Q&A Hero

Q: Asian options differ from American and European options in that A. they are only sold in Asian financial markets. B. they never expire. C. their payoff is based on the average price of the underlying asset. D. they are only sold in Asian financial markets and they never expire. E. they are only sold in Asian financial markets and their payoff is based on the average price of the underlying asset.

Q: A callable bond should be priced the same as A. a convertible bond. B. a straight bond plus a put option. C. a straight bond plus a call option. D. a straight bond plus warrants. E. a straight bond.

Q: ING Stock currently sells for $38. A one-year call option with strike price of $45 sells for $9, and the risk-free interest rate is 4%. What is the price of a one-year put with strike price of $45? A. $9.00 B. $12.89 C. $16.00 D. $18.72 E. $14.27

Q: Common size balance sheets make it easier to compare firms A. with different degrees of leverage. B. of different sizes. C. in different industries. D. that use different inventory valuation methods (FIFO vs. LIFO).

Q: Common size income statements make it easier to compare firms A. that use different inventory valuation methods (FIFO vs. LIFO). B. in different industries. C. with different degrees of leverage. D. of different sizes.

Q: Common size financial statements make it easier to compare firms A. of different sizes. B. in different industries. C. with different degrees of leverage. D. that use different inventory valuation methods (FIFO vs. LIFO).

Q: To create a common size balance sheet, ____________ all items on the balance sheet by ____________. A. multiply; owners'equity B. multiply; total assets C. divide; owners'equity D. divide; total assets E. multiply; debt

Q: To create a common size income statement, ____________ all items on the income statement by A. multiply; net income B. multiply; total revenue C. divide; net income D. divide; total revenue E. multiply; COGS

Q: __________ provides a snapshot of the financial condition of the firm at a particular time. A. The balance sheet B. The income statement C. The statement of cash flows D. All of the options are correct. E. None of the options are correct.

Q: An example of a liquidity ratio is A. fixed asset turnover. B. current ratio. C. acid test or quick ratio. D. fixed asset turnover and acid test or quick ratio. E. current ratio and acid test or quick ratio.

Q: A firm has a lower quick (or acid test) ratio than the industry average, which implies A. the firm has a lower P/E ratio than other firms in the industry. B. the firm is less likely to avoid insolvency in the short run than other firms in the industry. C. the firm may be more profitable than other firms in the industry. D. the firm has a lower P/E ratio than other firms in the industry, and the firm is less likely to avoid insolvency in the short run than other firms in the industry. E. the firm is less likely to avoid insolvency in the short run than other firms in the industry, and the firm may be more profitable than other firms in the industry.

Q: A firm has a higher quick (or acid test) ratio than the industry average, which implies A. the firm has a higher P/E ratio than other firms in the industry. B. the firm is more likely to avoid insolvency in the short run than other firms in the industry. C. the firm may be less profitable than other firms in the industry. D. the firm has a higher P/E ratio than other firms in the industry, and the firm is more likely to avoid insolvency in the short run than other firms in the industry. E. the firm is more likely to avoid insolvency in the short run than other firms in the industry, and the firm may be less profitable than other firms in the industry.

Q: Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. The beta of Sure Tool Company's stock is 1.25. If Sure's intrinsic value is $21.00 today, what must be its growth rate? A. 0.0% B. 10% C. 4% D. 6% E. 7%

Q: Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. What is the intrinsic value of Sure's stock today? A. $20.60 B. $20.00 C. $12.12 D. $22.00

Q: Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. The market's required rate of return on Sure's stock is A. 14.0%. B. 17.5%. C. 16.5%. D. 15.25%. E. None of the options are correct.

Q: The most popular approach to forecasting the overall stock market is to use A. the dividend multiplier. B. the aggregate return on assets. C. the historical ratio of book value to market value. D. the aggregate earnings multiplier. E. Tobin's Q.

Q: One of the problems with attempting to forecast stock market values is that A. there are no variables that seem to predict market return. B. the earnings multiplier approach can only be used at the firm level. C. the level of uncertainty surrounding the forecast will always be quite high. D. dividend-payout ratios are highly variable. E. None of the options are correct.

Q: Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders'equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90. What is Paper Express's market value per share? A. $1.68 B. $2.60 C. $32.14 D. $60.71 E. None of the options are correct.

Q: Paper Express Company has a balance sheet which lists $85 million in assets, $40 million in liabilities, and $45 million in common shareholders'equity. It has 1,400,000 common shares outstanding. The replacement cost of the assets is $115 million. The market share price is $90. What is Paper Express's book value per share? A. $1.68 B. $2.60 C. $32.14 D. $60.71 E. None of the options are correct.

