Finance & Investment Concepts: Present Value, Dividend Discount Model & Expected Returns, Exams of Investment Management and Portfolio Theory

Download Finance & Investment Concepts: Present Value, Dividend Discount Model & Expected Returns and more Exams Investment Management and Portfolio Theory in PDF only on Docsity! INVESTMENT THEORY MULTIPLE CHOICE QUESTIONS (100 pts, 1 pt ea) 1. Financial theory is useful because it is: > a. able to predict stock and bond prices. b. logical. c. mathematically rigorous. d. derived from economic principles. 2. A P/E of 20 implies that the firm has five cents in earnings for each dollar of: a. stockholders’ equity. b. book value. > c. market value. d. sales. 3. Using annual compounding, the present value of a $39,703 to be received in 16 years when a 9% rate of return can be earned on investment is: a. $9,406. > b. $10,000. c. $5,000. d. $157,633. 4. According to the Efficient Markets Hypothesis, outstanding stock-market returns earned by an investment superstar cannot be due to: a. luck. > b. conventional wisdom. c. superior stock-picking skill. d. superior stock-market timing ability. 5. Which among the following is not consistent with the regression to the mean concept? > a. persistent rates of return on stockholders’ equity that average 20% per year. b. over the long run, investing larger amounts of capital tends to drive down the rate of profit per dollar invested. c. low-profit firms see their profit rate rise over time as investors redeploy funds to other more profitable uses. d. the normal rate of return concept. 6. According to the "Rule of 72," a 9% rate of return will double your money in: > a. 8 years. b. 9 years. c. 27 years. d. 72 years. 7. At a 6% annual rate of return, an annuity of $10,000 per month has an investment cost of: a. $120,000. b. $1 million. > c. $2 million. d. $16.7 million. 8. Present value falls with: a. an increase in the future sum. b. a decrease in the discount rate. c. a decrease in the time horizon. > d. an increase in the interest rate. docsity.com 2 9. When compared with a continuously compounded rate of return, an equivalent dollar profit can be earned with an annual compounded rate of return that is: > a. higher. b. lower. c. the same. d. none of these. docsity.com 5 19. The Efficient Markets Hypothesis is consistent with the notion that: > a. every security is always fairly priced. b. the average professional investor will underperform the market before expenses. c. some securities are overvalued. d. some securities are undervalued. 20. S&P/BARRA Value and Growth Indexes are constructed by dividing stocks in an S&P index into two mutually exclusive groups according to the firm’s: a. dividend yield. b. price-earnings ratio. > c. price-book ratio. d. earnings per share growth rate. 21. Which among the following statements is true? a. S&P/BARRA Value and Growth Indexes have relatively high turnover over the course of a year. b. Companies in the S&P/BARRA Value Index tend to have higher market capitalizations, on average, than those in the associated Growth Index. c. There are many more companies in the S&P/BARRA Growth Index than in the Value Index. > d. Large losses at component firms can cause surprisingly high P/E ratios for the Value Index. 22. Which among the following statements is false? a. A long-term investor should expect to receive similar rates of return on value and growth stocks. b. During the late-1970s, value stocks outperformed growth stocks > c. Superior rates of earnings per share growth leads to consistently above-average rates of return for growth stocks. d. During the late 1990s, growth stocks outperformed value stocks. 23. Reversion to the mean theory predicts lower expected returns for stocks with low: a. price-book ratios. b. price-sales ratios. c. historical returns. > d. earnings-price ratios. 24. Holding all else equal, EBITDA will rise with a rise in: a. interest rates. b. taxes. c. depreciation. > d. sales revenue. 25. Private Market Value (PMV) is not dependent upon: a. earnings per share. > b. earnings and price momentum. c. cash flow. d. management quality. 