Deck 27: 3: Sec 273 Mc Asset Valuation

Question 1

Fundamental analysis shows that stock in Johnson's Lumber Company has a price that is less than its present value.

A)This stock is overvalued;you should consider adding it to your portfolio.
B)This stock is overvalued;you shouldn't consider adding it to your portfolio.
C)This stock is undervalued;you should consider adding it to your portfolio.
D)This stock is undervalued;you shouldn't consider adding it to your portfolio.

Answer 1

C

Question 2

The performance of index funds

A)usually falls short of the performance of actively-managed funds.
B)provides evidence in support of the notion that stock prices do not depend upon supply and demand.
C)provides evidence in support of the efficient markets hypothesis.
D)provides evidence in support of the notion that stock-market participants are irrational.

Answer 2

D

Question 3

Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

A)This means its present value is less than its price.You should consider adding the stock to your portfolio.
B)This means its present value is less than its price.You shouldn't consider adding the stock to your portfolio.
C)This means its present value is more than its price.You should consider adding the stock to your portfolio.
D)This means its present value is more than its price.You shouldn't consider adding the stock to your portfolio.

Answer 3

C

Question 4

Fundamental analysis shows that stock in Widgets-R-Us has a present value that is lower than its price.

A)This stock is overvalued;you should consider adding it to your portfolio.
B)This stock is overvalued;you shouldn't consider adding it to your portfolio.
C)This stock is undervalued;you should consider adding it to your portfolio.
D)This stock is undervalued;you shouldn't consider adding it to your portfolio.

Question 5

A high-ranking corporate official of a well-known company is unexpectedly sentenced to prison for criminal activity in trading stocks.This should

A)raise the price and raise the present value of the corporation's stock.
B)raise the price and lower the present value of the corporation's stock.
C)lower the price and raise the present value of the corporation's stock.
D)lower the price and lower the present value of the corporation's stock.

Question 6

According to fundamental analysis,a saver should prefer to buy stocks that are

A)undervalued.This means the price of the stock is low given the value of the corporation.
B)undervalued.This means the value of the corporation is low given the price of stock.
C)overvalued.This means the price of the stock is high given the value of the corporation.
D)overvalued.This means the value of the corporation is high given the price of stock.

Question 7

If the efficient markets hypothesis is correct,then

A)the number of shares of stock offered for sale exceeds the number of shares of stock that people want to buy.
B)the stock market is informationally efficient.
C)stock prices never follow a random walk.
D)All of the above are correct.

Question 8

Dividends

A)are the rates of return on mutual funds.
B)are cash payments that companies make to shareholders.
C)are the difference between the price and present value per share of a stock.
D)are the rates of return on a company's capital stock.

Question 9

When a person engages in detailed analysis of a company to determine its value,he or she is engaging in

A)standard deviation analysis.
B)informational analysis.
C)fundamental analysis.
D)efficiency analysis.

Question 10

Fundamental analysis determines the value of a stock based on

A)dividends.
B)the expected final sale price.
C)the ability of the corporation to earn profits.
D)All of the above are correct.

Question 11

Fundamental analysis shows that stock in Stainless Appliance Company has a present value below its price.

A)This stock is overvalued;you should consider adding it to your portfolio.
B)This stock is overvalued;you shouldn't consider adding it to your portfolio.
C)This stock is undervalued;you should consider adding it to your portfolio.
D)This stock is undervalued;you shouldn't consider adding it to your portfolio.

Question 12

Cash payments that companies make to shareholders are called

A)annuities.
B)dividends.
C)premiums.
D)favorables.

Question 13

Suppose that fundamental analysis indicates a particular company's stock is overvalued.

A)This means its present value is less than its price.You should consider adding the stock to your portfolio.
B)This means its present value is less than its price.You shouldn't consider adding the stock to your portfolio.
C)This means its present value is more than its price.You should consider adding the stock to your portfolio.
D)This means its present value is more than its price.You shouldn't consider adding the stock to your portfolio.

Question 14

By purchasing shares in a mutual fund that holds a portfolio of stocks,a person can

A)benefit from fundamental analysis,since the mutual fund requires its shareholders to perform fundamental analysis on their own.
B)benefit from fundamental analysis,since the mutual fund hires one or more individuals to perform fundamental analysis for the fund.
C)eliminate market risk.
D)reduce the standard deviation of his or her portfolio to zero.

Question 15

If you believe that stock prices follow a random walk,then probably you

A)do not believe that there is positive relationship between risk and return.
B)do not believe that stock prices reflect all available information.
C)believe in the validity of the efficient markets hypothesis.
D)believe that it is a good idea to engage in fundamental analysis.