Q: High Tech Chip Company paid a dividend last year of $2.50. The expected ROE for next year is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 60%, the dividend in the coming year should be A. $1.00. B. $2.50. C. $2.69. D. $2.81. E. None of the options are correct.

Q: A company paid a dividend last year of $1.75. The expected ROE for next year is 14.5%. An appropriate required return on the stock is 10%. If the firm has a plowback ratio of 75%, the dividend in the coming year should be A. $1.80. B. $2.12. C. $1.77. D. $1.94.

Q: High Tech Chip Company is expected to have EPS in the coming year of $2.50. The expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 70%, the growth rate of dividends should be A. 5.00%. B. 6.25%. C. 6.60%. D. 7.50%. E. 8.75%.

Q: Fools Gold Mining Company is expected to pay a dividend of $8 in the upcoming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Fools Gold Mining Company has a beta of 0.25. The return you should require on the stock is A. 2%. B. 4%. C. 6%. D. 8%.

Q: Midwest Airline is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Midwest Airline has a beta of 3.00. The return you should require on the stock is A. 10%. B. 18%. C. 30%. D. 42%.

Q: Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Torque Corporation has a beta of 1.2. What is the intrinsic value of Torque's stock? A. $14.29 B. $14.60 C. $12.33 D. $11.62

Q: Torque Corporation is expected to pay a dividend of $1.00 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Torque Corporation has a beta of 1.2. What is the return you should require on Torque's stock? A. 12.0% B. 14.6% C. 15.6% D. 20% E. None of the options are correct.

Q: If a firm's sales decrease by 15%, and profits decrease by 20% during a recession, the firm's operating leverage is A. -1.33. B. 0.75. C. 5. D. −5.

Q: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30 per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50 per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the after-tax profit of firm C will be A. $0. B. $6,000. C. $36,000. D. $60,000. E. -$630,000.

Q: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30 per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50 per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the tax of firm C will be A. -$420,000. B. $750,000. C. $510,000. D. $204,000.

Q: Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30 per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50 per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the before-tax profit of firm C will be A. $1,680,000. B. -$1,050,000. C. $510,000. D. $204,000.

Q: What should the purchase price of a 2-year zero-coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000? A. $877.54 B. $888.33 C. $883.32 D. $893.36 E. $871.80

Q: The yield curve A. is a graphical depiction of term structure of interest rates. B. is usually depicted for U.S. Treasuries in order to hold risk constant across maturities and yields. C. is usually depicted for corporate bonds of different ratings. D.is a graphical depiction of term structure of interest rates and is usually depicted for U.S. Treasuries in order to hold risk constant across maturities and yields. E. is a graphical depiction of term structure of interest rates and is usually depicted for corporate bonds of different ratings.

Q: The on the run yield curve is A. a plot of yield as a function of maturity for zero-coupon bonds. B. a plot of yield as a function of maturity for recently-issued coupon bonds trading at or near par. C. a plot of yield as a function of maturity for corporate bonds with different risk ratings. D. a plot of liquidity premiums for different maturities.

Q: The pure yield curve can be estimated A. by using zero-coupon Treasuries. B. by using stripped Treasuries if each coupon is treated as a separate "zero." C. by using corporate bonds with different risk ratings. D. by estimating liquidity premiums for different maturities. E. by using zero-coupon Treasuries and by using stripped Treasuries if each coupon is treated as a separate "zero."

Q: Forward rates ____________ future short rates because ____________. A. are equal to; they are both extracted from yields to maturity B. are equal to; they are perfect forecasts C. differ from; they are imperfect forecasts D. differ from; forward rates are estimated from dealer quotes while future short rates are extracted from yields to maturity E. are equal to; although they are estimated from different sources, they both are used by traders to make purchase decisions

Q: Given the bond described above, if interest were paid semi-annually (rather than annually), and the bond continued to be priced at $850, the resulting effective annual yield to maturity would be A. less than 12%. B. more than 12%. C. 12%. D. Cannot be determined. E. None of the options are correct.

Q: When computing yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the A. coupon rate. B. current yield. C. yield to maturity at the time of the investment. D. prevailing yield to maturity at the time interest payments are received. E. the average yield to maturity throughout the investment period.

Q: The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n 1 period zero-coupon bond rolled over into a one-year bond in year n is defined as A. the forward rate. B. the short rate. C. the yield to maturity. D. the discount rate. E. None of the options are correct.

Q: An upward-sloping yield curve A. may be an indication that interest rates are expected to increase. B. may incorporate a liquidity premium. C. may reflect the confounding of the liquidity premium with interest rate expectations. D. All of the options are correct. E. None of the options are correct.

Q: The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. What is the price of a 4-year maturity bond with a 12% coupon rate paid annually? (Par value = $1,000.) A. $742.09 B. $1,222.09 C. $1,000.00 D. $1,141.92 E. None of the options are correct.

