Question 1: Price/earnings (P/E) ratios:
a. reflect the amount investors are willing to pay for each dollar of earnings.
b. can be calculated using either forecast or historical earnings per share.
c. can be estimated by dividing the firm's payout ratio by the difference between the required return and the growth rate.
d. all of the above.
e. none of the above.
Question 2: Which of the following is not a popular approach used by practitioners to value common stock?
a. liquidation value
b. terminal value
c. book value
d. price/earnings multiples
e. none of the above
Question 3: The __________ argues that stock returns are best explained by a three-factor model.
a. APT
b. Fama-French model
c. M & M model
d. CAPM
e. Harry Markowitz model
Question 4: The search for the composition of the optimal portfolio begins when investors form estimates of the __________ for all risky assets in the economy.
a. expected returns
b. standard deviations
c. covariances
d. all of the above
e. none of the above
Question 5: Jonathan is a risk averse investor. This means that he would:
a. never invest in anything but blue-chip stocks
b. be willing to pay for homeowner's insurance
c. be willing to enter into any fair bet because the expected payoff is not negative
d. be willing to enter into a fair bet only if it showed a consistent inverse relationship between risk and expected average return
e. prefer to keep his money in his mattress, but is afraid of being robbed