Question 16

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.

A)This stock is overvalued;you should consider adding it to your portfolio.
B)This stock is overvalued;you shouldn't consider adding it to your portfolio.
C)This stock is undervalued;you should consider adding it to your portfolio.
D)This stock is undervalued;you shouldn't consider adding it to your portfolio.

Question 17

Fundamental analysis is

A)the study of the relation between risk and return of stock portfolios.
B)the determination of the allocation of savings between stocks and bonds based on a person's degree of risk aversion.
C)the study of a company's accounting statements and future prospects to determine its value.
D)a method used to determine how adding stocks to a portfolio will change the risk of the portfolio.

Question 18

Which of the following is correct?

A)Risk-averse people will not hold stock.
B)Diversification cannot reduce firm-specific risk.
C)The larger the percentage of stock in a portfolio,the greater the risk,but the greater the average return.
D)Stock prices are determined by fundamental analysis rather than by supply and demand.

Question 19

Which of the following is correct concerning diversification?

A)It only reduces firm-specific risk,but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30.
B)It only reduces firm-specific risk;much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30.
C)It only reduces market risk,but most of the reduction comes from increasing the number of stocks in a portfolio to well above 30.
D)None of the above is correct.

Question 20

Fundamental analysis shows that stock in Cedar Valley Furniture Corporation has a price that exceeds its present value.

A)This stock is overvalued;you should consider adding it to your portfolio.
B)This stock is overvalued;you shouldn't consider adding it to your portfolio.
C)This stock is undervalued;you should consider adding it to your portfolio.
D)This stock is undervalued;you shouldn't consider adding it to your portfolio.

Question 21

According to the efficient markets hypothesis,which of the following would increase the price of stock in the Simpson Corporation?

A)Simpson announces,just as everyone had expected,that it has hired a new highly respected CEO.
B)Simpson announces that its profits were low,but not as low as the market had expected.
C)Analysis by a column in a business weekly indicates that Simpson is overvalued.
D)All of the above would increase the price.

Question 22

The efficient markets hypothesis says that

A)only individual investors can make money in the stock market.
B)it should be easy to find stocks whose price differs from their fundamental value.
C)stock prices follow a random walk.
D)All of the above are correct.

Question 23

Which of the following terms is used to describe a situation in which the price of an asset rises above what appears to be its fundamental value?

A)"random walk"
B)"random bubble"
C)"speculative bubble"
D)"speculative hedge"

Question 24

Which of the following is correct?

A)Managed funds typically have a higher return than indexed funds.This tends to refute the efficient market hypothesis.
B)Managed funds typically have a higher return than indexed funds.This tends to support the efficient market hypothesis.
C)Index funds typically have a higher rate of return than managed funds.This tends to refute the efficient market hypothesis.
D)Index funds typically have a higher rate of return than managed funds.This tends to support the efficient market hypothesis.

Question 25

If stock prices follow a random walk,it means

A)long periods of declining prices are followed by long periods of rising prices.
B)the greater the number of consecutive days of price declines,the greater the probability prices will increase the following day.
C)stock prices are unrelated to random events that shock the economy.
D)stock prices are just as likely to rise as to fall at any given time.

Question 26

An index fund

A)holds only stocks and bonds that are indexed to inflation.
B)holds all the stocks in a given stock index.
C)guarantees a return that follows the index of leading economic indicators.
D)typically has a lower return than a managed fund.

Question 27

Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down.According to the efficient markets hypothesis,which of the these things make the price of FineLine Corporation Stock fall?

A)both the interest rate rising and the revenue announcement
B)neither the interest rate rising nor the revenue announcement
C)only the interest rate rising
D)only the revenue announcement

Question 28

If the efficient market hypothesis is correct,then

A)index funds should typically beat managed funds,and usually do.
B)index fund should typically beat managed funds,but usually do not.
C)mutual funds should typically beat index funds,and usually do.
D)mutual funds should typically beat index funds,but usually do not.

Question 29

Fundamental analysis shows that Quadrangle Company is fairly valued.Then Quadrangle Company unexpectedly improves its production techniques and unexpectedly hires a new CEO away from another very successful competitor.Suppose this has no effect on the price of the stock of Quadrangle Company.

A)Fundamental analysis would now show the corporation is overvalued.The fact that the price was unchanged is consistent with the efficient markets hypothesis.
B)Fundamental analysis would now show the corporation is overvalued.The fact that the price was unchanged is not consistent with the efficient markets hypothesis.
C)Fundamental analysis would now show the corporation is undervalued.The fact that the price was unchanged is consistent with the efficient markets hypothesis.
D)Fundamental analysis would now show the corporation is undervalued.The fact that the price was unchanged is not consistent with the efficient markets hypothesis.

