Question 1

Use the table for the question(s)below.
Consider the following average annual returns:  
-What is the excess return for the S&P 500?

Accepted Answer

A) 5.7% 
B) 7.0% 
C) 0% 
D) 8.4% 
A) 5.7% 
B) 7.0% 
C) 0% 
D) 8.4%

Question 2

What is the market portfolio?

Accepted Answer

The portfolio that contains al

Question 3

Use the information for the question(s)below.
Big Cure and Little Cure are both pharmaceutical companies.Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA)waiting for approval.If approved,Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure.Little Cure has 10 separate less important drugs before the FDA waiting for approval.If approved,each of Little Cure's drugs would produce $100 million in net income for Little Cure.The probability of the FDA approving a drug is 50%.
-The standard deviation of Little Cure's average net income for their ten new drugs is closest to:

Accepted Answer

A) $50 million. 
B) $25 million. 
C) $16 million. 
D) $500 million. 
A) $50 million. 
B) $25 million. 
C) $16 million. 
D) $500 million.

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) The expected return is the return that actually occurs over a particular time period. 
B) If you hold the stock beyond the date of the first dividend,then to compute your return you must specify how you invest any dividends you receive in the interim. 
C) The average annual return of an investment during some historical period is simply the average of the realized returns for each year. 
D) The realized return is the total return we earn from dividends and capital gains,expressed as a percentage of the initial stock price. 
A) The expected return is the return that actually occurs over a particular time period. 
B) If you hold the stock beyond the date of the first dividend,then to compute your return you must specify how you invest any dividends you receive in the interim. 
C) The average annual return of an investment during some historical period is simply the average of the realized returns for each year. 
D) The realized return is the total return we earn from dividends and capital gains,expressed as a percentage of the initial stock price.

Question 5

Use the following information to answer the question(s)below.
Suppose that the market portfolio is equally likely to increase by 24% or decrease by 8%.Security "X" goes up on average by 29% when the market goes up and goes down by 11% when the market goes down.Security "Y" goes down on average by 16% when the market goes up and goes up by 16% when the market goes down.Security "Z" goes up on average by 4% when the market goes up and goes up by 4% when the market goes down.
-The risk-free rate is closest to:

Accepted Answer

A) 0%. 
B) 4%. 
C) 8%. 
D) 16%. 
A) 0%. 
B) 4%. 
C) 8%. 
D) 16%.

Question 6

Use the following information to answer the question(s)below.  
-If the expected return on the market is 11% and the risk-free rate is 4%,then the expected return of investing in IBM is closest to:

Accepted Answer

A) 9.1%. 
B) 10.3%. 
C) 11.0%. 
D) 12.0%. 
A) 9.1%. 
B) 10.3%. 
C) 11.0%. 
D) 12.0%.

Question 7

Use the table for the question(s)below.
Consider the following probability distribution of returns for Alpha Corporation:  
-Suppose an investment is equally likely to have a 35% return or a -20% return.The standard deviation on the return for this investment is closest to:

Accepted Answer

A) 38.9%. 
B) 0%. 
C) 19.4%. 
D) 27.5%. 
A) 38.9%. 
B) 0%. 
C) 19.4%. 
D) 27.5%.

Question 8

Use the table for the question(s)below.
Consider the following price and dividend data for General Electric Company:  
-Assume that you purchased General Electric Company stock at the closing price on December 31,2008 and sold it after the dividend had been paid at the closing price on January 26,2009.Your total return rate (yield)for this period is closest to:

Accepted Answer

A) 0.75%. 
B) -8.80%. 
C) 0.70%. 
D) -8.13%. 
A) 0.75%. 
B) -8.80%. 
C) 0.70%. 
D) -8.13%.

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) Beta measures the sensitivity of a security to market-wide risk factors. 
B) Volatility measures total risk,while beta measures only systematic risk. 
C) The beta is the expected percentage change in the excess return of the market portfolio for a 1% change in the excess return of a security. 
D) Utilities tend to be stable and highly regulated,and thus are insensitive to fluctuations in the overall market. 
A) Beta measures the sensitivity of a security to market-wide risk factors. 
B) Volatility measures total risk,while beta measures only systematic risk. 
C) The beta is the expected percentage change in the excess return of the market portfolio for a 1% change in the excess return of a security. 
D) Utilities tend to be stable and highly regulated,and thus are insensitive to fluctuations in the overall market.

Question 10

Use the table for the question(s)below.
Consider the following realized annual returns:  
-The geometric average annual return on Stock A from 2000 to 2009 is closest to:

Accepted Answer

A) 12.4%. 
B) 16.7%. 
C) 13.2%. 
D) 17.8%. 
A) 12.4%. 
B) 16.7%. 
C) 13.2%. 
D) 17.8%.

Question 11

Which of the following statements is FALSE?

Accepted Answer

A) We measure the degree of estimation error statistically through the standard error of the estimate. 
B) When focusing on the returns of a single security,it is common practice to assume that all dividends are immediately invested at the risk-free rate. 
C) We estimate the standard deviation or volatility as the square root of the variance. 
D) We estimate the variance by computing the average squared deviation from the average realized return. 
A) We measure the degree of estimation error statistically through the standard error of the estimate. 
B) When focusing on the returns of a single security,it is common practice to assume that all dividends are immediately invested at the risk-free rate. 
C) We estimate the standard deviation or volatility as the square root of the variance. 
D) We estimate the variance by computing the average squared deviation from the average realized return.

Question 12

Use the table for the question(s)below.
Consider the following price and dividend data for General Electric Company:  
-Assume that you purchased Ford Motor Company stock at the closing price on December 31,2008 and sold it at the closing price on December 30,2009.Your realized annual return for the year 2009 is closest to:

Accepted Answer

A) -45.1%. 
B) -44.5%. 
C) -48.5%. 
D) -47.3%. 
A) -45.1%. 
B) -44.5%. 
C) -48.5%. 
D) -47.3%.

Question 13

Use the table for the question(s)below.
Consider the following probability distribution of returns for Alpha Corporation:  
-Suppose an investment is equally likely to have a 35% return or a -20% return.The expected return for this investment is closest to:

Accepted Answer

A) 7.5%. 
B) 15%. 
C) 5%. 
D) 10%. 
A) 7.5%. 
B) 15%. 
C) 5%. 
D) 10%.

Question 14

Use the table for the question(s)below.
Consider the following realized annual returns:  
-The standard deviation of the returns on the Index from 2000 to 2009 is closest to:

Accepted Answer

A) 19.5%. 
B) 20.5%. 
C) 3.8%. 
D) 8.8%. 
A) 19.5%. 
B) 20.5%. 
C) 3.8%. 
D) 8.8%.

Question 15

Which of the following investments offered the highest overall return over the past ninety-two years?

Accepted Answer

A) Treasury Bills 
B) S&P 500 
C) Small stocks 
D) Corporate bonds 
A) Treasury Bills 
B) S&P 500 
C) Small stocks 
D) Corporate bonds

Question 16

Use the table for the question(s)below.
Consider the following realized annual returns:  
-Suppose that you want to use the 10-year historical average return on Stock B to forecast the expected future return on Stock B.Calculate the 95% confidence interval for your estimate of the expected return.

Accepted Answer

Rannual = @#IMG-DLM& = @#IMG-DLM& = 31.1% @#IMG-DLM& Variance = SUM of

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) The compounded geometric average return is most often used for comparative purposes. 
B) We should use the arithmetic average return when we are trying to estimate an investment's expected return over a future horizon based on its past performance. 
C) The geometric average return will always be above the arithmetic average return and the difference grows with the volatility of the annual returns. 
D) The geometric average return is a better description of the long-run historical performance of an investment. 
A) The compounded geometric average return is most often used for comparative purposes. 
B) We should use the arithmetic average return when we are trying to estimate an investment's expected return over a future horizon based on its past performance. 
C) The geometric average return will always be above the arithmetic average return and the difference grows with the volatility of the annual returns. 
D) The geometric average return is a better description of the long-run historical performance of an investment.

Question 18

Use the table for the question(s)below.
Consider the following price and dividend data for General Electric Company:  
-Assume that you purchased General Electric Company stock at the closing price on December 31,2008 and sold it after the dividend had been paid at the closing price on January 26,2009.Your capital gains rate (yield)for this period is closest to:

Accepted Answer

A) 0.75%. 
B) 0.70%. 
C) -8.81%. 
D) -8.15%. 
A) 0.75%. 
B) 0.70%. 
C) -8.81%. 
D) -8.15%.

Question 19

Use the table for the question(s)below.
Consider the following probability distribution of returns for Alpha Corporation:  
-The standard deviation of the return on Alpha Corporation is closest to:

Accepted Answer

A) 22.4%. 
B) 19.0%. 
C) 21.8%. 
D) 19.4%. 
A) 22.4%. 
B) 19.0%. 
C) 21.8%. 
D) 19.4%.

Question 20

Use the table for the question(s)below.
Consider the following average annual returns:  
-What is the excess return for Treasury Bills?

Accepted Answer

A) 0% 
B) -8.4% 
C) -2.7% 
D) -1.4% 
A) 0% 
B) -8.4% 
C) -2.7% 
D) -1.4%

Exam 10: Capital Markets and the Pricing of Risk

Use the table for the question(s)below. Consider the following average annual returns: -What is the excess return for the S&P 500?

What is the market portfolio?

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. -If the expected return on the market is 11% and the risk-free rate is 4%,then the expected return of investing in IBM is closest to:

Use the table for the question(s)below. Consider the following probability distribution of returns for Alpha Corporation: -Suppose an investment is equally likely to have a 35% return or a -20% return.The standard deviation on the return for this investment is closest to:

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following realized annual returns: -The geometric average annual return on Stock A from 2000 to 2009 is closest to:

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following probability distribution of returns for Alpha Corporation: -Suppose an investment is equally likely to have a 35% return or a -20% return.The expected return for this investment is closest to:

Use the table for the question(s)below. Consider the following realized annual returns: -The standard deviation of the returns on the Index from 2000 to 2009 is closest to:

Which of the following investments offered the highest overall return over the past ninety-two years?

Use the table for the question(s)below. Consider the following realized annual returns: -Suppose that you want to use the 10-year historical average return on Stock B to forecast the expected future return on Stock B.Calculate the 95% confidence interval for your estimate of the expected return.

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following probability distribution of returns for Alpha Corporation: -The standard deviation of the return on Alpha Corporation is closest to:

Use the table for the question(s)below. Consider the following average annual returns: -What is the excess return for Treasury Bills?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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