MGT 181 - Final Review Problems

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

Standard deviation is a measure of which one of the following?

volatility

The average compound return earned per year over a multi-year period is called the _____ average return.

geometric

The return earned in an average year over a multi-year period is called the _____ average return.

arithmetic

Which one of the following statements best defines the efficient market hypothesis?

All securities in an efficient market are zero net present value investments.

Which one of the following correctly describes the dividend yield?

next year's annual dividend divided by today's stock price

Which one of the following statements related to capital gains is correct?

An increase in an unrealized capital gain will increase the capital gains yield.

Which of the following statements is correct in relation to a stock investment?

I. The capital gains yield can be positive, negative, or zero. & III. The total return can be positive, negative, or zero.

The real rate of return on a stock is approximately equal to the nominal rate of return:

minus the inflation rate.

As long as the inflation rate is positive, the real rate of return on a security will be ____ the nominal rate of return

less than

Which one of the following categories of securities had the highest average return for the period 1926-2010?

small company stocks

Which one of the following categories of securities had the lowest average risk premium for the period 1926-2010?

U.S. Treasury bills

Which one of the following categories of securities has had the most volatile returns over the period 1926-2010?

small-company stocks

Which one of the following is a correct ranking of securities based on their volatility over the period of 1926-2010? Rank from highest to lowest

small company stocks, long-term corporate bonds, intermediate-term government bonds

What was the highest annual rate of inflation during the period 1926-2010?

between 10 and 15 percent

The excess return is computed as the:

return on a risky security minus the risk-free rate.

Which one of the following earned the highest risk premium over the period 1926-2010?

small-company stocks

What was the average rate of inflation over the period of 1926-2010?

between 3.0 and 3.5 percent

Assume that you invest in a portfolio of large-company stocks. Further assume that the portfolio will earn a rate of return similar to the average return on large-company stocks for the period 1926-2010. What rate of return should you expect to earn?

between 10 and 12.5 percent

To convince investors to accept greater volatility, you must:

increase the risk premium.

Estimates of the rate of return on a security based on a historical arithmetic average will probably tend to _____ the expected return for the long-term and estimates using the historical geometric average will probably tend to _____ the expected return for the short-term.

overestimate; underestimate

Which two of the following are the most likely reasons why a stock price might not react at all on the day that new information related to the stock issuer is released?

the information has no bearing on the value of the firm & the information was anticipated

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information.

Which of the following statements related to market efficiency tend to be supported by current evidence?

I. Markets tend to respond quickly to new information. & II. It is difficult for investors to earn abnormal returns. & II. Short-run prices are difficult to predict accurately based on public information

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient.

semistrong

One year ago, you purchased a stock at a price of $33.49. The stock pays quarterly dividends of $0.20 per share. Today, the stock is selling for $28.20 per share. What is your capital gain on this investment?

-$5.29

Six months ago, you purchased 100 shares of stock in Global Trading at a price of $38.70 a share. The stock pays a quarterly dividend of $0.15 a share. Today, you sold all of your shares for $40.10 per share. What is the total amount of your dividend income on this investment?

$30

You own 400 shares of Western Feed Mills stock valued at $51.20 per share. What is the dividend yield if your annual dividend income is $352?

1.72 percent

One year ago, you purchased a stock at a price of $47.50 a share. Today, you sold the stock and realized a total loss of 22.11 percent. Your capital gain was -$12.70 a share. What was your dividend yield?

4.63 percent

You just sold 600 shares of Wesley, Inc. stock at a price of $32.04 a share. Last year, you paid $30.92 a share to buy this stock. Over the course of the year, you received dividends totaling $1.20 per share. What is your total capital gain on this investment?

$672

Four months ago, you purchased 1,500 shares of Lakeside Bank stock for $11.20 a share. You have received dividend payments equal to $0.25 a share. Today, you sold all of your shares for $8.60 a share. What is your total dollar return on this investment?

-$3,525

One year ago, you purchased 500 shares of Best Wings, Inc. stock at a price of $9.75 a share. The company pays an annual dividend of $0.10 per share. Today, you sold all of your shares for $15.60 a share. What is your total percentage return on this investment?

61.03 percent

Last year, you purchased a stock at a price of $47.10 a share. Over the course of the year, you received $2.40 per share in dividends while inflation averaged 3.4 percent. Today, you sold your shares for $49.50 a share. What is your approximate real rate of return on this investment

6.79 percent

A stock had returns of 11 percent, -18 percent, -21 percent, 20 percent, and 34 percent over the past five years. What is the standard deviation of these returns?

24.01 percent

A stock had returns of 16 percent, 4 percent, 8 percent, 14 percent, -9 percent, and -5 percent over the past six years. What is the geometric average return for this time period?

4.26 percent

Calculate the standard deviation of the following rates of return:

Year & Return

year 1: 7%

year 2: 25%

year 3: 14%

year 4: -15%

year 5: 16%

15.08 percent

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 2 percent, -12 percent, 16 percent, 22 percent, and 18 percent. What is the variance of these returns?

0.01972

You've observed the following returns on Crash-n-Burn Computer's stock over the past five years: 3 percent, -10 percent, 24 percent, 22 percent, and 12 percent. Suppose the average inflation rate over this time period was 3.6 percent and the average T-bill rate was 4.8 percent. Based on this information, what was the average nominal risk premium?

5.40 percent

You find a certain stock that had returns of 4 percent, -5 percent, -15 percent, and 16 percent for four of the last five years. The average return of the stock for the 5-year period was 13 percent. What is the standard deviation of the stock's returns for the five-year period?

31.23 percent

Great Lakes Health Care common stock offers an expected total return of 9.2 percent. The last annual dividend was $2.10 a share. Dividends increase at a constant 2.6 percent per year. What is the dividend yield?