Question 30

According to the efficient markets hypothesis,worse-than-expected news about a corporation will

A)have no effect on its stock price.
B)raise the price of the stock.
C)lower the price of the stock.
D)change the price of the stock in a random direction.

Question 31

An asset market is said to experience a speculative bubble when

A)the price of the asset rises above what appears to be its fundamental value.
B)the price of the asset appears to follow a random walk.
C)the market cannot establish an equilibrium price for the asset.
D)the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms.

Question 32

According to the efficient market hypothesis,which of the following statements is not correct?

A)Stock market prices tend to rise today if they rose yesterday.
B)As judged by the typical person in the market,all stocks are fairly valued all the time.
C)At the market price,the number of shares being offered for sale matches the number of shares people want to buy.
D)All of the above statements are incorrect.

Question 33

Which of the following is correct concerning stock market irrationality?

A)Bubbles could arise,in part,because the price that people pay for stock depends on what they think someone else will pay for it in the future.
B)Economists almost all agree that the evidence for stock market irrationality is convincing and the departures from rational pricing are important.
C)Some evidence for the existence of market irrationality is that informed and presumably rational managers of mutual funds generally beat the market.
D)All of the above are correct.

Question 34

Whenever the price of an asset rises above what appears to be its fundamental value,the market is said to be experiencing a

A)conjectural mistake.
B)fundamental mishap.
C)speculative bubble.
D)temporary inefficiency.

Question 35

Some people claim that stocks follow a random walk.What does this mean?

A)The price of stock one day is about what it was on the previous day.
B)Changes in stock prices cannot be predicted from available information.
C)Stock prices are not determined by market fundamentals such as supply and demand.
D)Prices of stocks of different firms in the same industry show no or little tendency to move together.

Question 36

In the 1990s,Fed Chair Alan Greenspan believed that the market was

A)undervalued,and evidence later showed that this was clearly correct.
B)undervalued,but whether it was remains debatable.
C)overvalued,and evidence later showed that this was clearly correct.
D)overvalued,but whether it was remains debatable.

Question 37

In the 1990s,Fed Chairperson Alan Greenspan questioned whether the stock market

A)boom at that time reflected "irrational exuberance."
B)decline at that time reflected "irrational funk."
C)boom at that time reflected "rational exuberance."
D)decline at that time reflected "rational funk."

Question 38

Which of the following is not consistent with the efficient market hypothesis?

A)Stock prices should follow a random walk.
B)Index funds should typically outperform highly managed funds.
C)News has no effect on stock prices.
D)There is little point in spending many hours studying the business pages looking for undervalued stocks.

Question 39

Which of the following is not correct?

A)There is a greater reduction in risk by increasing the number of stocks in a portfolio from 1 to 10,than by increasing it from 100 to 120 stocks.
B)The historical rate of return on stocks has been about 5 percentage points higher than the historical rate of return on bonds.
C)Stock in an industry that is very sensitive to economic conditions is likely to have a higher average return than stock in an industry that is not so sensitive to economic conditions.
D)If you had information about a corporation that no one else had,you could earn a very high rate of return.This contradicts the efficient market hypothesis.

Question 40

If stock prices follow a random walk,then stock investors can make large profits by

A)buying stocks whose prices have been falling for several days.
B)buying stocks whose prices have been rising for several days.
C)performing fundamental analysis of stocks using data contained in annual reports.
D)using inside information.

Question 41

The value of a stock is based on the

A)present values of the dividend stream and final price.As a result,the value of a stock rises when interest rates rise.
B)present values of the dividend stream and final price.As a result,the value of a stock falls when interest rates rise.
C)future values of the dividend stream and final price.As a result,the value of a stock rises when interest rates rises.
D)future values of the dividend stream and final price.As a result,the value of a stock falls when interest rates rise.

Question 42

If your research leads you to believe that the present value of a stock's dividend stream and future price is less than its price then you believe the stock is

A)overvalued so you should consider buying it.
B)overvalued so you should not consider buying it.
C)undervalued so you should consider buying it.
D)undervalued so you should not consider buying it.

Question 43

The efficient markets hypothesis implies

A)that all stocks are fairly valued all the time and that no stock is a better buy than any other.
B)that all stocks are fairly valued all the time,but that some stocks may be better buys than other.
C)that some stocks may be better buys than others and stock experts can determine which ones.
D)that no stock is efficiently valued.

