Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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Financial markets perform all of the following
functions except
a. | they allocate resources to their most efficient
use. | b. | they intermediate between borrowers and
lenders. | c. | they establish market rates of
discount. | d. | they determine bond
prices |
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2.
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If a company announces a dividend of £5.00 and
this is expected to grow 5% per year indefinitely, with a market rate of interest of 0.04, then,
according to the Gordon growth model, the market price of this company’s stock is
a. | £55.5. | c. | £525. | b. | £500. | d. | £555. |
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3.
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If the stock market is efficient, this implies
that
a. | investors can never earn a higher return than the market
portfolio. | b. | stock prices vary
only in response to a change in the underlying fundamentals. | c. | stock prices are only influenced by random factors. | d. | past prices of stock give no information on future prices of
stock. |
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4.
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The strong form of the efficient market hypothesis
predicts that security prices
a. | reflect all available
information. | b. | never deviate from
their equilibrium rate. | c. | are
predictable. | d. | never create stock
market bubbles. |
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5.
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The capital asset pricing model (CAPM) predicts
that a security’s expected return is equal to the risk free rate plus a premium based on
the
a. | security’s beta plus market
risk. | c. | systematic risk of the
security. | b. | total risk of the security. | d. | unsystematic risk
of the security. |
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6.
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A stock with a beta of one would be expected to
have a return equal to
a. | zero. | c. | the
market rate . | b. | the risk free
rate. | d. | one plus the market premium. |
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7.
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Total portfolio risk is equal to
a. | systematic risk plus non-diversifiable
risk. | b. | systematic risk plus diversifiable
risk. | c. | unsystematic risk plus non-diversifiable
risk. | d. | unsystematic risk plus diversifiable
risk. |
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8.
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The greater the beta, the ____________ of the
security in question. What is the missing phrase?
a. | less the avoidable risk | c. | less the unavoidable risk | b. | greater the avoidable risk | d. | greater the
unavoidable risk |
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