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Finance 301 Final

Terms in this set (147)

Begin of Session 23: Efficient Capital Markets and Random Walks
...
True or False: Systematic risk can be diversified away with a proper diversification strategy.
False. Systematic risk cannot be avoided.
What is the calculation for the market risk premium?
Market Return minus Risk Free Rate
What is the formula for CAPM?
Risk Free Rate + Beta (Market Risk Premium)
What kind of risk can be diversified away?
Unsystematic
If an investment is above the CAPM line, is that company over or undervalued?
Undervalued
Based on the theory of efficient capital markets, what would you expect to happen to the price of an investment if good news was released to the market?
Price would increase
How do you calculate Alpha?
Investment Return-CAPM
Given the following Betas, rank the expected return from highest to lowest.
Investment A 1.2
Investment B 1.5
Investment C .8
B, A, and then C. Companies with higher betas have a positive correlation with higher returns.
True or False: Using net returns, a diversified mutual fund with a Beta of zero will have an expected negative alpha that is equal to its expense ratio.
True
A fund that invested based on the strategies put forth in the Fama and French study would typically invest in what kind of ratios?
Assets with low P/E ratios
Also, the Fama study shows that portfolios with high BE/ME (Book value to market value) do better
Where is the stock plotted on the CAPM line if it has a positive alpha?
Above
In an efficient capital market, stock prices react to news ______ and _________.
Immediately; randomly
Which of the following forms of efficient markets is characterized by stock prices reflecting all publically available information?
Semi-Strong
What form reflects information contained in the history of past stock prices and trading volume?
Weak (This is what technical analysts do)
What form reflects all information, including information that is not available to the investment community?
Strong
In the CAPM equation, what does Beta measure?
A) Risk that you are not paid to take
B) Risk that you are paid to take
C) Firm specific risk
D) Riskless rate of return
E) Market risk premium
B) Risk that you are paid to take
What type of risk cannot be diversified away?
Systematic
If a firm's observed return was 10%, calculate the firm's alpha given the following information: S&P 500: 13%, T-Bills: 3%, Beta: 0.5
CAPM= 3% + .5 (13%-3%)= 8%
Investment Return= 10%
Alpha= Investment Return-CAPM= 2%
True or False: A fund's positive net investment performance versus its benchmark index is a good indicator of positive future performance
False. Past results do not indicate future performance.
True or False: If a market is efficient, the price of the investment will equal the value of an investment.
True
Begin of Session 24: Interest Rates and Bond Valuations Part One
...
Which of the following is NOT one of the types of risk associated with fixed-rate debt obligations?
A) Reinvestment risk
B) Default risk
C) Prepayment risk
D) Coupon risk
E) Interest risk
D) Coupon Risk
The difference between the yield on a non-callable US Treasury bond and the yield on a non-callable corporate bond with identical maturities is known as ______.
A) Coupon premium
B) Interest premium
C) Market premium
D) Spread to treasuries
E) Interest spread
D) Spread to Treasuries
Which of the following bonds would require the greatest yield? Bond 1: AAA rating, Bond 2: BBB Rating, Bond 3: B Rating
A) Bond 1
B) Bond 2
C) Bond 3
D) There is no difference in the bonds' yields
E) Cannot be determined
C) Bond 3. Bonds with lower ratings are considered more risky, and thus require a greater yield.
A callable bond will have a higher interest rate than its otherwise identical, non-callable bond.
A) True
B) False
A) True

This is because a callable bond must have a premium attached for being able to taken before its maturity.
Which of the following types of risk is most difficult to evaluate?
A) Reinvestment risk
B) Interest rate risk
C) Prepayment risk
D) Coupon risk
E) Default risk
B) Interest Rate Risk