Question 44

Suppose that an increased risk of mortgage defaults lowers the expected profitability of banks.Then we would expect to see

A)the demand for bank stocks rise which would raise the prices of bank stocks.
B)the demand for bank stocks rise which would reduce the prices of bank stocks.
C)the demand for bank stocks fall which would raise the prices of bank stocks.
D)the demand for bank stocks fall which would reduce the prices of bank stocks.

Question 45

The possibility of speculative bubbles in the stock market arises in part because

A)stock prices may not depend at all on psychological factors.
B)fundamental analysis may be the correct way to evaluate the value of stocks.
C)future streams of dividend payments are very hard to estimate.
D)the value of shares of stock depends not only on the future stream of dividend payments but also on the price at which the stock will be sold.

Question 46

The efficient markets hypothesis says that beating the market consistently is

A)impossible.Many studies find that beating the market is,at best,extremely difficult.
B)impossible.Many studies find that beating the market is relatively easy.
C)relatively easy.Many studies find that beating the market is,at best,extremely difficult.
D)relatively easy.Many studies find that beating the market is relatively easy.

Question 47

A person who believes strongly in the use of fundamental analysis to choose a portfolio of stocks

A)has a better chance of outperforming the market if stock prices follow a random walk than if they do not follow a random walk.
B)almost always chooses to hold index funds in his or her portfolio rather than actively-managed funds.
C)is spending his or her time wisely if the efficient markets hypothesis is correct.
D)is interested in the likely ability of a corporation to pay dividends in the future.

Question 48

During a financial crisis the possibility of bank failures rises.An increase in the likelihood of a bank failing shifts demand for its stock

A)right,so the price rises.
B)right,so the price falls.
C)left,so the price rises.
D)left,so the price falls.

Question 49

If more people think a corporation's stock is overvalued than think it is undervalued then there is a

A)surplus,so its price will rise.
B)surplus,so its price will fall.
C)shortage,so its price will rise.
D)shortage,so its price will fall.

Question 50

An automobile manufacturer unexpectedly announces that it has hired a new chief executive officer.It is widely believed that the presence of this individual will raise the profitability of the corporation.At the same time interest rates unexpectedly rise.Which of the above would tend to make the price of the stock rise?

A)the announcement and the rise in interest rates
B)the announcement but not the rise in interest rates
C)the rise in interest rates,but not the announcement
D)neither the announcement nor the rise in interest rates

Question 51

According to the efficient market hypothesis

A)changes in the prices of stocks are predictable.Evidence shows that managed funds typically do better than indexed funds.
B)changes in the prices of stocks are predictable.Evidence shows that indexed funds typically do better than managed funds.
C)changes in the prices of stocks are not predictable.Evidence shows that managed funds typically do better than indexed funds.
D)changes in the prices of stocks are not predictable.Evidence shows that indexed funds typically do better than managed funds.

Question 52

If unexpected news raised people's expectations of a corporation's future dividends and price,then before the price changes this corporation's stock would be

A)overvalued,so its price would rise.
B)overvalued,so its price would fall.
C)undervalued,so its price would rise.
D)undervalued,so its price would fall.

Question 53

The efficient markets hypothesis implies that

A)building a portfolio based on a published list of the "most respected" companies is likely to produce a better-than-average return.
B)if a stock rose in price last year,it is likely to rise in price this year.
C)managed mutual funds should generally outperform indexed mutual funds.
D)None of the above are correct.

Question 54

A pharmaceutical company unexpectedly announces that it just developed an important new drug.This news should

A)raise the price of the corporation's stock;if it does not the stock is overvalued.
B)raise the price of the corporation's stock;if it does not the stock is undervalued.
C)reduce the price of the corporation's stock;if it does not the stock is overvalued.
D)reduce the price of the corporation's stock;if it does not the stock is undervalued.

Question 55

Which of the following methods of picking stocks is not consistent with fundamental analysis?

A)doing research such as thoroughly reading and analyzing companies' annual reports
B)choosing mutual funds that are managed by individuals with good reputations
C)viewing individual stock prices as unpredictable
D)relying upon the advice of Wall Street analysts

Question 56

The word "efficient" in the term "efficient markets hypothesis" refers to the idea that

A)fundamental analysis is an efficient way to go about choosing which stocks to buy or sell.
B)stock prices move upward and downward "efficiently," rather than following a "random walk."
C)the stock market is "informationally efficient."
D)companies employ officers and managers who are well-qualified to perform their jobs.

