Which of the following is least likely an order matching rule used in a pure auction market?

The value per share is closest to:

$14.39.

Using the CAPM, the required rate of return

= 9.20% + 1.4(14.0% − 9.2%) = 9.20% +6.72% = 15.92%
The retention ratio (RR) = 1 − dividend payout ratio = 1 − 0.30 = 0.70
The growth rate (

) = (RR)(ROE) = (0.70)(10%) = 7.00%

(dividend payout) = 4.00(0.30) = 1.20
Next year's dividend

= 1.20(1 + 0.07) = 1.284

A limit sell order placed above the best offer is most likely:

Referred to as behind the market.

A limit sell order placed above the best offer is referred to as behind the market and will not be executed unless the market price increases. $b.A limit order placed below the best bid would be a marketable sell limit order. $b.A limit sell order placed above the best bid but below the best offer would have created a new market.

Which of the following types of market indices has a contrarian effect on portfolio weights?

Fundamental weighting

Fundamental weighting leads to a contrarian effect in that portfolio weights move away from securities whose prices have risen (as higher prices result in a lower earnings yield). Market value weighting results in the weight of a security in the index heading in the same direction as its price (momentum effect).

The type of equity index most likely to require rebalancing is a(n):

equal-weighted index.

The individual security weights in an equal-weighted index must be rebalanced periodically to restore equal weights as security prices change over time. The weights in a price-weighted index are determined by securities prices. Market capitalization-weighted indexes are self-adjusting to a large extent.

Ian Lance, CFA, is discussing short selling with a client and states, "The short seller must pay any dividend to the lender of the stock. In addition, the short seller must provide collateral to the brokerage house." Has Lance stated the short seller's obligations accurately?

Both of these statements are accurate.

In a short sale transaction, the lender of stock would not receive dividends from the issuing company. Therefore, if the company paid a dividend, the short seller would be required to pay that amount to the lender. The short seller must post some collateral or margin (usually the proceeds of selling the stock).

An analyst gathered the following information regarding an equity market index. The index was created on January 1, 2009 at which time its value was set to 1,000. It consists of the following 3 securities:
Given that dividends are paid at the end of the year and that the price return on the index for 2009 was 8.25%, the value of the price return index at the end of 2010 is closest to:

1,108.

Price return on security A = (31 − 35) / 35 = –11.43%
Price return on security B = (45 − 48) / 48 = –6.25%
Price return on security C = (32 − 27) / 27 = 18.52%
Price return on the index for 2010:
= (–0.1143 x 0.25) + (–0.0625 x 0.35) + (0.1852 x 0.4) = 2.36%
Therefore, value of the price return index at the end of 2010:
= 1,000 x 1.0825 x 1.0236 = 1,108.047

The type of equity security that gives its owners the right to vote the shares of, and receive dividends from, a foreign company is best described as a:

sponsored depository receipt.

The owner of a sponsored DR share has the same voting rights and receives the same dividends as the owner of a common share of the firm. With an unsponsored DR, the depository bank retains the voting rights. A global depository receipt may be sponsored or unsponsored.

A high yield bond fund states that through active management, the fund’s return has outperformed an index of Treasury securities by 4% on average over the past five years. As a performance benchmark for this fund, the index chosen is:

inappropriate, because the index does not reflect the actual bonds in which the fund invests.

Security market indexes may be used as benchmarks for the performance of active managers, but the index chosen should represent the universe of securities from which the manager is choosing. Here, an index of high yield bonds would be a more appropriate benchmark.

Which of the following classifications of firms is least likely to comprise cyclical firms?

Telecommunications.

Both technology and housing firms tend to be quite cyclical, that is, their profits are very sensitive to changes in overall growth. The profits of telecommunications firms, on the other hand, are less economically sensitive.

An analyst gathered the following data about a company:
•A historical earnings retention rate of 60% that is projected to continue into the future.
•A sustainable return on equity of 10%.
•A beta of 1.0.
•The nominal risk-free rate is 5%.
•The expected market return is 10%.
If next year’s EPS is $2 per share, what value should be estimated for this stock?

$20.00.

1212dividend payout = 1 - earnings retention rate = 1 - 0.6 = 0.4

g = (retention rate)(ROE) = (0.6)(0.10) = 0.06

price = (E)(P/E) = (2) (10) = 20
Alternatively, dividend will be 40% of 2 earnings or 0.80, and

Martin Gomez holds 100 shares of each of the stocks in a price-weighted index and reinvests cash dividends in additional shares. Assuming there are no stock splits, stock dividends, or changes in the makeup of the index, how will Gomez’s portfolio return compare with the price return of the index if the low-priced index stocks outperform the high-priced index stocks?

Gomez’s portfolio return will be higher.

The price return on the index does not include cash dividends. Since the reinvested dividends will add to the number of shares of those stocks that pay dividends, Gomez’s portfolio return (total return) will be higher than the price return on the index. The relative performance of high-priced and low-priced stocks does not affect this result.

Which of the following statements about short selling is least accurate?

A short seller loses if the price of the stock sold short decreases.

The short seller loses if the stock price increases. The other choices are accurate statements.

In the industry life cycle model, the threat of new entry into an industry is greatest during the:

growth stage.

New competitors are most likely to enter an industry during the growth stage of the industry life cycle. New entrants are less of a threat in the embryonic stage, when growth is slow and customer acceptance of the new product or service is highly uncertain. In the mature stage, the industry tends toward an oligopoly as competitors consolidate.

Pam Robers, CFA, is performing a valuation analysis on the common stock of Allstare Inc. The stock’s beta is 1.1, the risk-free rate is 5%, and the market risk premium is expected to be 8%. Allstare’s ROE is expected to be constant at 18%, and its dividend payout ratio has been fairly constant over time at 40%. The forward-earnings multiplier that Robers should use to estimate the current value of the shares is closest to:

13.

1212Required return = 5% + 1.1(8%) = 13.8%
Sustainable growth = 18%(1 - 0.4) = 10.8%