Individuals using a value investing strategy search for stocks that: a) have a well-established record of paying steady dividends. () b) have generated high rates of retun for at least five years. ) C) are less risky than most other stocks d) are underpriced in the market.

Individuals using a value investing strategy search for stocks that: a) have a well-established record of paying steady dividends. () b) have generated high rates of retun for at least five years. ) C) are less risky than most other stocks d) are underpriced in the market.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Choose one appropriate statement. 1. The movement of stock prices have certain patterns, and investors can make profits by studying such patterns. 2. If a hedge fund manager believes that Toyota will going to outperform Honda she will short stocks of both companies. 3. When one share of Apple stock is being traded at $150, the stock market believes that you can always sell a share of Apple stock for at least $150 in the future. 4. O An undervalued stock should outperform the market in the long run. 5. O Diversification is not appropriate because it would prevent investors from capitalizing on the superior return that can result from a concentrated holding of the stock of one successful company.
Stock analyst, Mr. Abhay, is analysing 3 stocks A, B and C having 3 common risk factors. Following data is observed. Assume λ0 as 5%. Calculate return as per APT model. If the expected returns of A, B and C are 13%, 18% and 11% respectively, indicate which stocks are undervalued or overvalued. What will be the implication in terms of arbitrage? Mr. Abhay is also interested in analysing the expected returns as per CAPM model. Risk free rate is 6%. Average Market Return is 19%. The equity beta of A, B and C are 1.1, 0.85 and 0.55 respectively. Calculate the required return as per CAPM and plot the stocks on SML. Indicate if the stocks are undervalued or overvalued if the expected returns are 13%, 18% and 11% respectively for A, B and C. Beta / Sensitivity Factor Risk Premium Stock A Stock B Stock C Management Risk 5.5% 1.5 1.1 0.8 Interest Rate Risk 2.0% 0.8 0.5 0.4 Inflation Risk 3.5% 0.5 0.9 0.7
3. Measuring stand-alone risk using realized (historical) data Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use realized stock returns to estimate the risk of a stock. Consider the case of Falcon Freight Inc. (FF): Five years of realized returns for FF are given in the following table. Remember: 1. While FF was started 40 years ago, its common stock has been publicly traded for the past 25 years. 2. The returns on its equity are calculated as arithmetic returns. 3. The historical returns for FF for 2014 to 2018 are: 2014 2015 2016 2017 2018 Stock return 20.00% 13.60% 24.00% 33.60% 10.40% Given the preceding data, the average realized return on FF’s stock is _______. The preceding data series represents ________ of FF’s historical returns. Based on this conclusion, the standard deviation of FF’s…
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Say stocks of firms which change their logo in a given year tend to outperform (have higher abnormal returns) the stocks of firms which don't change their logos for the following year. If markets are efficient and you used the correct model for expected returns in your analysis, what must be true about firms that change their logos relative to firms that don't change their logos? Firms that change their logos are more exposed to risk than firms that don't change their logos. Firms that change their logos are equally exposed to risk as firms that don't change their logos. Firms that change their logos are less exposed to risk than firms that don't change their logos. O We can't make any of the above statements
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