Question 1

The excess return is the difference between the average return on a security and the average return for:

Accepted Answer

A) Treasury Bonds. 
B) a portfolio of securities with similar risk. 
C) a broad-based market portfolio like the S&P 500 index. 
D) Treasury Bills. 
A) Treasury Bonds. 
B) a portfolio of securities with similar risk. 
C) a broad-based market portfolio like the S&P 500 index. 
D) Treasury Bills.

Question 2

Use the following information to answer the problem(s)below.
Consider two banks.Bank A has 1000 loans outstanding each for $100,000,that it expects to be fully repaid today.Each of Bank A's loans have a 6% probability of default,in which case the bank will receive $0 for each of the defaulting loans.Bank B has 100 loans of $1 million outstanding,which it also expects to be fully repaid today.Each of Bank B's loans have a 5% probability of default,in which case the bank will receive $0 for each of the defaulting loans.The chance of default is independent across all the loans.
-The standard deviation of the overall payoff to Bank B is closest to:

Accepted Answer

A) $751,000. 
B) $2,179,000. 
C) $2,375,000. 
D) $21,794,000. 
A) $751,000. 
B) $2,179,000. 
C) $2,375,000. 
D) $21,794,000.

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%.
-What is the expected payoff for Big Cure's Blockbuster drug?

Accepted Answer

A) $100 million 
B) $0 
C) $1 billion 
D) $500 million 
A) $100 million 
B) $0 
C) $1 billion 
D) $500 million

Question 4

Use the table for the question(s)below.
Consider the following price and dividend data for J.P.Morgan Chase:  
-Assume that you purchased J.P.Morgan Chase stock at the closing price on December 31,2008 and sold it at the closing price on December 30,2009.Calculate your realized annual return for the year 2005.

Accepted Answer

@#IMG-DLM& The Product of (1 + returns)-

Question 5

Use the information for the question(s)below.
Consider an economy with two types of firms,S and I.S firms always move together,but I firms move independently of each other.For both types of firm there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.
-The standard deviation for the return on a portfolio of 20 type I firms is closest to:

Accepted Answer

A) 5.25%. 
B) 5.10%. 
C) 15.0%. 
D) 23.0%. 
A) 5.25%. 
B) 5.10%. 
C) 15.0%. 
D) 23.0%.

Question 6

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

Accepted Answer

A) 2.7% 
B) 1.3% 
C) -5.7% 
D) 0% 
A) 2.7% 
B) 1.3% 
C) -5.7% 
D) 0%

Question 7

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 expected return on a security with a beta of 1 is closest to:

Accepted Answer

A) -4.0%. 
B) 3.2%. 
C) 4.0%. 
D) 8.0%. 
A) -4.0%. 
B) 3.2%. 
C) 4.0%. 
D) 8.0%.

Question 8

Which of the following types of risk doesn't belong?

Accepted Answer

A) Market risk 
B) Unique risk 
C) Idiosyncratic risk 
D) Firm-specific risk 
A) Market risk 
B) Unique risk 
C) Idiosyncratic risk 
D) Firm-specific risk

Question 9

Use the information for the question(s)below.
Consider an economy with two types of firms,S and I.S firms always move together,but I firms move independently of each other.For both types of firm there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.
-What is the expected return for an individual firm?

Accepted Answer

A) 14% 
B) 3% 
C) 5% 
D) -5% 
A) 14% 
B) 3% 
C) 5% 
D) -5%

Question 10

Use the following information to answer the question(s)below.  
-If the risk-free rate is 5% and the expected return of investing in Merck is 11.3%,then the expected return on the market must be:

Accepted Answer

A) 8.0%. 
B) 10.0%. 
C) 10.4%. 
D) 12.0%. 
A) 8.0%. 
B) 10.0%. 
C) 10.4%. 
D) 12.0%.

Question 11

Which of the following statements is TRUE?

Accepted Answer

A) Small stocks have outperformed the S&P 500 in every year since 1925. 
B) The S&P 500 is more volatile than corporate bonds. 
C) Corporate bonds underperformed inflation during most years since 1925. 
D) Treasury Bills outperformed inflation during every year since 1925. 
A) Small stocks have outperformed the S&P 500 in every year since 1925. 
B) The S&P 500 is more volatile than corporate bonds. 
C) Corporate bonds underperformed inflation during most years since 1925. 
D) Treasury Bills outperformed inflation during every year since 1925.

