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Question
Which of the following statements is FALSE?A) If two stocks move in opposite directions, one will tend to be above average when to other is below average, and the covariance will be negative.
B) The correlation between two stocks has the same sign as their covariance, so it has a similar interpretation.
C) The covariance of a stock with itself is simply its variance.
D) The covariance allows us to gauge the strength of the relationship between stocks.
Answer
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Related questions
Q:
Nielson Motors has a debt-equity ratio of 1.8, an equity beta of 1.6, and a debt beta of 0.20. It is currently evaluating the following projects, none of which would change Nielson's volatility. Project
1
2
3
4
5 Investment
100
75
120
60
80 NPV
23
12
18
15
14 (All amounts are in $millions.)
In order for Nielson Motor's to be willing to invest, project 5 must have an NPV greater than:
A) $10.0 million
B) $12.5 million
C) $18.0 million
D) $22.5 million
Q:
Nielson Motors has a debt-equity ratio of 1.8, an equity beta of 1.6, and a debt beta of 0.20. It is currently evaluating the following projects, none of which would change Nielson's volatility. Project
1
2
3
4
5 Investment
100
75
120
60
80 NPV
23
12
18
15
14 (All amounts are in $millions.)
The total debt overhang associated with accepting project 4, is closest to:
A) $0 million
B) $13.5 million
C) $15.0 million
D) $38.6 million
Q:
Luther Industries has no debt and expects to generate free cash flows of $48 million each year. Luther believes that if it permanently increases its level of debt to $100 million, the risk of financial distress may cause it to lose some customers and receive less favorable terms from its suppliers. As a result, Luther's expected free cash flows with debt will be only $44 million per year. Suppose Luther's tax rate is 40%, the risk-free rate is 6%, the expected return of the market is 14%, and the beta of Luther's free cash flows is 1.25 (with or without leverage).
The value of Luther without leverage is closest to:
A) $315 million
B) $300 million
C) $205 million
D) $340 million
Q:
d'Anconia Copper is considering issuing one year debt, and has come up with the following estimates of the value of the interest tax shield and the probability of distress for different levels of debt:If in the event of distress, the present value of distress costs is equal to $5 million, then the optimal level of debt for d'Anconia Copper is:A) $25 millionB) $50 millionC) $60 millionD) $70 million
Q:
YearRisk-free ReturnMarket ReturnWyatt Oil ReturnMarket Excess ReturnWyatt Oil Excess ReturnBeta20073.0%6.0%5.5%3.0%2.5%0.83320081.5%-38.5%-32.6%.40%-34.1%0.85320091.0%22.5%19.6%21.5%18.6%0.865 The Market's average historical return is closest to: A) -2.50% B) -3.33% C) -4.33% D) -5.17%
Q:
Consider the following stock price and shares outstanding data:Stock NamePrice per ShareShares Outstanding (Billions)Lowes$28.801.53Wal-Mart$47.904.17Intel$19.605.77Boeing$75.000.79 Assume that you have $100,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks. The percentage of the shares outstanding of Boeing that you would hold in your portfolio is closest to: A) .000018% B) .000020% C) .000024% D) .000031%
Q:
Consider the following stock price and shares outstanding data:Stock NamePrice per ShareShares Outstanding (Billions)Lowes$28.801.53Wal-Mart$47.904.17Intel$19.605.77Boeing$75.000.79 Assume that you have $100,000 to invest and you are interested in creating a value-weighted portfolio of these four stocks. The number of shares of Wal-Mart that you would hold in your portfolio is closest to: A) 710 B) 1390 C) 1000 D) 870
Q:
Consider the following stock price and shares outstanding data:Stock NamePrice per ShareShares Outstanding (Billions)Lowes$28.801.53Wal-Mart$47.904.17Intel$19.605.77Boeing$75.000.79 If you are interested in creating a value-weighted portfolio of these four stocks, then the percentage amount that you would invest in Lowes is closest to: A) 25% B) 11% C) 20.0% D) 12%
Q:
Which of the following statements is FALSE? A) A market index reports the value of a particular portfolio of securities. B) The S&P 500 is the standard portfolio used to represent "the market" when using the CAPM in practice. C) Even though the S&P 500 includes only 500 of the more than 7,000 individual U.S. Stocks in existence, it represents more than 70% of the U.S. stock market in terms of market capitalization. D) The S&P 500 is an equal-weighted portfolio of 500 of the largest U.S. stocks.