26. A value catalyst is: > a. an inside or outside stimulus that will help close any discount between the current market price of a stock and the prorated value of the company based upon its private market value. b. favorable micro trend. c. favorable macro trend. d. earnings uptrend. docsity.com 6 27. According to Security Analysis, a sound investment strategy requires: > a. broad diversification. b. a price per share in excess of net current assets. c. the prudent use of margin borrowing. d. heavy reliance on bond investments. docsity.com 7 28. Benjamin Graham did not believe that the stock-market crash of 1929 was due to: a. stock manipulation by the exchanges and investment firms. b. margin borrowing for stock purchases. c. excessive optimism. > d. economic prosperity. 29. Reversion (regression) to the mean theory argues that the potential of low-profit firms is amplified by: a. entry. b. imitation. > c. exit. d. regulation. 30. According to Graham & Dodd, intrinsic value: a. cannot be justified by assets, earnings, dividends, sure prospects, and management. b. can be justified by dividends and expected capital gains. c. and current market price typically coincide. > d. and current market price rarely coincide given investor pessimism and euphoria. 31. According to Graham & Dodd: a. investors are rarely rational. b. intrinsic value tends to converge on price over time. > c. a sound valuation is eventually validated in an efficiently functioning marketplace. d. a sound valuation is quickly validated in an efficiently functioning marketplace. 32. According to Graham & Dodd, the objective of security analysis is to: > a. seek company valuations which, on average, prove more reliable than the marketplace. b. form an informed opinion of historical profitability and growth. c. picture the company as a going concern over all business conditions. d. identify overpriced securities, and to enjoy excess returns following the market's subsequent upward revaluation to a price consistent with intrinsic value. 33. The value of ROE is calculated as the ratio of: > a. ROE divided by P/E. b. the EPS growth rate divided by P/E. c. P/E divided by ROE. d. P/E divided by the EPS growth rate. 34. High dividend yields are typically associated with stocks that display: > a. below-average risk. b. below-average total returns. c. below-average risk-adjusted total returns. d. below-average dividend payout ratios. 35. Holding all else equal, an increase in dividend payments results in higher: a. EBITDA. b. cash flow. c. free cash flow. > d. none of these. 36. In a Value Line regression, the relevant Y-variable is: docsity.com 10 a. management quality. b. high profit margins. c. low dividend payout ratios. > d. tangible assets. docsity.com 11 46. TROW has a current price of 40, an expected dividend per share of $0.50, expected EPS of $2, expected EPS growth of 15% per year, and a typical P/E ratio of 20. According to the Discounted Present Value Model, what is the expected price for TROW in five years? a. $84.92 > b. $82.95 c. $80.45 d. $42.50 47. TROW has a current price of 40, an expected dividend per share of $0.50, expected EPS of $2, expected EPS growth of 15% per year, and a typical P/E ratio of 20. According to the Discounted Present Value Model, what is the expected price for TROW in five years? According to the Discounted Present Value Model, what is the expected rate of return on TROW over the next five years? > a. 16.25% b. 15% c. 12% d. 10% 48. INTC has a current price of 50, an expected dividend per share of $0.10, expected EPS of $1, expected EPS growth of 20% per year, and a typical P/E ratio of 25. According to the Discounted Present Value Model, what is the expected price for INTC in five years? a. $124.92 b. $124.42 > c. $62.21 d. $50.50 49. INTC has a current price of 50, an expected dividend per share of $0.10, expected EPS of $1, expected EPS growth of 20% per year, and a typical P/E ratio of 25. According to the Discounted Present Value Model, what is the expected rate of return on INTC over the next five years? a. 20.20% b. 20% > c. 4.6% d. none of these. 50. INTC has a current price of 50, an expected dividend per share of $0.10, expected EPS of $1, expected EPS growth of 20% per year, and a typical P/E ratio of 25. According to the Discounted Present Value Model, INTC is overvalued if investors have a risk-adjusted required return of: > a. 20.20% b. 4.6% c. 0.2% d. none of these. 51. LU had a current price of $30, is expected to pay a 30¢ dividend next year and grow dividends at a rate of 20% for the foreseeable future. According to the dividend discount model, the required rate of return for LU investors is: > a. 21%. b. 20%. c. 14%. d. 1%. 