IR Risk is the risk you take with possible changing interest rates and value of bond. No one knows when interest rates are going to rise, which makes it the hardest to evaluate.
What is reinvestment risk and how can you reduce this kind of risk?
Unknown rate at which cash inflows may be reinvested
Reduce by investing in zero-coupon bonds because no interim cash flows
What is interest rate risk and how can you reduce this kind of risk?
The risk that a change in market interest rates will affect the value of the bond. Reduce risk by buying floating rate bonds
What is prepayment risk, when is an issuer most likely to call a bond, and how can you reduce this kind of risk?
When an issuer calls a bond prior to its maturity. An issuer will call bond when interest rates drop. Reduce risk by investing in non-callable bonds
What is default risk and how can you reduce this kind of risk?
Risk that the bond will not pay interest or principle when due. Reduce by buying T-Bills
If interest rates are 7%, a bond with a 6% coupon and maturity of six years will be riskier than a bond with a coupon rate of 6% and a maturity of 3 years.
A) True
B) False
A) True
Longer the maturity, riskier the security.
The _______ the maturity of a bond and the _______ the coupon of a bond, the greater the risk.
A) Shorter, higher
B) Longer, higher
C) Shorter, lower
D) Longer, lower
D) Longer, Lower

The longer the maturity, the lower the coupon, greater the risk
What is the primary advantage of investing in a municipal bond?
A) Municipal bonds have no interest rate risk
B) Municipal bonds have very high yields
C) Municipal bonds are exempt from federal taxes
D) Municipal bonds usually have very short maturities
E) Municipal bonds have very high coupon rates
C) Municipal bonds are exempt from federal taxes.
A bond ($1,000 face) pays an 8% coupon, semi-annually, with a maturity of 10 years. Interest rates are 8%. What is the present value of this bond?
A) $856
B) $966
C) $1,000
D) $1,256
E) $1,466
C) $1,000

N=20, I/Y=4%, PMT=$40, FV=1000
This bond sells at Par value because the coupon and yields are the same.
A bond with a $1,000 face value pays a 7% coupon, semi-annually, with a maturity of 12 years. If interest rates are 5%, what is the present value of this bond?
A) $789
B) $899
C) $1,000
D) $1,179
E) $1,312
D) $1,179

N=24, I/Y=2.5%, PMT=$35, FV=1000
Prepayment risk on bonds is usually associated with?
A) Interest Rates Rising
B) Interest Rates Falling
C) The firm defaulting and not being able to prepay
D) The maturity date
E) Call Options
E) Call options

Prepayment risk is the risk you take if the issuer can call the option before its maturity deadline.
True or False: Fixed rate bonds typically have a lower yield than floating rate bonds because the investor in the bond has no interest rate risk.
A) True
B) False
B) False.

Interest rate risk has to do with the interest rates rising or falling which affects the value on a fixed rate bond. You avoid interest rate risk by investing in floating rate bonds.
Which bond rating would you expect to have the highest spread to treasury?
A) AA
B) AAA
C) BB
D) B
E) A
D) B

The lower the credit rating, the riskier the asset, the wider the spread to treasury
If the yield on a bond is above its coupon rate, it is called a:
A) Subordinated Note
B) Par Bond
C) Call Premium
D) Discount Bond
E) Premium Bond
D) Discount Bond

Discount- C < Y
Premium- Y < C
Who is responsible for overseeing interest rate policy in the United States?
A) U.S. Treasury
B) Senate
C) House of Representatives
D) Federal Reserve
E) Investment Banks
D) Federal Reserve
True or False: Yields are based on a spread over the comparable maturity Municipal Bond Index.
A) True
B) False
B) False.

They are based upon the Interest Rates of similar bonds in the market place.
Which of the following is true about bonds?
A) Interest is typically paid annually
B) Yields on Treasury Bonds are the basis for all other yields
C) The longer the maturity on a bond, the lower the yield
D) A bond with a yield below its coupon rate is called a discount bond
E) Bond investors are typically risk takers seeking large returns.
B) Yields on T-Bonds are the basis for all other yields because it takes into effect risk free securities.

Why the other options are wrong...
A) Interest is paid semi-annually
C) Longer the maturity, more risk, higher yield
D) When Y < C it is a premium bond
E) Bond investors are risk averse
Begin of Session 25: Interest Rates and Bond Valuations Part Two
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What is the value of a $1,000 30-year bond that pays coupon rate of 10% if interest rates in the market for similar bonds are at 8%?
A) $1,226.23
B) $628.70
C) $2,037.52
D) $2,357.41
E) $1,172.92
A) $1,226.23

N=60, I/Y=4%, PMT=$50, FV=1000
This bond trades at premium because its yield (8%) is less than its coupon (10%)
True or False: The higher the duration of a bond, the lower the risk of the bond.
A) True
B) False
B) False