Q:
Suppose all possible investment opportunities in the world are limited to the four stocks list in the table below:StockPrice per ShareNumber of Shares Outstanding (Millions)Taggart Transcontinental$15.6025Rearden Metal$13.0045Wyatt Oil$29.2510Nielson Motors$26.2526 Suppose that you have invested $100,000 invested in the market portfolio and that the stock price of Taggart Transcontinental suddenly drops to $7.80 per share. Which of the following trades would you need to make in order to maintain your investment in the market portfolio: 1. Buy approximately 1,140 shares of Taggart Transcontinental 2. Sell approximately 256 shares of Rearden Metal 3. Sell approximately 57 shares of Wyatt Oil 4. Sell approximately 148 shares of Nielson Motors A) 1 only B) 2 only C) 2, 3, and 4 only D) 1, 2, 3, and 4 E) None of the above
Q:
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year. You expect Von Bora's stock price to be $25.00 at the end of two years. Von Bora's equity cost of capital is 10%. Suppose you plan on purchasing Von Bora stock in one year, right after the $1.40 dividend is paid. You then plan on selling your stock at the end of year two, right after the $1.50 dividend is paid. The dividend yield that you will receive on your investment is closest to: A) 5.75% B) 6.50% C) 6.25% D) 4.00%
Q:
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year. You expect Von Bora's stock price to be $25.00 at the end of two years. Von Bora's equity cost of capital is 10%. Suppose you plan on purchasing Von Bora stock in one year, right after the $1.40 dividend is paid. You then plan on selling your stock at the end of year two, right after the $1.50 dividend is paid. The capital gain rate that you will receive on your investment is closest to: A) 4.00% B) 3.75% C) 6.25% D) 3.50%
Q:
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year. You expect Von Bora's stock price to be $25.00 at the end of two years. Von Bora's equity cost of capital is 10%. Suppose you plan to hold Von Bora stock for only one year. Your capital gain rate from holding Von Bora stock for the first year is closest to: A) 3.5% B) 4.0% C) 6.0% D) 4.5%
Q:
Consider the following returns:Year EndStock X Realized ReturnStock Y Realized ReturnStock Z Realized Return200420.1%-14.6%0.2%200572.7%4.3%-3.2%2006-25.7%-58.1%-27.0%200756.9%71.1%27.9%20086.7%17.3%-5.1%200917.9%0.9%-11.3%The covariance between Stock X's and Stock Z's returns is closest to: A) 0.05 B) 0.06 C) 0.10 D) 0.71
Q:
Consider the following returns:Year EndStock X Realized ReturnStock Y Realized ReturnStock Z Realized Return200420.1%-14.6%0.2%200572.7%4.3%-3.2%2006-25.7%-58.1%-27.0%200756.9%71.1%27.9%20086.7%17.3%-5.1%200917.9%0.9%-11.3%The variance on a portfolio that is made up of equal investments in Stock X and Stock Y stock is closest to: A) 0.12 B) 0.10 C) 0.69 D) 0.29
Q:
Consider the following returns:Year EndStock X Realized ReturnStock Y Realized ReturnStock Z Realized Return200420.1%-14.6%0.2%200572.7%4.3%-3.2%2006-25.7%-58.1%-27.0%200756.9%71.1%27.9%20086.7%17.3%-5.1%200917.9%0.9%-11.3%The Correlation between Stock X's and Stock Y's returns is closest to: A) 0.58 B) 0.29 C) 0.69 D) 0.10
Q:
Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. The weight on Abbott Labs in your portfolio is: A) 50% B) 40% C) 30% D) 20%
Q:
Suppose you invest $15,000 in Merck stock and $25,000 in Home Depot stock. You expect a return of 16% for Merck and 12% for Home Depot. What is the expected return on your portfolio? A) 13.50% B) 14.00% C) 13.75% D) 14.50%
Q:
Consider the following returns:Year EndStock X Realized ReturnStock Y Realized ReturnStock Z Realized Return200420.1%-14.6%0.2%200572.7%4.3%-3.2%2006-25.7%-58.1%-27.0%200756.9%71.1%27.9%20086.7%17.3%-5.1%200917.9%0.9%-11.3% The covariance between Stock X's and Stock Y's returns is closest to: A) 0.10 B) 0.29 C) 0.12 D) 0.69
Q:
Consider the following realized annual returns:Year EndIndex Realized ReturnStock A Realized Return200023.6%46.3%200124.7%26.7%200230.5%86.9%20039.0%23.1%2004-2.0%0.2%2005-17.3%-3.2%2006-24.3%-27.0%200732.2%27.9%20084.4%-5.1%20097.4%-11.3% Suppose that you want to use the 10 year historical average return on the Index to forecast the expected future return on the Index. The standard error of your estimate of the expected return is closest to: A) 19.4% B) 3.8% C) 6.2% D) 1.95%
Q:
Consider the following Price and Dividend data for J. P. Morgan Chase:DatePrice ($)Dividend ($)December 31, 2008$40.06February 9, 2009$36.80$0.50May 7, 2009$30.41$0.50August 10, 2009$34.86$0.50November 8, 2009$25.86$0.50December 30, 2009$18.86 Assume that you purchased J. P. Morgan Chase stock at the closing price on December 31, 2008 and sold it at the closing price on December 30, 2009. Calculate your realized annual return is for the year 2005.
