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Terms in this set (10)
A stock on the Security Market Line must have an NPV of $0.
True - it means that it is a fairly priced security.
If an investment has zero risk, it will have zero return.
False - Treasury Bonds are considered risk free and generates a return.
The more stocks that are added to a portfolio, the lower the portfolio Beta will become.
False - systematic risk cannot be diversified away. Portfolio Beta is based upon systematic risk.
If NPV is negative, then IRR must be negative also.
False, a negative NPV does not mean the IRR is negative. It means you are earning less than your Weighted Average Cost of Capital demands.
If a stock is above the Security Market Line, it must be too cheap.
True - a stock above the security market line is generating NPV returns that exceed the risk threshold.
The Efficient Market Hypothesis implies that we can never return a return that exceeds the stock market index.
False - it implies that you will not sustain returns greater than the stock market index over a long period of time.
Since depreciation is a non-cash expense, it has no effect on cash flow.
False - depreciation is added back to cash flow and higher depreciation expenses will increase free cash flows through their tax shield.
The Efficient Market Hypothesis questions a skilled investor's ability to consistently beat the market.
True - the Efficient Market Hypothesis suggests that a skilled investor is no better able to predict the future than an unskilled investors, and thus they will have similar returns in the long run.
All stocks that are expected to pay the same future dividends will have the same price.
False - different ranges exist around expected values so the different Betas and risk profiles apply different discount rates.
If a company announced record earnings, it's stock price would go up.
False - there are different expectations. A record may fail to meet expectations, a record may be priced in, the market may be down overall, their may be major negatives to offset the record earnings in the earnings report, etc.
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