Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Because diversification improves with the number of stocks held in a portfolio,an efficient portfolio should be a large portfolio containing many different stocks. 
B) The beta of a security is the sensitivity of the security's return to the return of the overall market. 
C) An efficient portfolio cannot be diversified further.That is,there is no way to reduce the risk of the portfolio without lowering its expected return. 
D) We call a portfolio that contains only unsystematic risk an efficient portfolio. 
A) Because diversification improves with the number of stocks held in a portfolio,an efficient portfolio should be a large portfolio containing many different stocks. 
B) The beta of a security is the sensitivity of the security's return to the return of the overall market. 
C) An efficient portfolio cannot be diversified further.That is,there is no way to reduce the risk of the portfolio without lowering its expected return. 
D) We call a portfolio that contains only unsystematic risk an efficient portfolio.

Question 2

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 the Index to forecast the expected future return on the Index.The standard error of your estimate of the expected return is closest to:

Accepted Answer

A) 19.4%. 
B) 3.8%. 
C) 6.2%. 
D) 1.95%. 
A) 19.4%. 
B) 3.8%. 
C) 6.2%. 
D) 1.95%.

Question 3

Common risk is also called:

Accepted Answer

A) diversifiable risk. 
B) market risk. 
C) firm-specific risk. 
D) independent risk. 
A) diversifiable risk. 
B) market risk. 
C) firm-specific risk. 
D) independent risk.

Question 4

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 beta for security "Z" is closest to:

Accepted Answer

A) -1.00. 
B) -0.25. 
C) 0.00. 
D) 0.25. 
A) -1.00. 
B) -0.25. 
C) 0.00. 
D) 0.25.

Question 5

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

Accepted Answer

A) 9.75%. 
B) 8.75%. 
C) 7.10%. 
D) 8.35%. 
A) 9.75%. 
B) 8.75%. 
C) 7.10%. 
D) 8.35%.

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) If the market portfolio were not efficient,investors could find strategies that would "beat the market" with higher average returns and lower risk. 
B) The CAPM states that the cost of capital depends only on systematic risk. 
C) The Capital Asset Pricing Model (CAPM)is primarily a theoretical model and is rarely used in practice to estimate the cost of capital. 
D) The market portfolio is an efficient portfolio. 
A) If the market portfolio were not efficient,investors could find strategies that would "beat the market" with higher average returns and lower risk. 
B) The CAPM states that the cost of capital depends only on systematic risk. 
C) The Capital Asset Pricing Model (CAPM)is primarily a theoretical model and is rarely used in practice to estimate the cost of capital. 
D) The market portfolio is an efficient portfolio.

Question 7

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 A to forecast the expected future return on Stock A.The standard error of your estimate of the expected return is closest to:

Accepted Answer

A) 16.4%. 
B) 3.32%. 
C) 10.49%. 
D) 33.20%. 
A) 16.4%. 
B) 3.32%. 
C) 10.49%. 
D) 33.20%.

Question 8

Use the information for the question(s)below.
Suppose that in the coming year,you expect Exxon-Mobil stock to have a volatility of 42% and a beta of 0.9,and Merck's stock to have a volatility of 24% and a beta of 1.1.The risk-free interest rate is 4% and the market's expected return is 12%.
-The cost of capital for a project with the same beta as Exxon Mobil's stock is closest to:

Accepted Answer

A) 11.6%. 
B) 11.2%. 
C) 12.8%. 
D) 7.6%. 
A) 11.6%. 
B) 11.2%. 
C) 12.8%. 
D) 7.6%.

Question 9

Use the table for the question(s)below.
Consider the following realized annual returns:  
-Using the data provided in the table,calculate the average annual return,the variance of the annual returns,and the standard deviation of the average returns for Stock B from 2000 to 2009.

Accepted Answer

Rannual = @#IMG-DLM& = @#IMG-DLM& = 31.1% @#IMG-DLM& Varianc

Question 10

Which of the following equations is INCORRECT?

Accepted Answer

A) Var(R)=   
B) SD(R)=   
C) Var(R)= ΣR PR × (R - E[R])2 
D) E[R] = ΣR PR × R 
A) Var(R)=   
B) SD(R)=   
C) Var(R)= ΣR PR × (R - E[R])2 
D) E[R] = ΣR PR × R

Question 11

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 S firms is closest to:

Accepted Answer

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

Question 12

Use the information for the question(s)below.
Suppose the market portfolio's excess return tends to increase by 30% when the economy is strong and decline by 20% when the economy is weak.A type S firm has excess returns that increase by 45% when the economy is strong and decrease by 30% when the economy is weak.A type I firm will also have excess returns of either 45% or -30%,but the type I firm's excess returns will depend only upon firm-specific events and will be completely independent of the state of the economy.
-What is the beta for a type I firm?

Accepted Answer

A) 1.0 
B) 0.75 
C) 0.0 
D) 1.5 
A) 1.0 
B) 0.75 
C) 0.0 
D) 1.5

Question 13

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 expected overall payoff to Bank B is:

Accepted Answer

A) $5,000,000. 
B) $6,000,000. 
C) $94,000,000. 
D) $95,000,000. 
A) $5,000,000. 
B) $6,000,000. 
C) $94,000,000. 
D) $95,000,000.

Question 14

Use the following information to answer the question(s)below.  
-If the market risk premium is 6% and the risk-free rate is 4%,then the expected return of investing in Ford Motor Company is closest to:

Accepted Answer

A) 10.0%. 
B) 16.2%. 
C) 17.1%. 
D) 20.6%. 
A) 10.0%. 
B) 16.2%. 
C) 17.1%. 
D) 20.6%.

Question 15

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 expected overall payoff to Bank A is:

Accepted Answer

A) $5,000,000. 
B) $6,000,000. 
C) $94,000,000. 
D) $95,000,000. 
A) $5,000,000. 
B) $6,000,000. 
C) $94,000,000. 
D) $95,000,000.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) In exchange for bearing systematic risk,investors want to be compensated by earning a higher return. 
B) A key step to measuring systematic risk is finding a portfolio that contains only unsystematic risk. 
C) When evaluating the risk of an investment,an investor will care about its systematic risk,which cannot be eliminated through diversification. 
D) To measure the systematic risk of a stock,we must determine how much of the variability of its return is due to systematic,market-wide risks versus diversifiable,firm-specific risks. 
A) In exchange for bearing systematic risk,investors want to be compensated by earning a higher return. 
B) A key step to measuring systematic risk is finding a portfolio that contains only unsystematic risk. 
C) When evaluating the risk of an investment,an investor will care about its systematic risk,which cannot be eliminated through diversification. 
D) To measure the systematic risk of a stock,we must determine how much of the variability of its return is due to systematic,market-wide risks versus diversifiable,firm-specific risks.

Question 17

If a stock pays dividends at the end of each quarter,with realized returns of R1,R2,R3,and R4 each quarter,then the annual realized return is calculated as:

Accepted Answer

A) Rannual =   . 
B) Rannual = (1 + R1)(1 + R2)(1 + R3)(1 + R4). 
C) Rannual = (1 + R1)(1 + R2)(1 + R3)(1 + R4)- 1. 
D) Rannual = R1 + R2 + R3 + R4. 
A) Rannual =   . 
B) Rannual = (1 + R1)(1 + R2)(1 + R3)(1 + R4). 
C) Rannual = (1 + R1)(1 + R2)(1 + R3)(1 + R4)- 1. 
D) Rannual = R1 + R2 + R3 + R4.

Question 18

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

Accepted Answer

A) 5.00%. 
B) 4.75%. 
C) 3.625%. 
D) 3.75%. 
A) 5.00%. 
B) 4.75%. 
C) 3.625%. 
D) 3.75%.

Question 19

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 the market portfolio is closest to:

Accepted Answer

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

Question 20

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 A is closest to:

Accepted Answer

A) $689,000. 
B) $751,000. 
C) $2,179,000. 
D) $2,375,000. 
A) $689,000. 
B) $751,000. 
C) $2,179,000. 
D) $2,375,000.

Exam 10: Capital Markets and the Pricing of Risk

Which of the following statements is FALSE?

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 the Index to forecast the expected future return on the Index.The standard error of your estimate of the expected return is closest to:

Common risk is also called:

Use the table for the question(s)below. Consider the following realized annual returns: -The geometric average annual return on the Index 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 realized annual returns: -Suppose that you want to use the 10-year historical average return on Stock A to forecast the expected future return on Stock A.The standard error of your estimate of the expected return is closest to:

Use the table for the question(s)below. Consider the following realized annual returns: -Using the data provided in the table,calculate the average annual return,the variance of the annual returns,and the standard deviation of the average returns for Stock B from 2000 to 2009.

Which of the following equations is INCORRECT?

Use the following information to answer the question(s)below. -If the market risk premium is 6% and the risk-free rate is 4%,then the expected return of investing in Ford Motor Company is closest to:

Which of the following statements is FALSE?

If a stock pays dividends at the end of each quarter,with realized returns of R1,R2,R3,and R4 each quarter,then the annual realized return is calculated as:

Use the table for the question(s)below. Consider the following probability distribution of returns for Alpha Corporation: -The variance of the return on Alpha Corporation 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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