Q: The following is a list of prices for zero-coupon bonds with different maturities and par values of $1,000. What is the yield to maturity on a 3-year zero-coupon bond? A. 6.37% B. 9.00% C. 7.33% D. 10.00% E. None of the options are correct.

Q: Statman (1977) argues that ________ is consistent with some investors' irrational preference for stocks with high cash dividends and with a tendency to hold losing positions too long. A. mental accounting B. regret avoidance C. overconfidence D. conservatism

Q: An example of ________ is that a person may reject an investment when it is posed in terms of risk surrounding potential gains, but may accept the same investment if it is posed in terms of risk surrounding potential losses. A. framing B. regret avoidance C. overconfidence D. conservatism

Q: Psychologists have found that people who make decisions that turn out badly blame themselves more when that decision was unconventional. The name for this phenomenon is A. regret avoidance. B. framing. C. mental accounting. D. overconfidence. E. obnoxicity.

Q: ________ bias means that investors are too slow in updating their beliefs in response to evidence. A. Framing B. Regret avoidance C. Overconfidence D. Conservatism E. None of the options are correct.

Q: Barber and Odean (2000) ranked portfolios by turnover and report that the difference in return between the highest and lowest turnover portfolios is 7% per year. They attribute this to A. overconfidence. B. framing. C. regret avoidance. D. sample neglect.

Q: ____________ may be responsible for the prevalence of active versus passive investments management. A. Forecasting errors B. Overconfidence C. Mental accounting D. Conservatism E. Regret avoidance

Q: Single men trade far more often than women. This is due to greater ________ among men. A. framing B. regret avoidance C. overconfidence D. conservatism

Q: If a person gives too much weight to recent information compared to prior beliefs, they would make ________ errors. A. framing B. selection bias C. overconfidence D. conservatism E. forecasting

Q: DeBondt and Thaler believe that high P/E result from investors' A. earnings expectations that are too extreme. B. earnings expectations that are not extreme enough. C. stock price expectations that are too extreme. D. stock price expectations that are not extreme enough.

Q: Forecasting errors are potentially important because A. research suggests that people underweight recent information. B. research suggests that people overweight recent information. C. research suggests that people correctly weight recent information. D. research suggests that people either underweight recent information or overweight recent information depending on whether the information was good or bad. E. None of the options are correct.

Q: Information processing errors consist of I) forecasting errors. II) overconfidence. III) conservatism. IV) framing. A. I and II B. I and III C. III and IV D. IV only E. I, II, and III

Q: If you believe in the ________ form of the EMH, you believe that stock prices reflect all relevant information, including historical stock prices and current public information about the firm, but not information that is available only to insiders. A. semistrong B. strong C. weak D. All of the options are correct. E. None of the options are correct.

Q: Del Guerico and Reuter (2014) report that the average underperformance of actively-managed mutual funds is driven largely by A. sector mutual funds. B. index funds. C. direct-sold funds. D. broker-sold funds. E. bank-sold mutual funds.

Q: Patell and Woflson (1984) report that most of the stock-price response to corporate dividend or earnings announcements occurs within ____________ of the announcement. A. 10 minutes B. 45 minutes C. 2 hours D. 4 hours E. 2 trading days

Q: If you believe in the reversal effect, you should A. sell bonds in this period if you held stocks in the last period. B. sell stocks in this period if you held bonds in the last period. C. sell stocks this period that performed well last period. D. go long. E. sell stocks this period that performed well last period and go long.

Q: Sehun (1986) finds that the practice of monitoring insider trade disclosures, and trading on that information, would be A. extremely profitable for long-term traders. B. extremely profitable for short-term traders. C. marginally profitable for long-term traders. D. marginally profitable for short-term traders. E. not sufficiently profitable to cover trading costs.

Q: At freshman orientation, 1,500 students are asked to flip a coin 20 times. One student is crowned the winner (tossed 20 heads). This is most closely associated with A. regret avoidance. B. selection bias. C. overconfidence. D. the lucky event issue.

Q: Your professor finds a stock-trading rule that generates excess risk-adjusted returns. Instead of publishing the results, she keeps the trading rule to herself. This is most closely associated with A. regret avoidance. B. selection bias. C. framing. D. insider trading.

Q: The Food and Drug Administration (FDA) just announced yesterday that they would approve a new cancer-fighting drug from King. You observe that King had an abnormal return of 0% yesterday. This suggests that

Q: Music Doctors just announced yesterday that its first quarter sales were 35% higher than last year's first quarter. You observe that Music Doctors had an abnormal return of 2% yesterday. This suggests that A. the market is not efficient. B. Music Doctors stock will probably rise in value tomorrow. C. investors expected the sales increase to be larger than what was actually announced. D. investors expected the sales increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

Q: LJP Corporation just announced yesterday that it would undertake an international joint venture. You observe that LJP had an abnormal return of 3% yesterday. This suggests that A. the market is not efficient. B. LJP stock will probably rise in value again tomorrow. C. investors view the international joint venture as bad news. D. investors view the international joint venture as good news. E. earnings are expected to decrease next quarter.

