Question 1

Which of the following securities generates a return that is closest to a risk-free rate of return?

Accepted Answer

A) treasury bill 
B) treasury bond 
C) commercial paper 
D) corporate bond 
E) corporate stock 
A) treasury bill 
B) treasury bond 
C) commercial paper 
D) corporate bond 
E) corporate stock

Question 2

The total risk associated with an investment can be divided into _____.

Accepted Answer

A) systematic risk and nondiversifiable risk 
B) firm-specific risk and unsystematic risk 
C) market risk and firm-specific risk 
D) market risk and nondiversifiable risk 
E) firm-specific risk and total risk 
A) systematic risk and nondiversifiable risk 
B) firm-specific risk and unsystematic risk 
C) market risk and firm-specific risk 
D) market risk and nondiversifiable risk 
E) firm-specific risk and total risk

Question 3

The _____ of an investment is a measure of the tightness, or variability, of its set of returns.

Accepted Answer

A) correlation coefficient 
B) standard deviation of the returns 
C) beta coefficient 
D) coefficient of variation 
E) expected return 
A) correlation coefficient 
B) standard deviation of the returns 
C) beta coefficient 
D) coefficient of variation 
E) expected return

Question 4

Which of the following statements about the various types of risks is true?

Accepted Answer

A) A firm's default risk is a nondiversifiable risk. 
B) Interest rate risk is an unsystematic risk. 
C) Inflation risk is a systematic risk. 
D) Economic risk is a firm-specific risk. 
E) Political risk is a diversifiable risk. 
A) A firm's default risk is a nondiversifiable risk. 
B) Interest rate risk is an unsystematic risk. 
C) Inflation risk is a systematic risk. 
D) Economic risk is a firm-specific risk. 
E) Political risk is a diversifiable risk.

Question 5

Which of the following statements about risk measures is correct?

Accepted Answer

A) Beta is a measure of total risk, whereas standard deviation is the measure of unsystematic risk. 
B) Beta is a measure of unsystematic risk, whereas standard deviation is the measure of total risk. 
C) Beta is a measure of total risk, whereas standard deviation is the measure of systematic risk. 
D) Beta is a measure of systematic risk, whereas standard deviation is the measure of total risk. 
E) Beta is a measure of total risk, whereas Standard deviation is the measure of systematic risk. 
A) Beta is a measure of total risk, whereas standard deviation is the measure of unsystematic risk. 
B) Beta is a measure of unsystematic risk, whereas standard deviation is the measure of total risk. 
C) Beta is a measure of total risk, whereas standard deviation is the measure of systematic risk. 
D) Beta is a measure of systematic risk, whereas standard deviation is the measure of total risk. 
E) Beta is a measure of total risk, whereas Standard deviation is the measure of systematic risk.

Question 6

The part of a security's risk associated with random outcomes generated by events or behaviors specific to the firm is known as _____.

Accepted Answer

A) nondiversifiable risk 
B) unsystematic risk 
C) market risk 
D) systematic risk 
E) relevant risk 
A) nondiversifiable risk 
B) unsystematic risk 
C) market risk 
D) systematic risk 
E) relevant risk

Question 7

Risk is indicated by variability of returns, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.

Accepted Answer

A) True 
 B)False

Question 8

Other things held constant, if investors become less risk averse, the new security market line (SML) would _____.

Accepted Answer

A) not be affected 
B) shift down 
C) shift up 
D) have a steeper slope 
E) have a less steep slope 
A) not be affected 
B) shift down 
C) shift up 
D) have a steeper slope 
E) have a less steep slope

Question 9

Which of the following is the relevant risk of an investment, for which investors should be rewarded?

Accepted Answer

A) Firm-specific risk 
B) Total risk 
C) Systematic risk 
D) Unsystematic risk 
E) Diversifiable risk 
A) Firm-specific risk 
B) Total risk 
C) Systematic risk 
D) Unsystematic risk 
E) Diversifiable risk

Question 10

Isabel invested in four-stock portfolio; she invested 20 percent of her money in Stock A, 30 percent of her money in Stock B, 25 percent of her money in Stock C, and 25 percent of her money in Stock D. The betas for Stock A, B, C, and D are 0.4, 1.2, 2.5, and 1.75, respectively, and their expected returns are 12 percent, 24 percent, 30 percent, and 28 percent, respectively. What is the beta of Isabel's portfolio?

