Question 1

Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call a(n)

Accepted Answer

A)  financial meltdown. 
B)  irrational behavior. 
C)  stock market bubble. 
D)  none of these choices are correct. 
A)  financial meltdown. 
B)  irrational behavior. 
C)  stock market bubble. 
D)  none of these choices are correct.

Question 2

Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation?

Accepted Answer

A)  market risk line 
B)  probability market line 
C)  security market line 
D)  stock market line 
A)  market risk line 
B)  probability market line 
C)  security market line 
D)  stock market line

Question 3

You have a portfolio consisting of 20 percent Boeing (beta = 1.3) and 40 percent Hewlett-Packard (beta = 1.6) and 40 percent McDonald's stock (beta = 0.7). How much market risk does the portfolio have?

Accepted Answer

A)  This portfolio has 18 percent less risk than the general market. 
B)  This portfolio has 28 percent more risk than the general market. 
C)  This portfolio has 18 percent more risk than the general market. 
D)  This portfolio has 28 percent less risk than the general market. 
A)  This portfolio has 18 percent less risk than the general market. 
B)  This portfolio has 28 percent more risk than the general market. 
C)  This portfolio has 18 percent more risk than the general market. 
D)  This portfolio has 28 percent less risk than the general market.

Question 4

How might a large market risk premium impact people's desire to buy stocks?

Accepted Answer

A)  Investors with high risk aversion will be less willing to invest in stocks. 
B)  Investors with high risk aversion will be more willing to invest in stocks. 
C)  It will only impact the share prices. 
D)  none of these choices are correct. 
A)  Investors with high risk aversion will be less willing to invest in stocks. 
B)  Investors with high risk aversion will be more willing to invest in stocks. 
C)  It will only impact the share prices. 
D)  none of these choices are correct.

Question 5

You hold the positions in the following table. If you expect the market to earn 10 percent and the risk-free rate is 3 percent, what is the required return of the portfolio?
$$\begin{array} { l c r r } 
& \text { Price } & \text { Shares } & \text { Beta } \
\text { Websitecom } & \$ 25.00 & 100 & 2.72 \
\text { Budget Stores } & \$ 38.50 & 200 & 1.65 \
\text { Marnufacturing Corp } & \$ 52.00 & 50 & 2.30 \
\text { Pharnacy Corp. } & \$ 18.50 & 200 & 0.65
\end{array}$$

Accepted Answer

A)  14.83 percent 
B)  15.81 percent 
C)  28.67 percent 
D)  32.83 percent 
A)  14.83 percent 
B)  15.81 percent 
C)  28.67 percent 
D)  32.83 percent

Question 6

All of the following are necessary conditions for an efficient market EXCEPT

Accepted Answer

A)  low trading or transaction costs. 
B)  many buyers and sellers. 
C)  free and readily available information to market participants. 
D)  low stock prices. 
A)  low trading or transaction costs. 
B)  many buyers and sellers. 
C)  free and readily available information to market participants. 
D)  low stock prices.

Question 7

IBM's stock price is $22, it is expected to pay a $2 dividend, and analysts expect the firm to grow at 10 percent per year for the next five years. TDI's stock price is $10, it is expected to pay a $1 dividend, and analysts expect the firm to grow at 12 percent per year for the next five years. What is the difference in the two firms' required rates of return?

Accepted Answer

A)  2.91 percent 
B)  1.82 percent 
C)  2.03 percent 
D)  3.23 percent 
A)  2.91 percent 
B)  1.82 percent 
C)  2.03 percent 
D)  3.23 percent

Question 8

Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset?

Accepted Answer

A)  Unable to answer since there is no data to calculate the standard deviation. 
B)  A very low number since it would have very low risk. 
C)  1 
D)  0 
A)  Unable to answer since there is no data to calculate the standard deviation. 
B)  A very low number since it would have very low risk. 
C)  1 
D)  0

Question 9

A stock has an expected return of 9.5 percent, the risk-free rate is 2 percent and the return on the market is 8 percent. What is this stock's beta?

