Concept explainers
a. The stock price has risen steadily each day for the past 30 days.
b. The financial statements for a company were released three days ago, and you believe you’ve uncovered some anomalies in the company’s inventory and cost control reporting techniques that are causing the firm’s true liquidity strength to be understated.
c. You observe that the senior managers of a company have been buying a lot of the company’s stock on the open market over the past week.
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- Q1. A price weighted index places more weight on stocks with a higher price, whilst a value weighted index places more weight on stocks with a higher market capitalization. Discuss. Q2. Price weighted indices have been criticized because they introduce a downward bias by reducing the weight of growing companies whose stock split. What does this mean and why does the underweighting occur? Q3. What should be the risk premium and return on a stock with a Beta of zero under the Capital Asset Pricing Model (CAPM)? What about the risk premium and return on a stock with a Beta of 1? Q4. In a world of certainty, investors will always invest in the asset with the highest return. In the real world, investors hold a diversified portfolio of securities. Why is this the case?arrow_forward1.) According to Jacques’s recommendation, assuming that the market is in equilibrium, how much will the portfolio’s required return change? _______ 2.) Suppose, based on the earnings consensus of stock analysts, Jacques expects a return of 9.57% from the portfolio with the new weights. Does he think that the revised portfolio, based on the changes he recommended, is undervalued, overvalued, or fairly valued? _______ 3.) Suppose instead of replacing Atteric Inc.’s stock with Baque Co.’s stock, Jacques considers replacing Atteric Inc.’s stock with the equal dollar allocation to shares of Company X’s stock that has a higher beta than Atteric Inc.. If everything else remains constant, the portfolio’s risk would _______arrow_forward1. Which form of market efficiency is the best among weak, semi strong and strong? 2. Is stock market efficient? Give logic in favour of your answerarrow_forward
- 13 The value of the stock: Group of answer choices Increases as the required rate of return increases Increases as the dividend growth rate increases and increases as the required rate of return decreases Increases as the dividend growth rate increases Increases as the required rate of return decreasesarrow_forward1. If a company has a Beta = 1.7, this stock is riskier than the S&P 500 index. That means its price fluctuates more than the market average. We can also say that the company’s stock price is more volatile than average. What’s good about a Beta > 1 and what’s bad about it? 2. T or F? Higher risk investments give the investor a higher return. If this is true, why don’t we all invest in the riskiest investments we can find? What’s the difference between fundamental analysis and technical analysis? Don’t simply define them both. Figure out what’s different. 3. If the value > price, then BUY according to value investors If the value < price, the DON’T BUY or maybe sell or hold according to value investors Would “momentum” investors say Buy or Don’t Buy? What would “income investors” want to know in order to make a BUY decision?arrow_forward20. When we are studying the stock price reactions to earnings announcement, why do we need to know analysts’ earnings forecast consensus?arrow_forward
- 12.2 Factor Models Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart: Factor Beta Expected Value Actual Value GDP .0000734 $19,571 $19,843 Inflation -.90 2.6% 2.7% Interest Rates -.32 3.4% 3.2% What is the systematic risk of the stock return? Suppose unexpected bad news about the firm was announced that causes the stock price to drop by .85 percent. If the expected return on the stock is 10.9 percent, what is the total return on…arrow_forward6 The risks and expected cash flows for Stock A and Stock B are the same. Indeed, these two stocks are identical, but their liquidity differs. Stock A trades substantially more frequently than Stock B. The stock market is perfectly competitive. (i) Briefly explain why the equilibrium price of Stock A should be higher than that of Stock B. ii) Do you expect the difference in equilibrium prices between Stock A and Stock B to become larger or smaller during a financial crisis? Briefly explain your answerarrow_forward26) Which of the following statement(s) is/are accurate? Select one or more: The most aggressively priced orders are the highest priced buy orders and the lowest priced sell orders. Strong-form efficient markets theory proclaims that one cannot exploit publicly available news or financial statement information to routinely outperform the market. The highest bid in the market is the best bid, and the lowest ask in the market is the best offer. Active portfolio management based on fundamental analysis is most likely to produce abnormal returns if a market is weak-form efficient but semistrong-form inefficient.arrow_forward
- please quickly 11 In an efficient market: A.Prices are constant over the short-term. B.The risk premium on all securities will diminish to zero. C.All investors are guaranteed a positive return. D.Prices react quickly and correctly to new information. E.Risks for investment are low.arrow_forward14 - When applying the Capital Asset Pricing Model to the real world, all of the following questions remain to be answered EXCEPT: What is the best proxy for the “market” portfolio? What happens when investors cannot borrow and lend at the risk-free rate? How good the Capital Asset Pricing Model is at forecasting? What the Beta of the market portfolio of risky assets is? What the stability of individual stock betas is?arrow_forward10.Which of the following statement on stock valuation is incorrect?a.In dividend discount model, the stock value is the present value of all future dividends.b.We may use the dividend discount model to value all firms. c.Enterprise value is the sum of equity and debt minus cash. d.We may use price-earnings ratio to compute the value to comparable firms.arrow_forward
- Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781285867977Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning