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B_
Name (please Business 172a
print)
:
?.
Professor Reza
Fall2008 Midterm Examination
2
:ihj
JoSo State
University
I.
Instructions and notes:
Please put your name on BOTH the scantron and this exam. If your name is missing from either, you will receive ZERO on the exam - no exception and no changes afterwards. This is a closed-book, closed-notes exam. Do not consult others. You may use a calculator. There is one correct answer to each problem. Multiple answers receive zero point. Unless specified otherwise, approximations should be rounded to 2 digits after the decimal. Unless specified otherwise, assume that investors maximize their net worth (i.e., they are "rational") and firms maximize their common shareholders' net worth. unless specified otherwise, all markets are efficient. firms are tpical of the industry in which they operate.
II. III. IV. V.
a.
b. c.
1.
The major goal of company analysis is a. To determine how well its industry is doing b. To determine the quality of its management and how well it invests its funds 6 to determine the quantity and quality of its future earnings n. All of the above e. Both (b) and (c) Regarding the historical relationship between the economy and the stock market, a. The stock market lags the economic turning points by an average of about 5-6 months (6) fne stock market leads the economic turning points by an average of about 5-5 months v^. d The turning points of the stock market and the economy tend to be coincident (i.e., occur at about the same time). d. In general, there is no pattern between the turning points of the stock market and the economy
2.
3.
ln anticipation of an economic recovery, it is better to
@ in.r"ur" one's investment b. increase one's investment c. d.
away from T-bonds and in favor of low-quality bonds in favor of T-bonds and away from low-quality (i.e., low-grade
or riskier) bonds increase one's investment away from high-quality foreign currencies (such as the Euro or the Yen) and away from riskiest bonds increase one's investment in favor of securities or assets whose prices move down as
inflation rises.
4.
The reason why rising (or higher) inflation hurts stock prices is that a. Since the value ofassets on the books are kept on a historical basis, they do not reflect the higher prices caused by inflation b. Businesses, suppliers and employees cannot raise their prices and wages to keep up with
inflation
d. e. 5.
lnterest rates tend to rise with inflation, thus raising the required rate of return (i.e., cost of capital) All of the above Both (b) and (c)
A stock sells for $64.38 today. The price ofthis stock has risen by an average of2 cents per day
for the past few years and this increase is expected to continue for the foreseeable future. Ifyou belj,qye that stock prices follow the random walk nrodel, then you ( a\ you forecast this stock to be worth $64.40 tomorrow but *ith expectation that your \-t -b. lorecast could be wrong are certain that this sock'a'i11 be worth $64.40 tomorrow c. you forecast this stock to be worth $64.38 tomorrow since the random walk model clearly
states that "the best forecast of tomorrow's price is its today's price"
d. 6.
you cannot forecast the stock price since its riskiness is not given
The January Effect: a. Refers to the sharp increase in stock prices that occurs in .Ianuary on average b. Seems to be disappearing or has disappeared c. None of the above eotrt "a" and "b"
@
,) I
7- All other things equal, leading o
companies offer lower-risk investment prospects than nonJeading companies. Therefore, leading companies offer superior investment opportunities considering their risk and return. iai True
@
8.
False
The filter rule and the moving average model used by technical analysts ("technicians") imply that the weak-form of the efficient market hypothesis does not describe how the securities market works.
rrue 6 False b.
9\ '
The hrsis for technical analysis is that A security prices follow certain patterns and that these patterns repeat themselves; therefore, \/ an rmportant activity of technicians is to discover these patterns. b. one can forecast security prices using future eamings, dividends, and company business pians c. one can forecast security prices if one has access to company information that has not
been made pubiic
10. As far as technical analysis is concerned short sales by NY Stock Exchange specialists is a bullish signal is a bearish signal provides no sfunal whatsoever about stock prices
?. fu Y
ll.
Fu
,analysis can fail because the forecasts of earnings and dividends can be
t\';
12. In anticipation ofan
i
off
a.
b.
Economic upturn, a stock investor should allocate a greater share of her portfolio to higher-systematic (i.e., beta) risk stocks Economic uptum, a stock investor shouid allocate a greater share her of portfolio to lower-beta stocks Economic upturn, an investor should allocate a greater share of her portfolio to more
ts/
e. 13
,;l
cyclical stocks
Both (a) and (c) Both (b) and (c)
You bought a stock on Sep-15-05 for $20 and received a dividend of$1.50 on Sep-14-06 (one year later), at which time you soid the stock for $ 18. Your total rate of retum is
f;:l:t/; ic,;
"4.
150%
Lu+\':
none ofthe above
t4 The stock you bought ,orn".ugt for $40 is now worth $70 for
a gain of $30, and you expect it to rise further. But you want to make sure that your gain does not fall below $20. Assuming a relatively clam market, to achieve this objective you Place a "limit" order to sell your stock at $70 Place a "limit" order to sell your stock at $60 VU""a "stop" order to sell your stock at $60 Place a "stop" order to sell your stock at $70 Place a "stop" order to sell your stock at $20
a. b. @ d. e.