Longer duration, longer time to maturity, more risk
What is duration?
Duration is the price volatility measured in years
What is the primary advantage of investing in Municipal Bonds?
A) Muni Bonds are primarily floating rate bonds and have no interest rate risk
B) Muni Bonds are essentially risk free
C) Muni Bond Interest is exempt from federal taxes
D) Muni Bonds typically have very short term maturities
E) There is no advantage to investing in Muni Bonds
C) Muni Bond Interest is exempt from federal taxes
True or False: If the coupon rate of a bond is lower than the market yields for similar securities, it's price will be higher than the par value.
A) True
B) False
B) False

If a coupon < yield that means that that bond is selling at a discount and therefor sells for less than 100 cents on the dollar.
If the risk free rate is 2% and the yield on a bond is 7%, what is the spread to treasury assuming the bond is not callable or convertible?
A) 2%
B) 7%
C) 3%
D) 3.5%
E) 5%
E) 5%

The spread to treasury is essentially your default risk. You have to calculate the risk you are taking on by not investing in a risk free bond.
Calculate the taxable equivalent yield of a Muni Bond that yields 6% if the tax rate is 30%.
A) 20%
B) 8.6%
C) 10.2%
D) 4.2%
E) 7.8%
B) 8.6%

To calculate the taxable equivalent yield, you have to take the yield on the muni bond divided by (1-tax rate)
Value a 10 year, $1,000 bond with a coupon rate of 8% if market yields rise to 9%.
A) $1,445.28
B) $960.44
C) $534.57
D) $934.96
E) $1,276.95
D) $934.96

N=20, I/Y=4.5%, PMT=$40, FV=1000
This bond is selling at discount because the coupon rate of 8% is lower than the yield at 9&.
Value a 20 year, $1,000 bond with a coupon rate of 6% that is callable after 10 years at a 101% of par. Assume market yields are 5%.
A) $1,125.51
B) $1,084.05
C) $1,077.95
D) $1,306.32
E) $1,051.57
B) $1,084.05

Remember, when calculating callable bonds you have to calculate the price to worst. You must calculate the bond if it were to be called at 10 years and if it were not be called and pick the lower value.
If it were called...
N=20, I/Y=2.5%, PMT=$30, FV=1010
Which of the following is true of the yield curve?
A) It is a chart of implied forward rates over time
B) The pure expectations hypothesis is that the shape is a function of supply and demand
C) The liquidity preference hypothesis assumes investors are risk neutral
D) The yields included are adjusted with expectations of future inflation
E) It can be upward or downward sloping
E) It can be upward or downward sloping.
What is the pure expectation hypothesis?
Rate on LT bond is the average of the expected ST rates. Assumes that people are risk neutral. Upward sloping yield curve means investors think ST IR will rise.
What is market segmentation?
Different investors have different preferences for term of investment. Shape of the yield curve is only a function of S&D.
What is Liquidity Preference theory?
Rate on LT bonds is the average of the expected ST rates plus a liquidity premium. Risk averse investors must be induced to pay a higher IR.
What is the formula for valuing a bond?
Rf + Spread to Treasuries + Bond Specific Risk
Which of the following is true about the spread to treasuries of a bond?
A) The higher the credit rating, the higher a bond's spread to treasuries
B) The spread to treasuries is the difference in yield between a bond and a U.S. treasury of the same maturity
C) The lower the credit rating, the lower a bond's spread to treasuries
D) A bond's spread to treasuries is not dependent on credit ratings
E) A bond with a low spread to treasuries is more risky than a bond with a high spread to treasuries
B) The spread to treasuries is the difference in yield between a bond and a U.S. treasury of the same maturity.

Why the other answers are wrong...
A) Higher the credit rating, safer the investment, smaller the spread
C) Lower credit rating, riskier investment, larger the spread
D) Spread to treasuries is dependent on credit ratings
E) A low spread means it is closer to the risk free rate which makes it less risky
A callable bond:
A) would usually have a lower yield than a similar non-callable bond.
B) is attractive to the buyer because the immediate receipt of principal and premium usually produces a higher return.
C) is more apt to be called when interest rates are high because the interest savings will be greater.
D) generally has a higher credit rating than a similar non-callable bond.
E) is attractive to the issuer because it allows the issuer to prepay outstanding debt if new debt can be issued at lower rates.
E) is attractive to the issuer because it allows the issuer to prepay outstanding debt if new debt can be issued at lower rates.