52. LU had a current price of $30, is expected to pay a 30¢ dividend next year and grow dividends at a rate of 20% for the foreseeable future. According to the dividend discount model, LU is: a. over valued if investors require a 21% rate of return. b. undervalued if the actual dividend next year are 25¢. docsity.com 12 c. overvalued if the actual rate of growth is 21%. > d. worth $6 if investors require a 25% rate of return. 53. The constant growth version of the dividend valuation model is: > a. D1/(k-g). b. D1/(k+g). c. D0/(k+g). d. D0/(k-g). docsity.com 15 > a. percentage change in price for a given change in yield falls. b. percentage change in price for a given change in yield rises. c. dollar price change for a given change in yield rises. d. dollar price change for a given change in yield falls. 72. Which of the following statements about duration is false? > a. Duration is a complete measure of bond risk. b. Duration reflects coupon and maturity. c. Bond price changes are directly related to duration. d. Modified duration equals duration divided by (1+r). 73. The price of a 8% coupon bond with semiannual discounting, three years to maturity, and a market return of 6% is: > a. 105 3/8. b. $1,000. c. $1,260. d. 125 7/8. 74. If the y-axis is the percentage change is bond price, and the x-axis is the yield to maturity, a line that represents the price response to a given change in yield is: > a. convex to (bends away from) the origin. b. concave to (bends away from) the origin. c. concave to (bends toward) the origin. d. convex to (bends toward) the origin. 75. Modified duration measures the sensitivity of bond prices to changes in: > a. yield to maturity. b. Maculay duration. c. the sensitivity of modified duration to changes in yield to maturity. d. the sensitivity of modified duration to changes in term to maturity. 76. The yield curve would "flatten" with a rise in the: > a. T-Bill rate. b. long-term bond rate. c. equity risk premium. d. yield spread. 77. Holding all else equal, bond investment risk increases with an unexpected rise in: > a. inflation. b. credit quality. c. bond demand. d. liquidity. The common stock of ABC, Inc. pays no dividend, and has a market price of 80. ABC's 8% convertible bond sells at 128, and is convertible into common at a stock price of $100 per share. Use this information to answer the succeeding three questions. 78. The conversion value of ABC's convertible bond is: a. $1,280. b. $1,024. c. $1,000. > d. $800. 79. The percent premium to conversion value for ABC's convertible bond is: docsity.com 16 a. 375%. b. 160%. c. 100%. > d. 60%. 80. The breakeven time for XYZ's convertible bond is: a. 16 years. b. ten years. > c. six years. d. 3.5 years. 81. The three-year compound annual rate of return on a stock earning 25%, 100% and -60% is: > a. 0%. b. 16.7%. c. 21.6%. d. 25%. 82. The probability of outperforming a portfolio of stocks with long-term bonds over a 30-year holding period is roughly: > a. 0%. b. 67%. c. 90%. d. 100%. docsity.com 17 83. The probability of outperforming a portfolio of stocks with short-term bonds over a 5-year holding period is about: a. 0%. > b. 20%. c. 80%. d. 100%. 84. The highest annual rates of return on common stocks during the post World War II period were earned during the: a. 1950s. b. 1970s. c. 1980s. > d. 1990s. 85. The late-1990s were an especially attractive investment environment for: a. foreign stocks. > b. large cap growth stocks. c. large cap value stocks. d. small cap stocks. 86. The geometric mean return for a stock with a four-year performance history of +25%, +40%, -20% and +25% is: a. 0%. > b. 15%. c. 17.5%. d. 75%. 87. The arithmetic mean return for a stock with a three-year performance history of +14%, +26%, -2% is: a. 0%. > b. 12.7%. c. 40.8%. d. 43.6%. 88. Debt obligations of the U. S. Treasury that have maturities of more than one year but less than 10 years are called: a. Treasury bills. > b. Treasury notes. c. Treasury bonds. d. none of these. 89. From 1950 to the present, the annual rate of return on common stocks is roughly: a. 0-3%. b. 4-6%. > c. 12-14%. d. 20-25%. 90. Which among the following statements is true? a. Outstanding long-term bond returns coincide with periods of rising interest rates. > b. Outstanding stock return performance tends to follow years of sub-par performance. c. Nominal returns are adjusted to reflect the effects of inflation. d. Treasury bills seldom provide a before-tax return sufficient to offset the effects of inflation. 91. A required return does not include the: a. nominal risk-free rate. docsity.com