Question 57

Diversification

A)increases the likely fluctuation in a portfolio's return.Thus,the likely standard deviation of the portfolio's return is higher.
B)increases the likely fluctuation in a portfolio's return.Thus,the likely standard deviation of the portfolio's return is lower.
C)reduces the likely fluctuation in a portfolio's return.Thus,the likely standard deviation of the portfolio's return is higher.
D)reduces the likely fluctuation in a portfolio's return.Thus,the likely standard deviation of the portfolio's return is lower.

Question 58

If you are convinced that stock prices are impossible to predict from available information,then you probably also believe that

A)the efficient markets hypothesis is not a correct hypothesis.
B)the stock market is informationally efficient.
C)the stock market is informationally inefficient.
D)there is no reason to establish a diversified portfolio of stocks.

Question 59

The available evidence indicates that

A)about one-half of all managers of active mutual funds consistently outperform index funds.
B)outperforming the market on a consistent basis is extremely difficult to do.
C)there is little truth to the notion that there is a trade-off between risk and return.
D)there is little truth to the efficient markets hypothesis.

Question 60

If asset markets are driven by the "animal spirits" of investors,then

A)those markets reflect rational behavior.
B)those markets reflect irrational behavior.
C)the efficient markets hypothesis is correct.
D)the stock market exhibits informational efficiency.

Question 61

After the 1982 recession,the U.S.and world economies entered into a long period

A)of high unemployment rates.
B)high inflation rates.
C)that has become known as the "Great Moderation."
D)that has become known as the "Great Recession."

Question 62

Some people argue that there are two advantages to holding mutual funds.The first is that mutual funds provide an inexpensive way to hold a diversified portfolio.The second is that because of their expertise mutual fund managers should be able to consistently beat the market.Which of the following does the evidence show?

A)Diversification does reduce risk and mutual funds typically outperform the market.
B)Diversification does reduce risk,but mutual funds do not typically outperform the market.
C)Diversification does not reduce risk but mutual funds typically outperform the market.
D)Diversification does not reduce risk and mutual funds do not typically outperform the market.

Question 63

Which of the following approaches to investing does not rely on fundamental analysis to choose the stocks in your portfolio?​

A)​Choosing stocks based on research and analysis you do yourself
B)​Relying on advice from Wall Street analysts
C)​Buying shares of an actively managed mutual fund
D)​Buying shares of an index fund that purchases all stocks in a particular stock index

Question 64

Fundamental analysis shows that stock in "Night and Day" fitness centers has a price below its present value.

A)This stock is undervalued;you should consider adding it to your portfolio.
B)This stock is undervalued;you shouldn't consider adding it to your portfolio.
C)This stock is overvalued;you should consider adding it to your portfolio.
D)This stock is overvalued;you shouldn't consider adding it to your portfolio.

Question 65

Writing in The Wall Street Journal in 2009,economist Jeremy Siegel pointed out that the efficient markets hypothesis

A)was responsible for the financial crisis of 2008-2009.
B)was responsible for the Great Depression of the 1930s.
C)claims that prices observed in financial markets are always "right."
D)claims that prices observed in financial markets are mostly "wrong."

Question 66

A company unexpectedly announces a product recall due to safety concerns about its product.According to the efficient markets hypothesis,this news should

A)raise the price of the company's stock.
B)not affect the price of the company's stock.
C)reduce the price of the company's stock.
D)More information is needed to answer the question.

Question 67

No particular stock is a better buy than any other stock if

A)stock prices are driven by investors' "animal spirits."
B)the random-walk theory of stock prices is incorrect.
C)the efficient markets hypothesis is correct.
D)actively managed mutual funds always outperform index funds.

Question 68

Ron decides which stocks to purchase by throwing darts at the stock pages of The Wall Street Journal.Ron probably believes that

A)stock prices follow a random walk.
B)the stock market is informationally efficient.
C)it is better to own stock in 20 companies than it is to own stock in 2 companies.
D)All of the above are correct.

Question 69

Writing in the Wall Street Journal in 2009,economist Jeremy Siegel argued that,in the years leading up to the financial crisis of 2008-2009,

A)financial firms acted in too risky a fashion.
B)the Federal Reserves's efforts to rein in the risky behavior of certain financial firms were inadequate.
C)falling house prices "crashed the banks and the economy."
D)All of the above are correct.

Question 70

After much anticipation a company releases a new smartphone.The smartphone doesn't work as well as expected and lacks many of the features buyers had been expecting.The unexpectedly negative reaction to the smartphone would

A)raise the present value and the price of the corporation's stock.
B)raise the present value and reduce the price of the corporation's stock.
C)reduce the present value and the price of the corporation's stock.
D)reduce the present value and raise the price of the corporation's stock.