Why the other answers are wrong...
A) Callable bonds have higher yields because of more risk for the investor
B) Attractive to the issuer
C) An issuer is more likely to call a bond if interest rates drop because they can pay less money to the investor
D) Credit ratings don't really have a direct effect on whether a bond is callable versus non callable
Which of the following statements regarding the yield Which of the following statements regarding the yield curve is true?
A) Bonds with longer maturities usually have a lower yield.
B) The yield curve usually is upward sloping which means that investors require higher returns for longer maturity Treasury securities.
C) The yield curve displays the relationship between the yield to maturity of corporate bonds and default risk.
D) The yield curve displays the relationship between the risk and return of a stock.
E) The yield curve is the relationship between the risks and the maturities on municipal bonds.
B) The yield curve usually is upward sloping which means that investors require higher returns for longer maturity Treasury securities.
What is the yield curve?
Relationship between the yields and the maturities on Treasury securities
Under which scenario is an issuer MOST likely to call their bonds?
A) Bond prices go down
B) Interest rates go down
C) Interest rates go up
D) Interest rates remain the same
E) The company faces a liquidity crisis
B) IR goes down

This is because they can then pay less interest on the bond to the investor which is cheaper than holding the bond they currently have.
According to _________________, the yield curve represents a series of expected future short-term interest rates.
A) pure expectations hypothesis
B) the liquidity preference theory
C) the market segmentation hypothesis
D) the random walk hypothesis
E) the efficient markets theory
A) Pure Expectations Hypothesis
The market for U.S. Treasury securities is the largest and most liquid of any financial markets.
A) True
B) False
A) True
Which of the following type of bond has a coupon rate on the bond that is higher than the market yield?
A) Fixed-rate par bond with call option
B) Fixed-rate par bond
C) Fixed-rate discount bond
D) Zero coupon bond
E) Fixed-rate premium bond
E) Fixed-Rate Premium Bond

Par- Y=C
Discount- C<Y
Premium- Y<C
Which of the following types of investors would most likely favor a municipal bond?
A) Wealthy individuals
B) Risk averse investors
C) Risk seeking investors
D) Investors with low incomes
E) Corporations
D) Wealthy Individuals
According to _________________, most investors prefer to hold short-term securities, which is why longer-term securities must pay higher yields.
A) the pure expectations hypothesis
B) the liquidity preference theory
C) the market segmentation hypothesis
D) the random walk hypothesis
E) the efficient markets theory
B) Liquidity Preference Theory
If a corporate bond has a coupon rate of 3% and the market interest rate is 5%, the bond is classified as a_______:
A) Fixed-rate par bond
B) Fixed-rate discount bond
C) Fixed-rate premium bond
D) Zero coupon bond
E) Floating-rate premium bond
B) Fixed-Rate Discount Bond
Begin of Session 26: Interest Rates and Bond Valuations Part Two
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If you buy a stock at the beginning of the year at a price of $60, the company pays two quarterly dividends to $2 and then raises their dividend to $3 for the last two quarters of the year, and you sell the stock at the end of the year for $63, what was your return?
A) 16.7%
B) 18.3%
C) 20.6%
D) 21.7%
E) 25.0%
D) 21,7%

Dividends + Change in Price / Beginning Stock Price
True or False: A technical analyst will spend most of their time evaluating cash flows and relative valuation metrics.
A) True
B) False
B) False

A technical analyst looks at graphs and charts to see how past trends will influence future prices. Fundamental analyst look at cash flows, relative valuation metrics, DCF, and earnings.
If a company pays 100% of its profits in dividends and is expected to pay a $0.70 per quarter dividend in perpetuity, what is the value of the company's stock if the cost of capital is 8%?
A) $140.00
B) $2.80
C) $35.00
D) $11.43
E) $8.75
C) $35.00

Value of perpetuity= annual cash flow/discounting rate
(.7 * 4)/8%
A believer in modern portfolio theory would spend the majority of their time looking at:
A) Profits
B) Discounted Cash Flows
C) Short-term trends in price
D) Beta
E) Relative Valuation Metrics
D) Beta

Modern portfolio theory is based on risk and return.
True or False: A fundamental analyst believes that the price of a stock is always equal to its value.
A) True
B) False
B) False

Technical- Price does not equal value
Fundamental- Price will eventually equal value
Portfolio- Price equals value
Which is not required to value a stock using the discounted cash flow methodology?
A) Estimating the weighted average cost of capital
B) Forecasting expected cash flows
C) Evaluate recent changes and patterns in stock price
D) Calculate enterprise value
E) Calculate intrinsic stock value
C) Evaluate recent changes and patterns in stock price
True or False: A company that operates in a high-tech industry would typically have a longer excess return period than a company in a commoditized industry.
A) True
B) False
A) True
What is the excess return period?
Period during which a company is able to earn returns on new investments that are greater than its cost of capital because of a competitive advantage enjoyed by the firm
What is value of a perpetuity that pays $6 quarterly with a cost of capital of 10%?
A) $960
B) $24
C) $167
D) $240
E) $60
D) $240

(6*4)/10%
A fundamental analyst will typically use all of the following except:
A) P/E ratios
B) Discounted Cash Flow Techniques
C) Price Targets
D) Relative Valuation Metrics
E) Trading Volume Data
E) Trading Volume Data
True or False: A company that pays 100% of its profits in dividends will likely be valued higher in the future than a company that reinvests 100% of its profits because investors want the certainty of dividends.
A) True
B) False
B) False

Remember, a company's dividend policy does not affect the stock price in the short run. However, in the long run it does. A company that does not pay a dividend but reinvests those earnings into other products will help investors by an increased stock price.
What is true about interest rates and stock prices?
A) There is a direct relationship between interest rates and stock prices
B) There is an inverse relationship between interest rates and stock prices
C) Stock prices are only affected by interest rates over the long term
D) Stock prices are not affected by interest rates
E) Interest rates only affect stock prices in the short-term
B) There is an inverse relationship between IR and stock prices
The price volatility of the average stock is ______.
A) 10%
B) 20%
C) 27%
D) 36%
E) 49%
E) 49%

*Check but I think this is right
The dividend policy of a company does not affect its current value of its stock.
A) True
B) False
A) True
An asset that has a stream of even cash flows that continue to infinity is known as a _________.
A) Perpetuity
B) Dividend stock
C) Bond
D) Annuity
E) Growth company
A) Perpetuity
_________ believe that stock prices are influenced more by investor psychology and emotions of the crowd than by changes in the fundamentals of the company.
A) Fundamental analysts
B) Technical analysts
C) Modern Portfolio Theory analysts
D) Risk analysts
E) Trend analysts
C) Technical Analyst
Which of the following stock valuation approaches would a fundamental analyst use?
A) Comparing stock price movements on charts
B) Discounted Cash Flow analysis
C) Comparing changes in the volume of a stock
D) Only focusing on an investor's desired level of risk
E) Diversifying assets to an acceptable level of risk
B) DCF
A company's residual value generally represents the majority of its stock value.
A) True
B) False
A) True- 60-90%
Calculate the value of a perpetuity that has $2million in annual cash flows with a discount rate of 8%.
A) $15 million
B) $20 million
C) $25 million
D) $30 million
E) $35 million
C) $25 million

2million/8%
Calculate the return to shareholders for the following stock: Beginning Price: $55, Ending Price: $60, Dividends: $2
A) 6.3%
B) 9%
C) 10.5%
D) 12.7%
E) 15.9%
D) 12.7%

Dividends + Change / Beginning
2 + 5 / 55
Which of the following analysts believes that a stock's price will eventually equal its underlying value?
A) Portfolio Theory
B) Fundamental
C) Technical
D) Charting
E) Risk assessment
B) Fundamental

Technical- Price does not equal value
Fundamental- Price will eventually equal value
Portfolio- Price equals value
Begin of Session 27: How to Value a Stock
...
Which is definitely true regarding stock valuation?
A) If interest rates decline and risk increases, the value of a stock will increase
B) If expectations of future cash flows decline and risk decreases, the value of a stock will decrease
C) If expectations of future cash flows increase and interest rates rise, the value of a stock will increase
D) If risk increases and interest rates rise, the value of a stock will decrease
E) If risk decreases and interest rates fall, the value of a stock will decrease
D) If risk increases and IR rise, the value of the stock will decrease

As IR increase, value decreases
As risk increases, value decreases
As cash flows increase, value increases
True or False: If a company's earnings are in line with expectations, the stock price will increase significantly.
A) True
B) False
B) False

A company would have to beat expectations in order for the price to increase
Which of the following is NOT necessary to project free cash flow to the firm?
A) Revenue Growth
B) Operating Profit Margin
C) Beta
D) Working Capital Investment
E) Tax Rate
C) Beta

FCF = EBIT (1-T) + Change in NWC + CapEx
Which would stock would be the best buying opportunity?
Stock A: intrinsic value - $40, price - $45
Stock B: intrinsic value - $60, price - $40
Stock C: intrinsic value - $100, price - $90
Stock D: intrinsic value - $40, price - $20
Stock E: intrinsic value - $40, price - $60
A) Stock A
B) Stock B
C) Stock C
D) Stock D
E) Stock E
D) Stock D

Confused as to why Stock B and Stock D wouldn't be equal buying opportunities
Who would be most likely to value a stock based on the Discounted Cash Flow valuation technique?
A) Technical Analyst
B) Fundamental Analyst
C) Day Trader
D) All of the Above
E) None of the Above
B) Fundamental
Which of the following would NOT increase the intrinsic value of a Stock with all else constant?
A) Higher working capital as a % of sales
B) Higher Revenue Growth Rate
C) Lower Beta
D) Lower risk free interest rate
E) Lower Tax Rate
A) Higher working capital as a % of sales

Since we subtract NWC, if it were to grow we would be subtracting out a larger number causing FCF to decrease and value to decrease
True or False: With all fundamentals the same, a tech company will have a higher valuation than a non-tech company.
A) True
B) False
B) False

Depends on the company and market conditions
Which of the following would cause a stock's price to increase?
A) Company ABC losing $10 million in the quarter versus expectations of a $5 million loss
B) Company ABC reporting a revenue growth rate of 10%, in line with expectations
C) Company ABC reporting an operating profit margin of 15% versus expectations of 20%
D) Company ABC losing $5 million in the quarter versus expectations of a $10 million loss
E) Company ABC reporting an operating profit margin of 10%, in line with expectations
D) Company ABC losing $5 million in the quarter versus expectations of a $10 million loss
Given the following, calculate the intrinsic value per share of Company XYZ's stock:
Corp. Value - $26 million
Bonds Outstanding - $10 million
ST Liabilities - $350 thousand
LT Growth Rate - 6%
Beta - 1.2
Shares Outstanding - 1.5 million
A) $24.23
B) $17.33
C) $11.06
D) $10.43
E) $12.52
D) $10.43

Corp Value - (Bonds Outstanding + ST Liabilities) / Shares Outstanding
With all else constant, which would result in a lower intrinsic value per share of a company's stock?
A) Lower Market Risk Premium
B) Lower Investment as % of Revenue
C) Higher Revenue Growth
D) Lower Profit Margins
E) Lower Risk Free Rate
D) Lower Profit Margins
An increase in _________ risk in the market place was a major factor is the latest financial crisis.
A) Systematic
B) Unsystematic
C) Interest rate
D) Reinvestment
E) Inflation
C) Systematic
Systematic risk is the risk that you cannot avoid.
The value of a company is equal to the present value of its expected future cash flows, discounted for timing and risk.
A) True
B) False
A) True
Which of the following is NOT a step in discounted cash flow valuation?
A) Forecast expected cash flows
B) Estimate the discount rates
C) Calculate the enterprise value of a company
D) Calculate the per share price of a stock
E) Estimate the current ratio
E) Estimate the current ratio
_________ analysis tends to be more a short-term trading approach to buying and selling stocks.
A) Modern portfolio theory
B) Fundamental
C) Technical
D) Discounted cash flow
E) Cost of capital
C) Technical
Discounted cash flow is a type of ______ analysis.
A) Modern portfolio theory
B) Fundamental
C) Technical
D) Capital markets
E) Interest rate
B) Fundamental
In the long run, stock returns are influenced by growth in _________.
A) Earnings
B) Interest rates
C) Inflation
D) Risk
E) Supply and demand
A) Earnings
Using a higher risk-free rate in your WACC calculation will yield a lower value in a discounted cash flow analysis.
A) True
B) False
A) True