Accepted Answer

A)  1.50 
B)  1.25 
C)  1.19 
D)  0.94 
A)  1.50 
B)  1.25 
C)  1.19 
D)  0.94

Question 10

Compute the standard deviation given these four economic states, their likelihoods, and the potential returns:
$$\begin{array}{l}
\begin{array} { c c r } 
\text { Eccrorric State }&\text { Probability } & \text { Return } \
\text { fast growth }&0.40 & 50 \% \
\text {slow growth }&0.40 & 10\% \
\text { recession }&0.10 & - 10\%\
\text { depression }&0.10 & - 5\%
\end{array}
\end{array}$$

Accepted Answer

A)  6.71 percent 
B)  22.5 percent 
C)  23.37 percent 
D)  52.20 percent 
A)  6.71 percent 
B)  22.5 percent 
C)  23.37 percent 
D)  52.20 percent

Question 11

You hold the positions in the following table. What is the beta of your portfolio? If you expect the market to earn 10 percent and the risk-free rate is 4 percent, what is the required return of the portfolio?
$$\begin{array} { l r r r r } 
& \text { Price } & \text { Shares } & \text { Beta } \
\text { Advarsed Micro Devices } & \$ 10 & 200 & 4.2 \
\text { FedEx Corp. } & \$ 100 & 50 & 1.1 \
\text { Microsoft } & \$ 30 & 150 & 0.7 \
\text { Sara Lee Corp. } & \$ 15 & 200 & 0.5
\end{array}$$

Accepted Answer

A)  12.37 percent 
B)  9.73 percent 
C)  10.17 percent 
D)  11.68 percent 
A)  12.37 percent 
B)  9.73 percent 
C)  10.17 percent 
D)  11.68 percent

Question 12

Which of the following are the stocks of small companies that are priced below $1 per share?

Accepted Answer

A)  bargain stocks 
B)  hedge fund stocks 
C)  penny stocks 
D)  stock market bubble stocks 
A)  bargain stocks 
B)  hedge fund stocks 
C)  penny stocks 
D)  stock market bubble stocks

Question 13

Which of the following statements is incorrect?

Accepted Answer

A)  The capital market line shows the relationship between return and risk as measured by the standard deviation. 
B)  The Efficient Market Hypothesis states that security prices fully reflect all available information. 
C)  The security market line shows the relationship between return and risk as measured by beta. 
D)  none of these choices are incorrect. 
A)  The capital market line shows the relationship between return and risk as measured by the standard deviation. 
B)  The Efficient Market Hypothesis states that security prices fully reflect all available information. 
C)  The security market line shows the relationship between return and risk as measured by beta. 
D)  none of these choices are incorrect.

Question 14

A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?

Accepted Answer

A)  11.64 percent 
B)  12.00 percent 
C)  22.91 percent 
D)  34.92 percent 
A)  11.64 percent 
B)  12.00 percent 
C)  22.91 percent 
D)  34.92 percent

Question 15

Which of the following statements is incorrect?

Accepted Answer

A)  The security market line shows the relationship between risk and return for any stock or portfolio. 
B)  The y-intercept of the security market line represents the return on the risk-free asset. 
C)  The measure of risk used in creating the security market line is the standard deviation. 
D)  none of these choices are incorrect. 
A)  The security market line shows the relationship between risk and return for any stock or portfolio. 
B)  The y-intercept of the security market line represents the return on the risk-free asset. 
C)  The measure of risk used in creating the security market line is the standard deviation. 
D)  none of these choices are incorrect.

Question 16

Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10 percent and the risk-free rate is 4 percent, what is Hastings' required return?

Accepted Answer

A)  11.44 percent 
B)  12.44 percent 
C)  14.96 percent 
D)  16.40 percent 
A)  11.44 percent 
B)  12.44 percent 
C)  14.96 percent 
D)  16.40 percent

Question 17

A company's current stock price is $50.00 and its most recent dividend was $1.00 per share. Since analysts estimate the company will have a 5 percent growth rate, what is its expected return?

Accepted Answer

A)  2.20 percent 
B)  5.02 percent 
C)  7.00 percent 
D)  7.10 percent 
A)  2.20 percent 
B)  5.02 percent 
C)  7.00 percent 
D)  7.10 percent

Question 18

Which of the following is the average of the possible returns weighted by the likelihood of those returns occurring?

Accepted Answer

A)  efficient return 
B)  expected return 
C)  market return 
D)  required return 
A)  efficient return 
B)  expected return 
C)  market return 
D)  required return

Question 19

An asset pricing theory based on beta, a measure of risk is ________.

Accepted Answer

A)  The best known asset pricing equation 
B)  Starts with the modern portfolio theory 
C)  CAPM 
D)  All of the above 
A)  The best known asset pricing equation 
B)  Starts with the modern portfolio theory 
C)  CAPM 
D)  All of the above

Question 20

Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio?

Accepted Answer

A)  capital asset pricing line 
B)  capital market line 
C)  efficient market line 
D)  efficient market hypothesis 
A)  capital asset pricing line 
B)  capital market line 
C)  efficient market line 
D)  efficient market hypothesis

Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call a(n)

Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation?

You have a portfolio consisting of 20 percent Boeing (beta = 1.3) and 40 percent Hewlett-Packard (beta = 1.6) and 40 percent McDonald's stock (beta = 0.7). How much market risk does the portfolio have?

How might a large market risk premium impact people's desire to buy stocks?

All of the following are necessary conditions for an efficient market EXCEPT

Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset?

A stock has an expected return of 9.5 percent, the risk-free rate is 2 percent and the return on the market is 8 percent. What is this stock's beta?

Compute the standard deviation given these four economic states, their likelihoods, and the potential returns: Eccrorric State Probability Return fast growth 0.40 50\% slow growth 0.40 10\% recession 0.10 -10\% depression 0.10 -5\%

Which of the following are the stocks of small companies that are priced below $1 per share?

Which of the following statements is incorrect?

A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?

Which of the following statements is incorrect?

Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10 percent and the risk-free rate is 4 percent, what is Hastings' required return?

A company's current stock price is $50.00 and its most recent dividend was $1.00 per share. Since analysts estimate the company will have a 5 percent growth rate, what is its expected return?

Which of the following is the average of the possible returns weighted by the likelihood of those returns occurring?

An asset pricing theory based on beta, a measure of risk is ________.

Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 10: Estimating Risk and Return

Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call a(n)

Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation?

You have a portfolio consisting of 20 percent Boeing (beta = 1.3) and 40 percent Hewlett-Packard (beta = 1.6) and 40 percent McDonald's stock (beta = 0.7). How much market risk does the portfolio have?

How might a large market risk premium impact people's desire to buy stocks?

All of the following are necessary conditions for an efficient market EXCEPT

Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset?

A stock has an expected return of 9.5 percent, the risk-free rate is 2 percent and the return on the market is 8 percent. What is this stock's beta?

Compute the standard deviation given these four economic states, their likelihoods, and the potential returns: Eccrorric State Probability Return fast growth 0.40 50\% slow growth 0.40 10\% recession 0.10 -10\% depression 0.10 -5\%

Which of the following are the stocks of small companies that are priced below $1 per share?

Which of the following statements is incorrect?

A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?

Which of the following statements is incorrect?

Hastings Entertainment has a beta of 1.24. If the market return is expected to be 10 percent and the risk-free rate is 4 percent, what is Hastings' required return?

A company's current stock price is $50.00 and its most recent dividend was $1.00 per share. Since analysts estimate the company will have a 5 percent growth rate, what is its expected return?

Which of the following is the average of the possible returns weighted by the likelihood of those returns occurring?

An asset pricing theory based on beta, a measure of risk is ________.

Which of these is the line on a graph of return and risk (standard deviation) from the risk-free rate through the market portfolio?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters