FINA 4310 Exam II

The total return on a stock is equal to

capital gains yield + dividend yield

According to finance professionals, which one of these factors has the biggest impact on a firm’s PE ratio

growth opportunities

The underlying assumption of the dividend growth model is that a stock is worth

the present value of the future income provided by that stock

The expected dividend yield is equal to 

expected cash dividend/current stock price 

the capital gains yield plus the dividend yield on a security is called the 

total return 

the excess return you earn by moving from a relatively risk-free investment to a risky investment is called the

risk premium

the risk premium is computed by______ the average rate of return for an investment

subtracting the average return on U.S. Treasury bills from

How is the sharpe ratio defined 

risk premium/ standard deviation 

given a set of returns, the wider the distribution of those returns, the

higher the standard deviation

the higher the sharpe ratio, the

greater the return per unit of risk

The average annual compound return earned per year over a multiyear period is called the _____ average return 

geometric 

The return earned in a typical year during a multiyear period is called the ______ average return

arithmetic

Which one of the following measures the squared deviations of actual returns from expected returns?

variance

You plotted the monthly rate of return for two securities against time for the past 48 months. If the pattern of the movements of these two sets of returns rose and fell together the majority, but not all, of the time, then the securities have

a strong positive correlation 

The market risk of a portfolio of two stocks will be reduced the most if the securities within that portfolio have a correlation of 

-1 

The expected return on a portfolio

is limited by the returns on the individual securities within the portfolio 

the separation principle states that an investor will

invest only in the riskless asset and tangency portfolio, choosing the weights of each based on his/her individual risk tolerance

the capital allocation/market line 

intersects the vertical axis at the risk-free rate 

the primary purpose of portfolio diversification is to

eliminate security-specific risk

Which one of the following would tend to indicate that portfolio is being effectively diversified

a decrease in the portfolio standard deviation

The principle of diversification tells us that 

spreading investment portfolio’s holding across many diverse securities will lower the portfolio’s level of risk 

the intercept point of the security market line is the rate of return that corresponds to

the risk-free rate