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) Expected return should rise proportionately with volatility. 
B) Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return. 
C) Smaller stocks have lower volatility than larger stocks. 
D) The largest stocks are typically more volatile than a portfolio of large stocks. 
A) Expected return should rise proportionately with volatility. 
B) Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return. 
C) Smaller stocks have lower volatility than larger stocks. 
D) The largest stocks are typically more volatile than a portfolio of large stocks.

Question 13

Use the following information to answer the question(s)below.  
-If the expected return on the market is 11% and the expected return of investing in Merck is 10.35%,then the risk-free rate must be:

Accepted Answer

A) 3.0%. 
B) 4.0%. 
C) 4.5%. 
D) 5.0%. 
A) 3.0%. 
B) 4.0%. 
C) 4.5%. 
D) 5.0%.

Question 14

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 expected return on security "Y" is closest to:

Accepted Answer

A) 0%. 
B) 4%. 
C) 10%. 
D) 15%. 
A) 0%. 
B) 4%. 
C) 10%. 
D) 15%.

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) Firm-specific news is good or bad news about the company itself. 
B) Firms are affected by both systematic and firm-specific risk. 
C) When firms carry both types of risk,only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio. 
D) The risk premium for a stock is affected by its idiosyncratic risk. 
A) Firm-specific news is good or bad news about the company itself. 
B) Firms are affected by both systematic and firm-specific risk. 
C) When firms carry both types of risk,only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio. 
D) The risk premium for a stock is affected by its idiosyncratic risk.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) When an investment is risky,there are different returns it may earn. 
B) In finance,the variance of a return is also referred to as its volatility. 
C) The expected or mean return is calculated as a weighted average of the possible returns,where the weights correspond to the probabilities. 
D) The variance is a measure of how "spread out" the distribution of the return is. 
A) When an investment is risky,there are different returns it may earn. 
B) In finance,the variance of a return is also referred to as its volatility. 
C) The expected or mean return is calculated as a weighted average of the possible returns,where the weights correspond to the probabilities. 
D) The variance is a measure of how "spread out" the distribution of the return is.

Question 17

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%.
-Which pharmaceutical company faces less risk?

Accepted Answer

Little Cure,because it has a lower stand

Question 18

Which of the following is NOT a systematic risk?

Accepted Answer

A) The risk that oil prices rise,increasing production costs 
B) The risk that the Federal Reserve raises interest rates 
C) The risk that the economy slows,reducing demand for your firm's products 
D) The risk that your new product will not receive regulatory approval 
A) The risk that oil prices rise,increasing production costs 
B) The risk that the Federal Reserve raises interest rates 
C) The risk that the economy slows,reducing demand for your firm's products 
D) The risk that your new product will not receive regulatory approval

Question 19

Which of the following statements is TRUE?

Accepted Answer

A) Portfolios with lower volatility have historically rewarded investors with higher average returns. 
B) Individual stocks with higher volatility have consistently rewarded investors with higher average returns. 
C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios. 
D) Volatility seems to be a reasonable measure of risk when evaluating returns on individual stocks. 
A) Portfolios with lower volatility have historically rewarded investors with higher average returns. 
B) Individual stocks with higher volatility have consistently rewarded investors with higher average returns. 
C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios. 
D) Volatility seems to be a reasonable measure of risk when evaluating returns on individual stocks.

Question 20

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

Accepted Answer

A) 29.95%. 
B) 16.45%. 
C) 18.20%. 
D) 18.75%. 
A) 29.95%. 
B) 16.45%. 
C) 18.20%. 
D) 18.75%.

Exam 10: Capital Markets and the Pricing of Risk

The excess return is the difference between the average return on a security and the average return for:

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

Which of the following types of risk doesn't belong?

Use the following information to answer the question(s)below. -If the risk-free rate is 5% and the expected return of investing in Merck is 11.3%,then the expected return on the market must be:

Which of the following statements is TRUE?

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 expected return of investing in Merck is 10.35%,then the risk-free rate must be:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following is NOT a systematic risk?

Which of the following statements is TRUE?

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

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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