Question 1

Fabrizio, Inc.is expected to generate earnings of $1.50 per share this year.If the mean ratio of share price to expected earnings of competitors in the same industry is 20, then the stock price per share is $____.

Accepted Answer

The stock price per share can be calculated by multiplying the expected earnings per share by the mean ratio of share price to expected earnings of competitors in the same industry.

Stock price per share = expected earnings per share x mean ratio

Stock price per share = $1.50 x 20

Stock price per share = $30.00

Therefore, the stock price per share for Fabrizio, Inc. is $30.00.

Question 2

Portfolio managers who monitor systematic risk rather than total risk are more concerned about stock volatility than about beta.

Accepted Answer

Portfolio managers who monitor systematic risk are more concerned about beta, which measures a stock's volatility in relation to the market, rather than the stock's total individual volatility.

Question 3

Sorvino Co.is expected to offer a dividend of $3.2 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, according to the dividend discount model, is $____.

Accepted Answer

The dividend discount model formula is: Price = Dividend / (Required Rate of Return - Growth Rate).

In this case, the dividend is $3.2 per share, the required rate of return is 13%, and the growth rate is assumed to be zero since the dividend is expected to remain the same forever.

Thus, the price of a share of Sorvino stock can be calculated as: Price = $3.2 / (0.13 - 0) = $24.62.

Therefore, the best choice is C) 24.62.

Question 4

Stock repurchases are commonly viewed as an unfavorable signal about the firm.

Accepted Answer

Stock repurchases are commonly viewed as a favorable signal about the firm, as it signifies that the company has excess cash and believes that its stock is undervalued. It also boosts earnings per share by reducing the number of outstanding shares.

Question 5

Which of the following is incorrect regarding the capital asset pricing model (CAPM)?

Accepted Answer

The CAPM is not concerned with unsystematic risk, as it assumes that investors can effectively diversify away all unsystematic risk through portfolio diversification. The model is based solely on systematic risk, which is the risk that is inherent in the entire market or a specific market segment.

Question 6

A stock portfolio has more volatility when its individual stock returns are uncorrelated.

Accepted Answer

A stock portfolio typically has less volatility when its individual stock returns are uncorrelated because the diversification effect reduces overall portfolio risk.

Question 7

Which of the following is not a reason the PE ratio method may result in an inaccurate valuation for a firm?

Accepted Answer

The answer of Which of the following is not a...

Question 8

One way to forecast a portfolio's beta is to first forecast the betas of the individual stocks in the portfolio and then sum the individual forecasted betas, weighted by the market value of each stock.

Accepted Answer

The portfolio's beta is calculated by taking the weighted average of the individual stocks' betas, not by summing them. Each stock's beta is multiplied by its proportion in the portfolio, and then these products are summed.

Question 9

If beta is thought to be the appropriate measure of risk, a stock's risk-adjusted returns should be determined by the Sharpe index.

Accepted Answer

The Sharpe Ratio is used to measure the risk-adjusted return of an investment, but it does not specifically use beta as its measure of risk. Instead, it uses the standard deviation of the portfolio's excess return over a risk-free rate. Beta, as a measure of risk, is more closely associated with the Capital Asset Pricing Model (CAPM) for determining expected returns based on the market risk.

Question 10

Beta serves as a measure of risk because it can be used to derive a probability distribution of return based on a set of market returns.

Accepted Answer

Beta is a measure of systematic risk that indicates how sensitive an asset's returns are to market fluctuations. By using beta, one can estimate the expected return of an asset based on market returns and derive a probability distribution of return. Therefore, beta serves as a measure of risk.

Question 11

The ____ is not a factor used in the capital asset pricing model (CAPM) to derive the return of an asset.

Accepted Answer

The dividend growth rate is not a factor used in the CAPM. The other four factors (prevailing risk-free rate, market return, covariance between the asset's returns and market returns) are used in the CAPM to derive the return of an asset.

Question 12

The main source of uncertainty in computing the return of a stock is the dividend to be received next year.

Accepted Answer

The main source of uncertainty in computing the return of a stock is not just the dividend to be received next year, but also other factors such as market volatility, economic conditions, company financial performance and decisions, and geopolitical events.

Question 13

Stocks that have relatively little trading are normally subject to less price volatility.

Accepted Answer

Stocks that have relatively little trading volume are often subject to higher price volatility because there are fewer buyers and sellers in the market, which can lead to drastic price fluctuations.

Question 14

The value-at-risk method is intended to warn investors about the potential maximum loss that could occur.

Accepted Answer

The value-at-risk method is a risk management tool that estimates the potential maximum loss that could occur within a certain confidence level and time frame. Its purpose is to inform investors of the potential downside risk and help them make more informed investment decisions.

Question 15

The limitations of the dividend discount model are most pronounced for a firm that

Accepted Answer

The dividend discount model is based on predicting future dividends for a firm. If a firm retains all of its earnings, it does not pay out any dividends, and therefore the model cannot be applied.

Question 16

A firm's stock price is affected not only by macroeconomic and market conditions but also by firm specific conditions.

Accepted Answer

A firm's stock price can be impacted by a variety of factors, including economic conditions, market trends, and specific factors related to the company's financial performance and management decisions.

Question 17

The Treynor index is similar to the Sharpe index, except that is uses beta rather than standard deviation to measure the stock's risk.

Accepted Answer

The Treynor index is a portfolio performance measure that uses beta as a risk measure rather than standard deviation, making it different from the Sharpe index, which uses standard deviation as a measure of risk.

Question 18

Regarding the implied standard deviation, by plugging in the actual option premium paid by investors for a specific stock in the option-pricing model, it is possible to derive the anticipated volatility level.

Accepted Answer

By inserting the actual option premium paid into the option-pricing model and solving for volatility, the implied volatility can be derived.

Question 19

Kudrow, Inc.manufactures tennis balls.Kudrow just paid a dividend of $4.76 per share and plans to pay a dividend 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 $____.

Accepted Answer

The answer of Kudrow, Inc.manufactures tennis balls.Kudrow just paid a...

Question 20

Regarding the value-at-risk method, the same methods used to derive the maximum expected loss of one stock can be applied to derive the maximum expected loss of a stock portfolio for a given confidence level.

Accepted Answer

This statement is true. The value-at-risk method can be used to calculate the maximum expected loss of a stock portfolio for a given confidence level by applying the same methods used for one stock to the entire portfolio.

Quiz 11: Stock Valuation and Risk