Q: QQAG just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that QQAG had an abnormal return of 1.7% yesterday. This suggests that A. the market is not efficient. B. QQAG stock will probably rise in value tomorrow. C. investors expected the earnings increase to be larger than what was actually announced. D. investors expected the earnings increase to be smaller than what was actually announced. E. earnings are expected to decrease next quarter.

Q: Your opinion is that CSCO has an expected rate of return of 0.1375. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.115. According to the Capital Asset Pricing Model, this security Is A. underpriced. B. overpriced. C. fairly priced. D. Cannot be determined from data provided.

Q: Your opinion is that CSCO has an expected rate of return of 0.13. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.115. According to the Capital Asset Pricing Model, this security is A. underpriced. B. overpriced. C. fairly priced. D. Cannot be determined from data provided.

Q: A security has an expected rate of return of 0.10 and a beta of 1.1. The market expected rate of return is 0.08, and the risk-free rate is 0.05. The alpha of the stock is A. 1.7%. B. 1.7%. C. 8.3%. D. 5.5%.

Q: You invest $600 in a security with a beta of 1.2 and $400 in another security with a beta of 0.90. The beta of the resulting portfolio is A. 1.40. B. 1.00. C. 0.36. D. 1.08. E. 0.80.

Q: The risk-free rate is 7%. The expected market rate of return is 15%. If you expect a stock with a beta of 1.3 to offer a rate of return of 12%, you should A. buy the stock because it is overpriced. B. sell short the stock because it is overpriced. C. sell the stock short because it is underpriced. D. buy the stock because it is underpriced. E. None of the options, as the stock is fairly priced.

Q: Your personal opinion is that a security has an expected rate of return of 0.11. It has a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. According to the Capital Asset Pricing Model, this security is A. underpriced. B. overpriced. C. fairly priced. D. Cannot be determined from data provided.

Q: Empirical results regarding betas estimated from historical data indicate that betas A. are constant over time. B. are always greater than one. C. are always near zero. D. appear to regress toward one over time. E. are always positive.

Q: In a well-diversified portfolio, A. market risk is negligible. B. systematic risk is negligible. C. unsystematic risk is negligible. D. nondiversifiable risk is negligible.

Q: According to the Capital Asset Pricing Model (CAPM), which one of the following statements is false? A. The expected rate of return on a security increases in direct proportion to a decrease in the risk-free rate. B. The expected rate of return on a security increases as its beta increases. C. A fairly priced security has an alpha of zero. D. In equilibrium, all securities lie on the security market line. E. All of the statements are true.

Q: According to the Capital Asset Pricing Model (CAPM), a security with a A. positive alpha is considered overpriced. B. zero alpha is considered to be a good buy. C. negative alpha is considered to be a good buy. D. positive alpha is considered to be underpriced.

Q: According to the Capital Asset Pricing Model (CAPM), overpriced securities have A. positive betas. B. zero alphas. C. negative alphas. D. positive alphas.

Q: In a factor model, the return on a stock in a particular period will be related to A. firm-specific events. B. macroeconomic events. C. the error term. D. both firm-specific events and macroeconomic events. E. neither firm-specific events nor macroeconomic events.

Q: Analysts may use regression analysis to estimate the index model for a stock. When doing so, the intercept of the regression line is an estimate of A. the α of the asset. B. the β of the asset. C. the σ of the asset. D. the δ of the asset.

Q: Analysts may use regression analysis to estimate the index model for a stock. When doing so, the slope of the regression line is an estimate of A. the α of the asset. B. the β of the asset. C. the σ of the asset. D. the δ of the asset.

Q: The intercept in the regression equations calculated by beta books is equal to A. α in the CAPM. B. α + rf(1 + β). C. α + rf(1 β). D. 1 α.

Q: According to the index model, covariances among security pairs are A. due to the influence of a single common factor represented by the market index return. B. extremely difficult to calculate. C. related to industry-specific events. D. usually positive. E. due to the influence of a single common factor represented by the market index return and usually positive.

Q: The index model has been estimated for stocks A and B with the following results: RA = 0.03 + 0.7RM + eA. RB = 0.01 + 0.9RM + eB. σM = 0.35; σ(eA) = 0.20; σ(eB) = 0.10. The covariance between the returns on stocks A and B is A. 0.0384. B. 0.0406. C. 0.1920. D. 0.0772. E. 0.4000.