Question 1

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 couldbe____ affected by a weak dollar.

Accepted Answer

A weak dollar makes U.S. exports cheaper and more competitive abroad, potentially boosting sales and profits for exporting firms, hence favorably affecting their stock prices. Conversely, a weak dollar makes imports more expensive, which could hurt the profitability of importing firms, adversely affecting their stock prices.

Question 2

The ____ is often used to estimate the required rate of return for any firm with public traded stock.

Accepted Answer

The capital asset pricing model (CAPM) is commonly used to estimate the required rate of return for any firm with publicly traded stock. It takes into account the risk-free rate of return, the expected market return, and the firm's beta (a measure of the stock's volatility compared to the market). The Treynor and Sharpe indexes are also used in finance, but they are more focused on measuring risk-adjusted performance of a portfolio or investment.

Question 3

The "January effect" refers to a large

Accepted Answer

The January effect is a phenomenon where small-cap stocks tend to outperform large-cap stocks in January, resulting in a rise in the price of small stocks in January. This effect is thought to be driven by year-end tax-loss harvesting by investors, which leads to selling of large-cap stocks and buying of small-cap stocks at the end of December, and then reversing these trades in January.

Question 4

The beta of a stock portfolio is equal to a weighted average of the

Accepted Answer

The beta of a stock portfolio is calculated as the weighted average of the betas of the stocks in the portfolio. Beta measures the sensitivity of a stock's returns to changes in the market, and the beta of a portfolio reflects the overall market risk of the portfolio. Therefore, it is logical to use a weighted average of the individual stock betas to calculate the portfolio beta. The other choices, such as correlation coefficients or standard deviations, are not used to calculate portfolio beta.

Question 5

Morgan stock has an average return minus the average risk-free rate of 12.5 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Treynor index of Morgan stock is

Accepted Answer

The Treynor index is calculated as the excess return (average return minus risk-free rate) divided by the beta. Here, it is 12.5% / 2.5 = 0.05.

Question 6

Sorvino Co. is expected to offer a dividend of $3.20 per share per year forever. The required rate of return on Sorvino stock is 13 percent. Thus, the price of a share of Sorvino stock, accordingto the dividend discount model, is $____.

Accepted Answer

The answer of Sorvino Co. is expected to offer a...

Question 7

A stock's beta can be measured from the estimate of the ________ using regression analysis.

Accepted Answer

The slope coefficient in regression analysis measures the sensitivity of a stock's returns to the returns of the overall market, which is used to calculate a stock's beta. Therefore, the correct choice is D.

Question 8

Technical analysis relies on the use of ____ to make investment decisions.

Accepted Answer

Technical analysis uses past stock price trends, chart patterns, and technical indicators to predict future price movements and make investment decisions. It does not rely on interest rates, inflationary expectations, or industry conditions.

Question 9

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 firm's operationsareunaffected by the value of the dollar.)

Accepted Answer

When the dollar is expected to strengthen, foreign investors have to pay relatively less in their own currency to purchase shares of the U.S. firm. This makes the investment more attractive for them, leading to higher demand for the stock.

Question 10

If the returns of two stocks are perfectly correlated, then

Accepted Answer

If the returns of two stocks are perfectly correlated, then their correlation coefficient should equal 1.0. This means that the two stocks move in perfect sync with each other and as one stock's return changes, the other stock's return changes in the same direction and by the same amount. Beta measures the sensitivity of a stock's return to changes in the market return, and is not directly related to correlation. Similarly, the sum of their betas does not have any direct relationship to correlation. Finally, their portfolio standard deviation may or may not equal 1.0, depending on the individual standard deviations of the two stocks and their correlation.

Question 11

LeBlanc Inc. currently 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 thesame industry as LeBlanc Inc. is 15. LeBlanc is expected to pay a dividend of $3 per share over the next four years, and an 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?

Accepted Answer

Step 1: Calculate the terminal value. 
- Using the formula for the terminal value in the dividend discount model, we get: 
    TV = (D5 x (1 + g)) / (r - g) 
    where D5 is the dividend in year 5, g is the growth rate, and r is the required return. 
- We know that: 
    D1 = $3 
    g = 3% 
    r = 12% 
- We can use the formula for the dividend growth rate to find D5: 
    D5 = D1 x (1 + g)^4 = $3 x 1.03^4 = $3.63 
- Plugging in these values, we get: 
    TV = ($3.63 x 1.03) / (0.12 - 0.03) = $46.39

