fewer assets are debt financed.
2. More assets are debt financed.
3. The ratio of debt equity increases.
4. The ratio of debt equity decreases.
a. | 1 and 3. | |
b. | 1 and 4. | |
c. | 2 and 3. | |
d. | 2 and 4. |
2 points
Question 38
1. The technical approach suggests that future stock prices are forecasted by:
a. | Past stock rates. | |
b. | Financial ratios. | |
c. | Accounting statements. | |
d. | Monetary policy. |
2 points
Question 39
1. The Dogs of the Dow strategy:
a. | Forecasts the direction of the Dow Jones averages. | |
b. | Suggests buying the Dow stocks with the highest dividend yields. | |
c. | Outperforms the S&P 500. | |
d. | Suggests buying the lowest-priced Dow stocks. |
3 points
Question 40
1. Behavioral finance combines aspects from which two fields in an attempt to identify human traits that affect investment decisions?
a. | Accounting and finance. | |
b. | Finance and psychology. | |
c. | Physics and finance. | |
d. | Finance and marketing. |
Set up an amortization schedule for a $40,000 loan to be repaid in equal installments at the end of each of the next 5 years. The interest rate is 7%. Round your answers to the nearest cent. Enter "0" if required
Year | Payment | Repayment Interest | Repayment of Principal | Balance |
1 | $ | $ | $ | $ |
2 | $ | $ | $ | $ |
3 | $ | $ | $ | $ |
4 | $ | $ | $ | $ |
5 | $ | $ | $ | $ |
Total | $ | $ | $ |
How large must each annual payment be if the loan is for $80,000? Assume that the interest rate remains at 7% and that the loan is paid off over 5 years. Round your answer to the nearest cent.
$
How large must each payment be if the loan is for $80,000, the interest rate is 7%, and the loan is paid off in equal installments at the end of each of the next 10 years? This loan is for the same amount as the loan in part b, but the payments are spread out over twice as many periods. Round your answer to the nearest cent.
$
Why are these payments not half as large as the payments on the loan in part b?
-Select- Item 26
I. Because the payments are spread out over a longer time period, more principal must be paid on the loan, which raises the amount of each payment.
II. Because the payments are spread out over a longer time period, less interest is paid on the loan, which raises the amount of each payment.
III. Because the payments are spread out over a longer time period, less interest is paid on the loan, which lowers the amount of each payment.
IV. Because the payments are spread out over a shorter time period, more interest is paid on the loan, which lowers the amount of each payment.
V. Because the payments are spread out over a longer time period, more interest must be paid on the loan, which raises the amount of each payment.
You have a $2 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1. You are considering selling $100,000 worth of one stock with a beta of 0.8 and using the proceeds to purchase another stock with a beta of 1.3. What will the portfolio's new beta be after these transactions? Do not round intermediate calculations. Round your answer to two decimal places.
You have observed the following returns over time:
Year | Stock X | Stock Y | Market |
2009 | 12% | 11% | 10% |
2010 | 19 | 5 | 9 |
2011 | -15 | -8 | -12 |
2012 | 5 | 1 | 1 |
2013 | 20 | 13 | 13 |
Assume that the risk-free rate is 3% and the market risk premium is 6%. Do not round intermediate calculations.
What is the beta of Stock X? Round your answer to two decimal places.
What is the beta of Stock Y? Round your answer to two decimal places.
What is the required rate of return on Stock X? Round your answer to one decimal place.
%
What is the required rate of return on Stock Y? Round your answer to one decimal place.
%
What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Round your answer to one decimal place.
%
Your division is considering two investment projects, each of which requires an up-front expenditure of $25 million. You estimate that the cost of capital is 9% and that the investments will produce the following after-tax cash flows (in millions of dollars):
Year | Project A | Project B |
1 | 5 | 20 |
2 | 10 | 10 |
3 | 15 | 8 |
4 | 20 | 6 |
What is the regular payback period for each of the projects? Round your answers to two decimal places.
Project A years
Project B years
What is the discounted payback period for each of the projects? Round your answers to two decimal places.
Project A years
Project B years
If the two projects are independent and the cost of capital is 9%, which project or projects should the firm undertake?
-Select-Project AProject BBoth projectsItem 5
If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake?
-Select-Project AProject BItem 6
If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake?
-Select-Project AProject BItem 7
What is the crossover rate? Round your answer to two decimal places.
%
If the cost of capital is 9%, what is the modified IRR (MIRR) of each project? Round your answers to two decimal places.
Project A %
Project B %