6.60%

Electronics, Inc. common stock returned a nifty 23.5 percent rate of return last year. The dividend amount was $0.25 a share which equated to a dividend yield of 0.95 percent. What was the rate of price appreciation for the year?

22.55%

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?

expected return

Steve has invested in twelve different stocks that have a combined value today of

$121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

portfolio weight

Which one of the following is a risk that applies to most securities?

Systematic

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

systematic risk principle

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?

security market line

Which one of the following is represented by the slope of the security market line?

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

Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:

cost of capital.

The expected return on a stock given various states of the economy is equal to the:

weighted average of the returns for each economic state.

The expected return on a stock computed using economic probabilities is:

a mathematical expectation based on a weighted average and not an actual

anticipated outcome

The expected risk premium on a stock is equal to the expected return on the stock minus the:

risk-free rate.

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

market value of the investment in each stock.

The expected return on a portfolio considers which of the following factors?

I. percentage of the portfolio invested in each individual security

II. projected states of the economy

III. the performance of each security given various economic states

IV. probability of occurrence for each state of the economy

The expected return on a portfolio:

I. can never exceed the expected return of the best performing security in the portfolio.

II. must be equal to or greater than the expected return of the worst performing security in

the portfolio.

III. is independent of the unsystematic risks of the individual securities held in the

portfolio

If a stock portfolio is well diversified, then the portfolio variance:

may be less than the variance of the least risky stock in the portfolio.

The standard deviation of a portfolio:

can be less than the standard deviation of the least risky security in the portfolio.

The standard deviation of a portfolio:

can be less than the weighted average of the standard deviations of the individual

securities held in that portfolio.

Which one of the following events would be included in the expected return on Sussex stock?

This morning, Sussex confirmed that its CEO is retiring at the end of the year as

was anticipated

19. Which one of the following statements is correct?

Over time, the average unexpected return will be zero.

20. Which one of the following statements related to unexpected returns is correct?

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

Which one of the following is an example of unsystematic risk?

consumer spending on entertainment decreased nationally

Which one of the following is least apt to reduce the unsystematic risk of a portfolio?

reducing the number of stocks held in the portfolio

Which one of the following statements is correct concerning unsystematic risk?

Eliminating unsystematic risk is the responsibility of the individual investor.

Which one of the following risks is irrelevant to a well-diversified investor?

unsystematic risk

Which of the following are examples of diversifiable risk?

I. earthquake damages an entire town & IV. toymakers are required to improve their safety standards

Which of the following statements are correct concerning diversifiable risks?

I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated

securities.

II. There is no reward for accepting diversifiable risks.

III. Diversifiable risks are generally associated with an individual firm or industry

Which one of the following is the best example of a diversifiable risk?

a firm's sales decrease

Which of the following statements concerning risk are correct?

Nondiversifiable risk is measured by beta & Systematic risk is another name for nondiversifiable risk.

The primary purpose of portfolio diversification is to:

eliminate asset-specific risk

Which one of the following is most directly affected by the level of systematic risk in a security?

risk-free rate

32. Which one of the following statements is correct concerning a portfolio beta?

A portfolio beta is a weighted average of the betas of the individual securities

contained in the portfolio

At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset?

II. asset's beta

IV. market risk premium

Total risk is measured by _____ and systematic risk is measured by _____.

standard deviation; beta

The intercept point of the security market line is the rate of return which corresponds to:

the risk-free rate.

A stock with an actual return that lies above the security market line has:

a higher return than expected for the level of risk assumed.

The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock:

is underpriced.

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?

reward-to-risk ratio

The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B. Stock A has a beta of 0.82 and stock B has a beta of 1.29. This information implies that:

either stock A is overpriced or stock B is underpriced or both.

The market risk premium is computed by:

subtracting the risk-free rate of return from the market rate of return.

Jones & Co. is funded by a group of individual investors for the sole purpose of providing funding for individuals who are trying to convert their new ideas into viable products. What is this type of funding called?

venture capital

What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public?

registration statement

What is a prospectus?

a document that describes the details of a proposed security offering along with relevant information about the issuer

Which one of the following is a preliminary prospectus?

red herring

Tony currently owns 12,000 shares of GL Tools. He has just been notified that the firm is issuing additional shares of stock and that he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called?

rights offer

The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the:

gross spread

D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire offer of 25,000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share. What type of underwriting was this?

firm commitment

Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale. The underwriters sold a total of 53,000 shares to the public. The additional 3,000 shares were purchased in accordance with which one of the following?

green shoe provision

Roy owns 200 shares of R.T.F., Inc. He has opted not to participate in the current rights offering by this firm. As a result, Roy will most likely be subject to:

dilution

Direct business loans typically ranging from one to five years are called:

term loans

A group of five private investors recently loaned $6 million to Henderson Hardware for ten years at 9 percent interest. This loan is best described as a:

private placement

Pearson Electric recently registered 250,000 shares of stock under SEC Rule 415. The firm plans to sell 150,000 shares this year and the remaining 100,000 shares next year. What type of registration was this?

shelf registration

Which one of the following is probably the most successful means of finding venture capital?

personal contacts

Which one of the following statements concerning venture capital financing is correct?

venture capitalists often require at least a forty percent equity position as a condition of financing

Which one of the following statements concerning venture capitalists is correct?

exit strategy is a key consideration when selecting a venture capitalist

Trevor is the CEO of Harvest Foods, which is a privately-held corporation. What is the first step he must take if he wishes to take Harvest Foods public?

gain board approval

All new interstate security issues are regulated by the:

securities act of 1933

The Securities and Exchange Commission:

is concerned only that an issuing of stock complies with all rules and regulations

Underwriters generally:

receive less compensation under a competitive agreement than under a negotiated agreement