15
A stock last traded at $25.47 . A market order to stock for $25.47 .
buy- this stock guarantees that you
will buy this
a.
b.
True l.alse
16. The stock price of an oil company hardly moved after a major oil discovery was nade public. This is an examole of \ the strong fro- efficiency b. the semi-strong from efficiency c) the weak-form efficiency d. none ofthe above 17. In the Birth Phase (or Early Development Stage) of an industry, the issue(s) for an investor is (are): a. Will this industry survive?
\. How well is this industry managed? g Will a particular firm in the industry survive?
5}}
e.
Both "a" and "c" Both "a" and "b"
18. Behavioral Finance (as explained by Kahnemann) claims that investors tend to frame their investment plans/horizons too narowly. This means a. We underestimate our future incontes b. We do not consider our entire.future of investing oppornrnities c. We don't consider all the investmenl possibilities, such as stocks, bonds, options, reiil estate, art work, and so on.
19. Consider beating the market - i.e. earning more than the buy-and-hold strategy. .If markets-are -efficint, then the only way to beat the market rs --a. if your forecast of the market is correct and so is the forecast of other investors b. if your forecast of the market is correct and other investor's forecasts are wrong c. if your forecast of the market is the same as those of other investors, regardless of whether their forecast is nght or wrong.
,
20. Wiren it comes to individual investors,
a. b. \ \
(are)
Men trade more frequently than women; men earn lower returns than women Men trade more frequently than women; men earn higher returns than women Men trade less frequently than women; men earn higher returns than women tvt.tt trade less frequently than women; men earn lower returns than rvomen
21. Among the major differences between fundamental analysis (FA) and technical analysis (TA) is
a. b. , {c, d. e.
TA can time when to buy or sell stocks; FA can only determine if a stock is over- or under-priced FA can time when to buy or sell stocks; TA can only determine if a stock is over- or under-priced TA claims that investor sentirnents matter; FA focuses on factors that affect earnings Both (a) and (c) Both (b) and (c)
22. A company's
assets has book value
:
300, its debt has book value
:
I
100, and its net income
:15.
For this company
a. b. c. d. e. a.
ROE:7.5% Debt/Equity: 1/3 Debt/Equity:50%
Both (a) and (b) Both (a) and (c)
tr3 t-
l/
Consider the spread betweeh Treasury long-term bond yields (R) and T-bill rate (r). The spread R-r widens near or at the peak of the business cycle because the Fed pushes short-term rates down The spread R-r widens near or at the peak of the business cycle because the Fed pushes long-term rates up The spread R-r narrows near or at the peak of the business cycle because the Fed pushes short-term rates up The spread R-r narrows near or at the peak ofthe business cycle because the Fed pushes
b. c.
-"$\\
d.
{11
long-term rates dovrm
24.
If markets are efficient in ser,nistrong-form, this suggests that the market _-,fl. uses.current and past stock prices to set stock prices
-+. - e. d. e.
ia.
uses current arrd past stock prices and volumes of trade to set stock prices uses all the publicly availdble information about companies to set their stock prices
bothEEil-d "b"
none ofthe above
25. Among the reasons that technical analysis might not work is that the current stock price reflects all the available information; both public and private.
b.
True False
26. Consider beating the market - i.e. earning more than the buy-and-hold strategy. If capital markets are efficient, (il Technical analysis can beat the market
'(. c. d.
Fundamental analysis can beat the market Both technical and fundamental analyses can beat the market Neither technical or fundamental analyses can beat the market
27. Consider the spread between low-grade bond yields (i) and T-bill rate (r) | a. The spread i-r narrows around the peak of the business cycle because all long-term rates i _ fall around the peak ofthe business cycle ,a) ft r spread i-r widens around the peat ofthe business cycle because the relative riskiness
\'/ c.
i
of these bonds riSes
The spread i-r narrows around the peak of the business cycle because the relative riskiness ofthese bonds rises The spread i-r narrows around the peak of the business cycle because the relative riskiness of these bonds falls
I
d.
28. The 3-step process of fundamental analysis is a. (i). Determine the pattern of earnings or dividends of the company; (ii) estimate the
required rate of return (or expected return); ( iii) determine the intrinsic value of the stock (i) Forecast the dividends; (ii) estimate the expected return; (iii) decide which model to use to estimate the intrinsic value of the stock (--"_] (i) Determine tbe economy's outlook; (ii) analyze the industry; (iii) analyze the specific company d. none ofthe above
b.
29. The EMH casts doubt on the possibility that an actively managed portfolio can produce returns that are consistently superior to the returns of passively managed portfolio (assuming that both portfolios have similar risk characteristics).
il b.
True
False
30. You observe that the price of IBM stock changed drastieally on October 28 as a result of a certain event on that day (such as a new technology discovery by IBM). This finding refutes the a. weak form efficiency b. semi-strong form efficiency c.i strong form efficiency
d.
none ofthe above