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finance homework mcq -Corporate Finance answer with detailed explanations

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solution


Question

13.1 Competition and Capital Markets

 

 

Use the following information to answer the question(s) below.

 

 

Assume that the CAPM is a good description of stock price returns. The market expected return is 8% with 12% volatility and the risk-free rate is 3%. New news arrives that does not change any of these numbers, but it does change the expected returns of the following stocks:

 

 

Stock

 

 

Expected

 

 

Return

 

 

Volatility

 

 

Beta

 

 

Taggart Transcontinental

 

 

8%

 

 

28%

 

 

1.2

 

 

Rearden Metal

 

 

13%

 

 

40%

 

 

1.7

 

 

Wyatt Oil

 

 

7%

 

 

20%

 

 

0.8

 

 

Nielson Motors

 

 

10%

 

 

32%

 

 

1.3

 

 

1) The expected alpha for Taggart Transcontinental is closest to:

 

 

A) -3.00%

 

 

B) -1.00%

 

 

C) 1.00%

 

 

D) 3.00%

 

 

 

 

]

 

 

 

 

 

 

 

 

 

 

 

 

 

2) The expected alpha for Wyatt Oil is closest to:

 

 

A) -3.00%

 

 

B) -1.00%

 

 

C) 0.00%

 

 

D) 3.00%

 

 

 

 

3) Which of the following stocks represent buying opportunities?

 

 

1. Taggart Transcontinental

 

 

2. Rearden Metal

 

 

3. Wyatt Oil

 

 

4. Nielson Motors

 

 

A) 1 only

 

 

B) 1 & 2 only

 

 

C) 2 & 3 only

 

 

D) 2 & 4 only

 

 

 

 

 

 

 

4) Which of the following stocks represent selling opportunities?

 

 

1. Taggart Transcontinental

 

 

2. Rearden Metal

 

 

3. Wyatt Oil

 

 

4. Nielson Motors

 

 

A) 1 only

 

 

B) 1 & 2 only

 

 

C) 2 & 3 only

 

 

D) 2 & 4 only

 

 

 

Only Taggart Transcontinental represents a selling opportunities due to its negative expected alpha.

 

 

 

 

5) A stock\'s alpha is defined as the stock\'s:

 

 

A) expected return minus its required return.

 

 

B) expected return minus its actual return.

 

 

C) nominal return minus its required return.

 

 

D) required return minus its actual return.

 

 

 

 

13.2 Information and Rational Expectations

 

 

1) When all investors correctly interpret and use their own information, as well as information that can be inferred from market prices or the trades of others, they are said to have

 

 

A) sensation seeking expectations.

 

 

B) positive expectations.

 

 

C) rational expectations.

 

 

D) confident expectations.

 

 

 

 

Skill: Definition

 

 

2) The CAPM does not require investors have homogeneous expectations, but rather that they have

 

 

A) rational biases.

 

 

B) no biases.

 

 

C) heterogenous expectations.

 

 

D) rational expectations.

 

 

 

 

Skill: Conceptual

 

 

13.3 The Behavior of Individual Investors

 

 

1) Investors that suffer from a familiarity bias

 

 

A) prefer not to invest in companies they are familiar with.

 

 

B) favor investments in companies they are familiar with.

 

 

C) invest in the same stocks that their friends or family recommend.

 

 

D) tend to overestimate the precision of their knowledge.

 

 

 

 

2) The tendency of uninformed individuals to overestimate the precision of their knowledge is known as

 

 

A) overconfidence bias.

 

 

B) herd behavior.

 

 

C) familiarity bias.

 

 

D) disposition bias.

 

 

 

 

3) If investors have relative wealth concerns, they care most about

 

 

A) the return on their portfolio relative to their overall current wealth.

 

 

B) the performance of their portfolio relative to that of their peers.

 

 

C) their current portfolio performance relative to their past portfolio performance.

 

 

D) the performance of their current wealth relative to their past wealth.