Q:
Consider the following average annual returns:InvestmentAverage ReturnSmall Stocks23.2%S&P 50013.2%Corporate Bonds7.5%Treasury Bonds6.2%Treasury Bills4.8% What is the excess return for the S&P 500? A) 5.7% B) 7.0% C) 0% D) 8.4%
Q:
Which of the following statements is FALSE? A) The variance increases with the magnitude of the deviations from the mean. B) The variance is the expected squared deviation from the mean. C) Two common measures of the risk of a probability distribution are its variance and standard deviation. D) If the return is riskless and never deviates from its mean, the variance is equal to one.
Q:
Consider the following realized annual returns:Year EndIndex Realized ReturnStock A Realized Return200023.6%46.3%200124.7%26.7%200230.5%86.9%20039.0%23.1%2004-2.0%0.2%2005-17.3%-3.2%2006-24.3%-27.0%200732.2%27.9%20084.4%-5.1%20097.4%-11.3% Suppose that you want to use the 10 year historical average return on Stock A to forecast the expected future return on Stock A. The 95% confidence interval for your estimate of the expect return is closest to: A) 13.2% to 19.5% B) -4.5% to 37.4% C) 6.5% to 26.3% D) -15.0% to 47.9%
Q:
The excess return if the difference between the average return on a security and the average return for: A) Treasury Bonds. B) a portfolio of securities with similar risk. C) a broad based market portfolio like the S&P 500 index. D) Treasury Bills.
Q:
JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to: A) $25.00 B) $15.00 C) $31.25 D) $27.50
Q:
Rearden Metals has a current stock price of $30 share, is expected to pay a dividend of $1.20 in one year, and its expected price right after paying that dividend is $33. Rearden's expected dividend yield is closest to: A) 3.40% B) 3.65% C) 4.00% D) 4.20%
Q:
Which of the following formulas is INCORRECT?A) g = retention rate x return on new investmentB) Divt = EPSt x Dividend Payout RateC) P0 = D) rE = - g
Q:
Glucose Scan Incorporated (GSI) currently sells its latest glucose monitor, the Glucoscan 3000, to diabetic patients for $129. GSI plans on lowering their price next year to $99 per unit. The cost of goods sold for each Glucoscan unit is $50, and GSI expects to sell 100,000 units over the next year. Suppose that if GSI drops the price on the Glucoscan 3000 immediately, it can increase sales over the next year by 30% to 130,000 units. Also suppose that for each Glucoscan monitor sold, GSI expects additional sales of $100 per year on glucose testing strips and these strips have a gross profit margin of 75%. Considering the increase in the sale of testing strips, the incremental impact of this price drop on the firms EBIT is closest to: A) a decline of 1.5 million. B) a decline of 0.7 million. C) an increase of 0.7 million. D) an increase of 1.5 million.
Q:
Money that has been or will be paid regardless of the decision whether or not to proceed with the project is: A) cannibalization. B) considered as part of the initial investment in the project. C) an opportunity cost. D) a sunk cost.