Step 2: Calculate the stock price in year 4. 
- Using the formula for the adjusted dividend discount model, we get: 
    P4 = (D1 x (1 + g)) / (r - g) + (TV / (1 + r)^4) 
- Plugging in the values we know, we get: 
    P4 = ($3 x 1.03) / (0.12 - 0.03) + ($46.39 / (1 + 0.12)^4) = $29.25 + $98.58 = $127.83

Step 3: Calculate the stock price in year 4 using the PE ratio. 
- Using the P/E ratio, we can find the expected price in year 4: 
    P4 = E4 x PE4 
- We know that: 
    E1 = $10 
    g = 3% 
- Using the formula for the earnings in year 4, we get: 
    E4 = E1 x (1 + g)^3 = $10 x 1.03^3 = $11.26 
- Plugging in these values, we get: 
    P4 = $11.26 x 15 = $168.90

Since the adjusted dividend discount model gives a price of $127.83 and the PE ratio approach gives a price of $168.90, we choose the closest answer, which is D: $168.83.

Question 12

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. The Sharpe index for Boris stock is

Accepted Answer

The answer of Boris stock has an average return of...

Question 13

Zilo stock has an average return minus the average risk-free rate of 5 percent, a beta of 1, and a standard deviation of returns of 20 percent. The Sharpe index of Zilo stock is

Accepted Answer

The Sharpe index is the excess return of an asset over the risk-free rate, divided by its standard deviation of returns. 
In this case, the excess return is 5% (average return of Zilo stock minus the risk-free rate of 0%), and the standard deviation is 20%. 
So, Sharpe index = (5% / 20%) = 0.25. 
Therefore, the correct answer is C.

Question 14

The capital asset pricing model (CAPM) suggests that the required rate of return on a stock is directly influenced by the stock's :

Accepted Answer

The CAPM suggests that the required rate of return on a stock is directly influenced by its beta, a measure of the stock's volatility relative to the stock market as a whole. A higher beta suggests a higher level of risk and a higher required rate of return. The other options - industry competition, liquidity, and market capitalization - may be relevant to other aspects of a stock's valuation, but they are not direct influences on the required rate of return according to the CAPM.

Question 15

A higher beta for an asset reflects

Accepted Answer

A higher beta reflects a higher covariance between the asset's returns and the market returns. This means that the asset's returns are more closely tied to movements in the overall market, indicating a higher level of risk.

Question 16

According to the capital asset pricing model, the required return by investors on a security is

Accepted Answer

According to the capital asset pricing model (CAPM), the required return is directly related to the risk-free rate, the firm's beta, and the market return, not inversely.

Question 17

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.

Accepted Answer

Beta measures the sensitivity of a stock's return to changes in the market. A beta of 1.1 means that for a given 1 percent change in the value of the market, the stock's value is expected to change by 1.1 percent in the same direction. Therefore, the answer is B - stock's value.

Question 18

Kandle Company paid a dividend of $4.76 per share this year and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The requiredrate of return is 15 percent. The value of Kandle stock, according to the dividend discount model, is $____.

Accepted Answer

The value of the stock is calculated using the Gordon Growth Model: P = D1 / (r - g) = 5 / (0.15 - 0.03) = 41.67.

Question 19

The standard deviation of a stock's returns is used to measure the stock's

Accepted Answer

The standard deviation of a stock's returns is a commonly used measure of volatility, which reflects the degree of variation of returns from their average over a certain period of time. Volatile stocks have a higher standard deviation, indicating that their returns fluctuate more widely from day to day or month to month, and are therefore considered riskier than less volatile stocks. Beta, on the other hand, measures the sensitivity of a stock's returns to market fluctuations, while the Treynor index measures a stock's risk-adjusted performance relative to the market based on the capital asset pricing model (CAPM). The risk-free rate is a benchmark used to evaluate the return on investment in riskier assets such as stocks.

Question 20

Tarzak Inc. 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 industryas Tarzak is 15. Tarzak is expected to pay a dividend of $3 per share over the next four years, and an investor in Tarzak requires a return of 12 percent. The estimated stock price of Tarzak today should be ____ using the adjusted dividend discount model.

Accepted Answer

The correct answer is A because the adjusted dividend discount model takes into account the expected growth rate of earnings per share, the dividend payout ratio, and the required return. The formula for the adjusted dividend discount model is:P0 = D1 / (r - g)where:P0 is the current stock priceD1 is the expected dividend in the next yearr is the required returng is the expected growth rate of earnings per shareIn this case, the expected dividend in the next year is $3, the required return is 12%, and the expected growth rate of earnings per share is 3%. Plugging these values into the formula, we get:P0 = $3 / (0.12 - 0.03) = $116.41

Quiz 11: Stock Valuation and Risk

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 couldbe affected by a weak dollar.