1、Stock Valuation and Risk v 15Chapter 11Stock Valuation and Risk1.The common price-earnings valuation method applied the _ price-earnings ratio to _ earnings per share in order to value the firms stock.A)firms; industry B)firms; firmsC)average industry; industryD)average industry; firmsANSWER: D2. A
2、firm is expected to generate earnings of $2.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 15. Based on this information, the valuation of the firms shares based on the price-earnings (PE) method isA) $2.22.B) $6.76.C) $33.30.D) none
3、 of the aboveANSWER:C3. The PE method to stock valuation may result in an inaccurate valuation for a firm if errors are made in forecasting the firms future earnings or in choosing the industry composite used to derive the PE ratio.A) TrueB) FalseANSWER:A4. Bolwork Inc. is expected to pay a dividend
4、 of $5 per share next year. Bolworks dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $_ per share.A) 33.33B) 166.67C) 41.67D) 60.00ANSWER:C5. Protsky Inc. just p
5、aid a dividend of $2.20 per share. The dividend growth rate for Protskys dividends is 3 percent per year. If the required rate of return on Protsky stock is 12 percent, the stock should be valued at $_ per share according to the dividend discount model.A) 24.44B) 25.18C) 18.88D) 75.53ANSWER:B6. The
6、limitations of the dividend discount model are more pronounced when valuing stocksA) that pay most of their earnings as dividends.B) that retain most of their earnings.C) that have a long history of dividends.D) that have constant earnings growth.ANSWER:B7. Hancock Inc. retains most of its earnings.
7、 The company currently has earnings per share of $11. Hancock expects its earnings to grow at a constant rate of 2 percent per year. Furthermore, the average PE ratio of all other firms in Hancocks industry is 12. Hancock is expected to pay dividends per share of $3.50 during each of the next three
8、years. If investors require a 10 percent rate of return on Hancock stock, a fair price for Hancock stock today is $_.A) 113.95B) 111.32C) 105.25D) none of the aboveANSWER:A8.When evaluating stock performance, _ measures variability that is systematically related to market returns; _ measures total v
9、ariability of a stocks returns.A)beta; standard deviationB)standard deviation; betaC)intercept; betaD)beta; error termANSWER: A 9. The _ is commonly used as a proxy for the risk-free rate in the Capital Asset Pricing Model.A) Treasury bond rateB) prime rateC) discount rateD) federal funds rateANSWER
10、:A10. Arbitrage pricing theory (APT) suggests that a stocks price is influenced only by a stocks beta.A) TrueB) FalseANSWER:B11. Stock prices of U.S. firms primarily involved in exporting are likely to be _ affected by a weak dollar and _ affected by a strong dollar.A) favorably; adverselyB) adverse
11、ly; adverselyC) favorably; favorablyD) adversely; favorablyANSWER:A12. A weak dollar may enhance the value of a U.S. firm whose sales are dependent on the U.S. economy.A) TrueB) FalseANSWER:A13. The January effect refers to the _ pressure on _ stocks in January of every year.A) downward; largeB) upw
12、ard; largeC) downward; smallD) upward; smallANSWER:D14. The expected acquisition of a firm typically results in _ in the targets stock price.A) an increaseB) a decreaseC) no changeD) none of the aboveANSWER:A15. The _ index can be used to measure risk-adjusted performance of a stock while controllin
13、g forthe stocks volatility. A) Sharpe B) TreynorC) arbitrage D) margin ANSWER: A16. The _ index can be used to measure risk-adjusted performance of a stock while controlling forthe stocks beta. A) Sharpe B) TreynorC) arbitrage D) margin ANSWER: B17. Stock price volatility increased during the credit
