ch11 - Chapter 11 COMMON STOCKS: ANALYSIS AND STRATEGY...

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Chapter 11 COMMON STOCKS: ANALYSIS AND STRATEGY Multiple Choice Questions Taking a Global Perspective 1. A general consensus of analysts is that a typical investor should have ___ to ______ percent of his/her portfolio in international markets. a. 5; 10 b. 10; 20 c. 20: 30 d. 30: 40 (b, moderate) Analyzing Some Important Issues Involving Common Stock 2. For adequately diversified common stock portfolios, market effects often account for -------- percent and more of the variability of the portfolio’s return. a. 60 b. 70 c. 80 d. 90 (d, moderate) 3. From 1989 to April 2003, the Japanese stock market lost what percent of its value? a. 50 b. 60 c. 70 d. 80 (d, moderate) Chapter Eleven Common Stocks: Analysis and Strategy 135
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4. Which of the following is TRUE regarding the risk premium? The risk premium a. must reflect all the uncertainty involved in the asset. b. does not apply to low beta stocks. c. is directly related to changes in the interest rate. d. reflects only the financial risk of a security. (a, moderate) 5. The required rate of return for a common stock is defined as the: a. expected return given an assumed set of probabilities and expected cash flows on the stock. b. minimum expected return necessary to induce an investor to purchase the stock. c. maximum expected return based on estimates of expected cashflows from the stock. d. expected return after evaluation of the risk on the stock has been taken. (b, easy) 6. The -------------- provides investors with a method of calculating a required return for a stock. a. dividend discount model b. risk-free rate c. Fisher model d. Capital Asset Pricing Model (d, moderate) 7. The nominal risk-free rate is the: a. same as the real risk-free rate. b. real risk-free rate plus an inflation premium. c. real risk-free rate plus an interest rate premium. d. market interest rate. (b, moderate) Chapter Eleven Common Stocks: Analysis and Strategy 136
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8. Risk premiums above the riskless rate of return must: a. account for inflation b. account for overall market risk. c. account for business and financial risk. d. account for purchasing power risk. (c, difficult) 9. If investors in the market become more pessimistic, it is expected that the risk premium will ----------- and the required return will ----------. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase (a, moderate) 10. Under the CAPM, the relationship between the required rate of return and risk is assumed to be a. linear and downward sloping. b. nonlinear and downward sloping. c. linear and upward sloping. d. nonlinear and upward sloping. (c, easy) 11. The equity risk premium for the market is 8 percent. Wilson Products has a beta of 0.4. The real risk-free rate is 2 percent and the expected inflation premium is 5 percent. The required rate of return for Wilson is __________ percent.
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ch11 - Chapter 11 COMMON STOCKS: ANALYSIS AND STRATEGY...

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