Chapter 11
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Stock Valuation and Risk

1. The common price-earnings valuation method applied the ______ price-earnings ratio to ________ earnings per share in order to value the firm’s stock. A) firm’s; industry B) firm’s; firm’s C) average industry; industry D) average industry; firm’s

ANSWER: D

2. A firm is expected to generate earnings of $2.22 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 15. Based on this information, the valuation of the firm’s shares based on the price-earnings (PE) method is A) $2.22. B) $6.76. C) $33.30. D) none of the above

ANSWER: C

3. The PE method to
What is the Treynor Index for the stock? A) .03 B) .75 C) 1.33 D) .02 E) 50

ANSWER: D

21. If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are A) weak-form efficient. B) semi-strong form efficient. C) strong form efficient. D) B and C E) none of the above

ANSWER: A

22. If security markets are semi-strong form efficient, investors cannot solely use ______ to earn excess returns. A) previous price movements B) insider information C) publicly available information D) A and C

ANSWER: D

23. The ______ is commonly used to determine what a stock’s price should have been. A) Capital Asset Pricing Model B) Treynor Index C) Sharpe Index D) B and C

ANSWER: A

24. A stock’s beta is estimated to be 1.3. The risk-free rate is 5 percent, and the market return is expected to be 9 percent. What is the expected return on the stock based on the CAPM? A) 5.2 percent B) 11.7 percent C) 16.7 percent D) 4 percent E) 10.2 percent

ANSWER: E

25. According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be ______ affected by a weak dollar. Stock prices of U.S. importing firms could be ______