14、 crisis. A) True B) False ANSWER: A18.The Sharpe Index measures theA)average return on a stock.B)variability of stock returns per unit of returnC)stocks beta adjusted for risk.D)excess return above the riskfree rate per unit of risk.ANSWER: D 19.A stocks average return is 11 percent. The average ris
15、kfree rate is 9 percent. The stocks beta is 1 and its standard deviation of returns is 10 percent. What is the Sharpe Index?A).05B).5C).1D).02E).2ANSWER: E 20.A stocks average return is 10 percent. The average riskfree rate is 7 percent. The standard deviation of the stocks return is 4 percent, and
16、the stocks beta is 1.5. What is the Treynor Index for the stock?A).03B).75C)1.33D).02E)50ANSWER: D 21.If security prices fully reflect all marketrelated information (such as historical price patterns) but do not fully reflect all other public information, security markets areA)weakform efficient.B)s
17、emistrong form efficient.C)strong form efficient.D)B and CE)none of the aboveANSWER: A 22.If security markets are semistrong form efficient, investors cannot solely use _ to earn excess returns.A)previous price movementsB)insider informationC)publicly available informationD)A and CANSWER: D 23.The _
18、 is commonly used to determine what a stocks price should have been.A)Capital Asset Pricing ModelB)Treynor IndexC)Sharpe IndexD)B and CANSWER: A 24.A stocks beta is estimated to be 1.3. The riskfree rate is 5 percent, and the market return is expected to be 9 percent. What is the expected return on
19、the stock based on the CAPM?A)5.2 percentB)11.7 percentC)16.7 percentD)4 percentE)10.2 percentANSWER: E 25.According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be _ affected by a weak dollar. Stock prices of U.S. importing firms could be _
20、 affected by a weak dollar.A)adversely; favorablyB)favorably; adversely C)favorably; favorably D)adversely; adverselyANSWER: B 26.The demand by foreign investors for the stock of a U.S. firm sold on a U.S. exchange may be higher when the dollar is expected to _, other things being equal. (Assume the
21、 firms operations are unaffected by the value of the dollar.)A)strengthenB)weakenC)stabilizeD)B and CANSWER: A 27.A higher beta of an asset reflectsA)lower risk.B)lower covariance between the assets returns and market returns.C)higher covariance between the assets returns and the market returns.D)no
22、ne of the aboveANSWER: C 28.The “January effect” refers to a largeA)rise in the price of small stocks in January.B)decline in the price of small stocks in January.C)decline in the price of large stocks in January.D)rise in the price of large stocks in January.ANSWER: A 29.Technical analysis relies o
23、n the use of _ to make investment decisions.A)interest ratesB)inflationary expectationsC)industry conditionsD)recent stock price trendsANSWER: D 30.The arbitrage pricing theory (APT) differs from the capital asset pricing model (CAPM) in that it suggests that stock pricesA)are influenced only by the
24、 market itself.B)can be influenced by a set of factors in addition to the market.C)are not influenced at all by the market.D)cannot be influenced at all by the industry factors.ANSWER: B 31.According to the capital asset pricing model, the required return by investors on a security isA)inversely rel
25、ated with the risk-free rate.B)inversely related with the firms beta.C)inversely related with the market return.D)none of the aboveANSWER: D 32. Boris stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 25 percent. The average risk-free rate is 6 percent.
26、 The Sharpe index for Boris stock isA) 0.35.B) 0.36.C) 0.45.D) 0.28.E) none of the aboveANSWER: B33. Morgan stock has an average return of 15 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Treynor index of Morgan stock isA) 0.04.B) 0.05.C) 0.35.D) 0.03.E) none of the
27、aboveANSWER: B34. Zilo stock has an average return of 15 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Sharpe index of Zilo stock isA) 0.36.B) 0.35.C) 0.28.D) 0.45.E) none of the aboveANSWER: B35. Sorvino Co. is expected to offer a dividend of $3.2 per share per year
28、 forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, according to the dividend discount model, is $_.A) 4.06B) 4.16C) 40.63D) 24.62E) none of the aboveANSWER: D36. Kudrow stock just paid a dividend of $4.76 per share and plans to pay a di
29、vidend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kudrow stock, according to the dividend discount model, is $_.A) 39.67B) 41.67C) 33.33D) 31.73E) none of the aboveANSWER: B37. LeBlanc Inc. curr
30、ently has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as LeBlanc Inc. is 15. LeBlanc is expected to pay a dividend of $3 per share over the next four years, and an
31、investor in LeBlanc requires a return of 12 percent. What is the forecasted stock price of LeBlanc in four years, using the adjusted dividend discount model?A) $150.00B) $163.91C) $45.00D) $168.83E) none of the aboveANSWER: D38. Tarzak Inc. has earnings of $10 per share, and investors expect that th
32、e earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as Tarzac is 15. Tarzac is expected to pay a dividend of $3 per share over the next four years, and an investor in Tarzac requires a return of 12 percent. The estimated stock
33、price of Tarzak today should be _ using the adjusted dividend discount model.A) $116.41B) $104.91C) $161.15D) none of the aboveANSWER: A39. The standard deviation of a stocks returns is used to measure a stocksA) volatility.B) beta.C) Treynor Index.D) risk-free rate.ANSWER: A40. The formula for a st
34、ock portfolios volatility does not contain theA) weight (proportional investment) assigned to each stock.B) variance (standard deviation squared) of returns of each stock.C) correlation coefficients between returns of each stock. D) risk-free rate.ANSWER: D41. If the returns of two stocks are perfec
35、tly correlated, thenA) their betas should each equal 1.0.B) the sum of their betas should equal 1.0.C) their correlation coefficient should equal 1.0.D) their portfolio standard deviation should equal 1.0.ANSWER: C42. A stocks beta can be measured from the estimate of the using regression analysis.
36、A) interceptB) market returnC) risk-free rateD) slope coefficientANSWER: D43. A beta of 1.1 means that for a given 1 percent change in the value of the market, the is expected to change by 1.1 percent in the same direction.A) risk-free rateB) stocks value C) stocks standard deviationD) correlation c
37、oefficientANSWER: B44. Stock X has a lower beta than Stock Y. The market return for next month is expected to be either 1 percent, +1 percent, or +2 percent with an equal probability of each scenario. The probability distribution of Stock X returns for next month isA) the same as that of Stock Y.B)
38、more dispersed than that of Stock Y.C) less dispersed than that of Stock Y.D) zero.ANSWER: C45. The beta of a stock portfolio is equal to a weighted average of theA) betas of stocks in the portfolio.B) betas of stocks in the portfolio, plus their correlation coefficients.C) standard deviations of st
39、ocks in the portfolio.D) correlation coefficients between stocks in the portfolio.ANSWER: A46. Value at risk estimates the a particular investment for a specified confidence level.A) beta ofB) risk-free rate of C) largest expected loss toD) standard deviation ofANSWER: C47. A stock has a standard de
40、viation of daily returns of 1 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stocks expected daily return is .2 percent. The lower boundary isA) 1.45 percent.B) 1.85 percent.C) 0 percent.D
41、) 1.65 percent.ANSWER: A48. A stock has a standard deviation of daily returns of 3 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stocks expected daily return is .1 percent. The lower boun
42、dary isA) 1.65 percent.B) 3.00 percent.C) 4.85 percent.D) 5.05 percent.ANSWER: C49. Which of the following is not commonly used as the estimate of a stocks volatility?A) the estimate of its standard deviation of returns over a recent periodB) the trend of historical standard deviations of returns ov
43、er recent periodsC) the implied volatility derived from an option pricing modelD) the estimate of its option premium derived from an option pricing modelANSWER: D50. The credit crisis only affected the stock performance of stocks in the U.S. A) True B) FalseANSWER: B51. When new information suggests
44、 that a firm will experience lower cash flows than previouslyanticipated or lower risk, investors will revalue the corresponding stock downward.A) True B) FalseANSWER: B52. A relatively simple method of valuing a stock is to apply the mean price-earnings (PE) ratio of allpublicly traded competitors
45、in the respective industry to the firms expected earnings for the year.A) True B) FalseANSWER: A53. While the previous years earnings are often used as a base for forecasting future earnings, the recentyears earnings do not always provide an accurate forecast of the future.A) True B) FalseANSWER: A54. If inves
