ECONOMICS

70. Praxair’s upcoming dividend is expected to be $2.25 and its stock is selling at $65. The firm has a beta of 0.8 and is expected to grow at 10% for the foreseeable future. Compute Praxair’s required return using both CAPM and the constant growth model. Assume that the market portfolio will earn 10 percent and the risk-free rate is 3 percent.
A. CAPM: 8.6%; Constant Growth Model: 13.46%
B. CAPM: 9.7%; Constant Growth Model: 12.56%
C. CAPM: 10.1%; Constant Growth Model: 11.46%
D. CAPM: 8.2%; Constant Growth Model: 9.56%

 

71. Estee Lauder’s upcoming dividend is expected to be $0.65 and its stock is selling at $45. The firm has a beta of 1.1 and is expected to grow at 10% for the foreseeable future. Compute Estee Lauder’s required return using both CAPM and the constant growth model. Assume that the market portfolio will earn 11 percent and the risk-free rate is 4 percent.
A. CAPM: 11.2%; Constant Growth Model: 10.97%
B. CAPM: 11.7%; Constant Growth Model: 11.44%
C. CAPM: 10.1%; Constant Growth Model: 11.46%
D. CAPM: 9.2%; Constant Growth Model: 9.56%

 

72. ABC Inc. has a dividend yield equal to 3% and is expected to grow at a 7% rate for the next 7 years. What is ABC’s required return?
A. 10%
B. 11%
C. 4%
D. 5%

 

73. US Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price continues to increase resulting in a total increase of $11. Given this information which of the following statements is correct?
A. This is an example of a market overreaction.
B. This is an example of a market underreaction.
C. This is an example of a semi-strong efficient market.
D. None of these statements are correct.

 

74. US Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a net increase of only $4. Given this information which of the following statements is correct?
A. This is an example of a market overreaction.
B. This is an example of a market underreaction.
C. This is an example of a semi-strong efficient market.
D. None of these statements are correct.

 

75. Which of the following is incorrect?
A. Technical analysis is expected to work if markets are weak-form efficient.
B. If markets are strong-form efficient then they must also be weak-form efficient.
C. It is not likely that the market is strong-form efficient.
D. None of these statements are incorrect.

 

76. Which of the following is correct?
A. Hedge funds often sell stock they don’t even own.
B. Hedge funds maintain secrecy about their holdings, trading and strategies.
C. Hedge funds are limited to sophisticated investors.
D. All of these statements are correct.

 

77. Which of the following statements is incorrect?
A. The capital market line shows the relationship between return and risk as measured by the standard deviation.
B. The Efficient Market Hypothesis states that security prices fully reflect all available information.
C. The security market line shows the relationship between return and risk as measured by beta.
D. None of these statements are correct.

 

78. Stock A has a required return of 19%. Stock B has a required return of 11%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks?
A. Stock A is riskier.
B. Stock B is riskier.
C. The stocks have the same risk.
D. We would need to know if the markets are efficient to answer this question.

 

79. Stock A has a required return of 19%. Stock B has a required return of 11%. Assume a risk-free rate of 4.75%. By how much does Stock A’s risk premium exceed the risk premium of Stock B?
A. 3.25%
B. 6.25%
C. 8.00%
D. 7.00%

 

80. Stock A has a required return of 12%. Stock B has a required return of 15%. Assume a risk-free rate of 4.75%. Which of the following is a correct statement about the two stocks?
A. Stock A is riskier.
B. Stock B is riskier.
C. The stocks have the same risk.
D. We would need to know if the markets are efficient to answer this question.

 

81. IBM’s stock price is $22, it is expected to pay a $2 dividend, and analysts expect the firm to grow at 10% per year for the next 5 years. TDI’s stock price is $10, it is expected to pay a $1 dividend, and analysts expect the firm to grow at 12% per year for the next 5 years. What is the difference in the two firms’ required rate of returns?
A. 2.91%
B. 1.82%
C. 2.03%
D. 3.23%

 

82. Which of the following statements is correct?
A. If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient.
B. There is evidence to suggest that the market is strong-form efficient because corporate insiders have made extraordinary profits by trading on inside information.
C. The Efficient Market Hypothesis states that security prices will be based on their expected return.
D. None of these statements is correct.

 

83. IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the following statements must be correct?
A. The market risk premium for Apple must be larger than the market risk premium of IBM.
B. If investors become more risk averse, the expected return of Apple will increase more than the expected return on IBM.
C. Apple’s expected rate of return must be three times as large as IBM’s.
D. None of these statements is correct.

 

84. You hold a diversified portfolio consisting of $1,000 investment in each of 10 different stocks. The portfolio has a beta of 0.8. You have decided to sell one of your stocks that has a beta equal to 1.1 for $1,000. You will purchase $1,000 of a new stock with a beta of 2.5. After these two transactions (sell and buy), what will be the beta of the new portfolio?
A. 1.1
B. 0.99
C. 0.87
D. 0.94

 

85. A stock has an expected return of 14.5%, the risk-free rate is 4% and the return on the market is 11%. What is this stock’s beta?
A. 1.5
B. 3.0
C. 1.05
D. .94

 

86. In 2000, the S&P500 Index earned 11% while the T-bill yield was 4.4%. Given this information, which of the following statements is correct with respect to the market risk premium?
A. The market risk premium must have been negative.
B. The market risk premium must have been positive.
C. The market risk premium must have been zero.
D. Unable to answer without more information.

 

87. How might a small market risk premium impact people’s desire to buy stocks?
A. Investors with high risk aversion will be less willing to invest in stocks.
B. Investors with high risk aversion will be more willing to invest in stocks.
C. It will only impact the share prices.
D. None of these statements is correct.

 

88. How might a large market risk premium impact people’s desire to buy stocks?
A. Investors with high risk aversion will be less willing to invest in stocks.
B. Investors with high risk aversion will be more willing to invest in stocks.
C. It will only impact the share prices.
D. None of these statements is correct.

 

89. Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset?
A. Unable to answer since there is no data to calculate the standard deviation.
B. A very low number since it would have very low risk.
C. 1
D. 0

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