 

 

 

 

 

4) An individual\'s desire for intense risk-taking experiences is known as

 

 

A) phenomenon seeking.

 

 

B) herd seeking.

 

 

C) sensation seeking.

 

 

D) rational expectations seeking.

 

 

 

 

5) Which of the following is not true regarding individual investor behavior.

 

 

A) Individual investors fail to diversify their portfolios adequately.

 

 

B) A vast majority of individual investors hold fewer than 10 stocks in their portfolio.

 

 

C) Employees tend to overinvest in their company\'s own stock.

 

 

D) Individual investors\' portfolios consistently outperform the market averages.

 

 

 

 

13.4 Systematic Trading Biases

 

 

Use the following information to answer the question(s) below.

 

 

Consider the price paths of the following stocks over a six-month period:

 

 

Stock

 

 

January

 

 

February

 

 

March

 

 

April

 

 

May

 

 

June

 

 

Taggart Transcontinental

 

 

$15

 

 

$18

 

 

$21

 

 

$18

 

 

$20

 

 

$24

 

 

Rearden Metal

 

 

$30

 

 

$22

 

 

$16

 

 

$24

 

 

$30

 

 

$36

 

 

Wyatt Oil

 

 

$20

 

 

$21

 

 

$23

 

 

$24

 

 

$26

 

 

$26

 

 

Nielson Motors

 

 

$20

 

 

$17

 

 

$14

 

 

$12

 

 

$14

 

 

$12

 

 

None of these stocks pay dividends.

 

 

1) Assume that you are an investor with the disposition effect and you bought each of these stocks in January. Suppose that it is currently the end of March, which stocks are you most inclined to sell?

 

 

1. Taggart Transcontinental

 

 

2. Rearden Metal

 

 

3. Wyatt Oil

 

 

4. Nielson Motors

 

 

A) 1 only

 

 

B) 1 & 3 only

 

 

C) 2 only

 

 

D) 2 & 4 only

 

 

 

 

2) Assume that you are an investor with the disposition effect and you bought each of these stocks in January. Suppose that it is currently the end of March, which stocks are you most inclined to hold?

 

 

1. Taggart Transcontinental

 

 

2. Rearden Metal

 

 

3. Wyatt Oil

 

 

4. Nielson Motors

 

 

A) 1 only

 

 

B) 1 & 3 only

 

 

C) 2 only

 

 

D) 2 & 4 only

 

 

 

 

3) Assume that you are an investor with the disposition effect and you bought each of these stocks in January. Suppose that it is currently the end of June, which stocks are you most inclined to sell?

 

 

1. Taggart Transcontinental

 

 

2. Rearden Metal

 

 

3. Wyatt Oil

 

 

4. Nielson Motors

 

 

A) 1 only

 

 

B) 1 & 3 only

 

 

C) 2 only

 

 

D) 1, 2 & 3 only

 

 

 

 

 

4) Assume that you are an investor with the disposition effect and you bought each of these stocks in January. Suppose that it is currently the end of June, which stocks are you most inclined to hold?

 

 

1. Taggart Transcontinental

 

 

2. Rearden Metal

 

 

3. Wyatt Oil

 

 

4. Nielson Motors

 

 

A) 1 only

 

 

B) 4 only

 

 

C) 1 & 3 only

 

 

D) 2 & 4 only

 

 

 

 

5) If investors believe that others have superior information which they can take advantage of by copying their trades, this can lead to

 

 

A) an informational cascade effect.

 

 

B) a disposition effect.

 

 

C) a sensation seeking effect.

 

 

D) an overconfidence bias.

 

 

 

 

6) The tendency to hang on to losers and sell winners is known as the

 

 

A) cascade effect.

 

 

B) disposition effect.

 

 

C) overconfidence bias.

 

 

D) systematic behavior bias.

 

 

 

 

7) When investors imitate each other\'s actions, this is known as ________ behavior.

 

 

A) pack

 

 

B) flock

 

 

C) herd

 

 

D) shepherd

 

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