This is true because if you have a higher risk free rate, you would have a higher WACC causing you to discount at a greater level which would decrease value.
In a WACC calculation, which of the following measures risk?
A) Risk free rate
B) Market return
C) Beta
D) CAPM
E) Debt to equity ratio
C) Beta
The value of a stock is equal to the present value of its earnings.
A) True
B) False
B) False

It is equal to present value of its future cash flows discounted for time and risk.
Who determines the stock price of a company?
A) Management
B) Board of Directors
C) Investment Banks
D) The Market
E) The Government
D) The market
Begin of Session 28: Management of Risk Part One
Don't Have
Begin of Session 29: Management of Risk Part Two
...
Which of the following is an example of Herding?
A) You buy a stock that a fundamental analysis shows is undervalued
B) You believe that because the market has done well, it will continue to do well
C) You save money at a low rate for vacation rather than paying off a high interest credit card
D) Fund managers are buying a company's stock that has no revenue so you buy it too
E) A company's risk profile changes so you sell the stock
D) Fund managers are buying a company's stock that has no revenue so you buy it too

Herding: "Going along with the crowd" Ex- .com bubble
True or False: Less than half of fund managers believe that their performance will be above average.
A) True
B) False
B) False

Many people are over confident and therefor think that they will be above average investors
At what point in the market cycle would overconfidence most likely be prevalent?
A) Relief
B) Fear
C) Hope
D) Capitulation
E) Euphoria
E) Euphoria

**Check
True or False: An example of the hot hand fallacy is falsely supposing that a coin flip will be heads because the previous flip was heads.
A) True
B) False
A) True

Hot Hand Fallacy: Contributes causal significance to change advance. No matter what happened previously, the odds are still the same.
Loss aversion means that:
A) People will evaluate gains and losses the same
B) The utility gained from a win will be greater than the utility lost from a loss of the same magnitude
C) The utility function will flatten out faster for losses than gains
D) The value function will be steeper for losses than for gains
E) Most people will accept a $1,000 coin flip bet
D) The value function will be steeper for losses than for gains.

Loss Aversion: Regret is more than the pain of a loss. It is the pain associated with feeling responsible for the loss.
Which of the following is an example of anchoring in behavioral finance?
A) Comparing a stock price to its 52-week high
B) Comparing two different stocks before deciding which to buy
C) Evaluating the risk of a portfolio of stocks
D) Buying an index fund to ensure you receive market returns
E) Refusing to put money in the market due to risk of loss
A) Comparing a stock price to its 52-week high.

An anchor is a benchmark.
Which of the following is an example of confirmation bias?
A) An investor reading the business section
B) An analyst researching the risks of a stock they wish to recommend
C) A fund manager selling a stock after consecutive poor earnings report
D) A gold investor reading only articles that support a gold buying strategy
E) A fund manager comparing the fund's returns to the S&P 500
D) A gold investor reading only articles that support a gold buying strategy

Confirmation Bias: Only reading material that supports your argument.
Regret Theory states that the fear of regret associated with losses leads to:
A) Mental Accounting
B) Loss Aversion
C) Market Bubbles
D) Anchoring
E) Herding
B) Loss Aversion
Which of the following, on average, is true regarding investment performance?
A) The individual investor is able to outperform the S&P 500
B) The individual investor is able to outperform most equity funds
C) Equity funds typically outperform the S&P 500
D) The individual stock investor underperforms the S&P 500
E) The individual stock investor outperforms Corporate Bond returns
D) The individual stock investor underperforms the S&P 500
True or False: Income Gap Analysis and Duration Gap Analysis are tools used by financial institutions to manage credit risk.
A) True
B) False
B) False

Credit risk is established by S&P, Finch, and Moody's.
What is disposition effect?
Investors tend to hold on to losers too long and sell winners too quickly
What is mental accounting?
Involves investors taking a big risk in one area and avoiding rational risk in other areas
Begin of Session 30: Final Exam Review
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Which of the following is TRUE regarding fixed rate premium bonds?
A) The bond's coupon rate is lower than the yield that it offers.
B) The bond's coupon rate is higher than the yield that it offers.
C) The bond's coupon rate is equal to the yield that it offers.
D) The market value of the bond is less than its par value.
E) The market value of the bond is equal to its par value
B) The bond's coupon rate is higher than the yield that it offers.

Premium- Y<C
Discount- C<Y
Par- Y=C
Estimate the beta for the stock given the following information (closest answer):
Year 1: Stock return = 5.00%; Market return = 6.00%
Year 2: Stock return = -2.0%; Market return = -2.4%
A) 0.67
B) 0.83
C) 1.25
D) 1.57
E) 2.01
B) .83

Since the stock went up or down less than the market did, it would have a beta less than one slightly
Using the CAPM, calculate the expected return for Company XYZ:
Beta = 1.3
Treasury Bill rate = 5%
S&P 500 averaged return rate = 10.0%
A) 5.0%
B) 6.5%
C) 7.0%
D) 11.5%
E) 18.0%
D) 11.5%

5% + 1.3(10%-5%)
Given the following information, calculate the alpha of the portfolio:
Beta = 1.25
T-Bills Rate = 5.0%
S&P 500 averaged return rate= 12%
Actual Return on the Portfolio = 13%
A) -0.75%
B) 1.0%
C) 2.0%
D) 2.5%
E) -2.5%
A) -.75%

CAPM= 5% + 1.25(12%-5%)= 13.75%
Alpha= 13%-13.75%= -.75%
Given the following information, calculate the present value of the following $1,000 bond that pays semi-annual coupons.
Coupon Rate: 9%
Interest Rate: 10%
Maturity: 9 years
A) $917
B) $942
C) $964
D) $1,000
E) $1,468
B) $942

N=18, I/Y=5%, PMT=$45, FV=1000
If there are two $1,000 bonds that pay semi-annual coupons, one with a 30-year maturity and the other with a 10-year maturity and both with a coupon rate of 10%, what will happen to their values if market interest rates fall to 8%?
A) The value of the 30-year bond will be $90.33 lower than the 10-year bond
B) The value of the 10-year bond will be $90.33 lower than the 30-year bond
C) The value of the 30-year bond will be $51.17 lower than the 10-year bond
D) The value of the 10-year bond will be $51.17 lower than the 30-year bond
E) Their values will be the same because their coupon rates are the same
B) The value of the 10-year bond will be $90.33 lower than the 30-year bond
Beta is a measure of__________________________
A) Market related systematic risk of an asset
B) Unsystematic risk
C) Difference between the observed return and expected return
D) Rate of return of an asset
E) Difference between the asset return and risk free rate of return
A) Market related systematic risk of an asset
Alpha is a measure of _______________________
A) The difference between the observed and expected return of an asset
B) The difference between market volatility and the volatility of an asset
C) The difference between the cost of debt and the cost of equity
D) The difference between the systematic and unsystematic risk of the asset
E) None of the above
A) The difference between the observed and expected return of an asset

Alpha= Return on Investment - CAPM
Value a 30 year, $1,000 bond with a coupon rate of 10% that is callable after 10 years at a 103% of par. Assume market yields are 8% and semi-annual coupon payments.
A) $1,226.23
B) $1,149.59
C) $1,506.92
D) $752.67
E) $1,815.42
B) $1,149.59
If GE's stock is trading at $25 per share, what is the intrinsic value of a put option with a strike price of $30 if the option is trading at $8?
A) $3
B) $5
C) $13
D) $18
E) $22
B) $5

Intrinsic Value= Price per share - Strike Price
Time Value= Option Price - Intrinsic Value

25-30=-5
Which of the following forms of efficient markets is characterized by stock prices reflecting all publically available information?
A) Weak Form
B) Semi-strong Form
C) Strong Form
D) Random Form
E) Independent Form
B) Semi-Strong

Weak- Stock prices reflect past prices and trading volumes
Semi-Strong- All public information
Strong- All public and private
Which of the following types of risk can be diversified away?
A) Market risk
B) Systematic risk
C) Unsystematic risk
D) Market premium risk
E) Systemic risk
C) Unsystematic
Formulas to Know
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CAPM Formula
Rf+B(Rm-Rf)
Alpha Formula
Return on Investment - CAPM
Intrinsic Value per Share
Corp Value - (Bonds Outstanding + ST Liabilities) / Shares Outstanding
Intrinsic Value of Option
Stock Price - Strike Price
Time Value of Option
Option Price - Intrinsic Value
Value of Perpetuity
Annual Cash Flows / Discount Rate
Return on Stock Formula
Dividends + Change in Price / Beginning Price
THIS SET IS OFTEN IN FOLDERS WITH...