Accepted Answer

A) 1.82 
B) 1.96 
C) 1.50 
D) 1.43 
E) 1.38 
A) 1.82 
B) 1.96 
C) 1.50 
D) 1.43 
E) 1.38

Question 11

The expected rate of return of an investment _____.

Accepted Answer

A) equals one of the possible rates of return for that investment 
B) equals the required rate of return for the investment 
C) is the mean value of the probability distribution of possible outcomes 
D) is the median value of the probability distribution of possible outcomes 
E) is the mode value of the probability distribution of possible outcomes 
A) equals one of the possible rates of return for that investment 
B) equals the required rate of return for the investment 
C) is the mean value of the probability distribution of possible outcomes 
D) is the median value of the probability distribution of possible outcomes 
E) is the mode value of the probability distribution of possible outcomes

Question 12

A stock has a beta coefficient, β, equal to 1.20. The risk premium associated with the market is 9 percent, and the risk-free rate is 5 percent. Application of the capital asset pricing model indicates that the stock's appropriate return should be _____.

Accepted Answer

A) 9.8% 
B) 5.2% 
C) 12.5% 
D) 15.8% 
E) 17.2% 
A) 9.8% 
B) 5.2% 
C) 12.5% 
D) 15.8% 
E) 17.2%

Question 13

Which of the following statements is correct?

Accepted Answer

A) A security's beta measures its diversifiable (firm-specific) risk relative to that of other securities. 
B) If the returns of two firms are negatively correlated, one of them must have a negative beta. 
C) A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only one stock. 
D) Combining stocks that are perfectly negatively correlated and that have the same beta coefficient into a portfolio is riskier than holding an individual stock, because the portfolio will not benefit from diversification. 
E) A stock's beta can be calculated by comparing its returns to the market's returns over some time period because the beta coefficient measures a stock's volatility relative to market. 
A) A security's beta measures its diversifiable (firm-specific) risk relative to that of other securities. 
B) If the returns of two firms are negatively correlated, one of them must have a negative beta. 
C) A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only one stock. 
D) Combining stocks that are perfectly negatively correlated and that have the same beta coefficient into a portfolio is riskier than holding an individual stock, because the portfolio will not benefit from diversification. 
E) A stock's beta can be calculated by comparing its returns to the market's returns over some time period because the beta coefficient measures a stock's volatility relative to market.

Question 14

Which of the following statements is true about the beta of a portfolio?

Accepted Answer

A) If the beta of a portfolio doubles, its required return also doubles. 
B) If a stock included in the portfolio has a negative beta, the portfolio's required return is negative. 
C) Portfolios that contain higher beta stocks have more company-specific risk, but do not necessarily have more market risk. 
D) If a portfolio's beta increases from 1.2 to 1.5, its actual rate of return will decrease by 1.5 times the market risk premium. 
E) If the beta of a stock is three, the stock's relevant risk is three times as volatile as the market portfolio. 
A) If the beta of a portfolio doubles, its required return also doubles. 
B) If a stock included in the portfolio has a negative beta, the portfolio's required return is negative. 
C) Portfolios that contain higher beta stocks have more company-specific risk, but do not necessarily have more market risk. 
D) If a portfolio's beta increases from 1.2 to 1.5, its actual rate of return will decrease by 1.5 times the market risk premium. 
E) If the beta of a stock is three, the stock's relevant risk is three times as volatile as the market portfolio.

Question 15

The risk-free rate of return is 4 percent, and the market return is 10 percent. The betas of Stocks A, B, C, D, and E are 0.85, 0.95, 1.20, 1.35, and 0.5, respectively. The expected rates of return for Stocks A, B, C, D, and E are 8 percent, 9 percent, 10 percent, 14 percent, and 6 percent, respectively. Which stock should a rational investor purchase?

Accepted Answer

A) A 
B) B 
C) C 
D) D 
E) E 
A) A 
B) B 
C) C 
D) D 
E) E

Question 16

The variance of the returns of Stock X is 62.5 percent, and the expected return from the stock is 18 percent. Calculate the coefficient of variation of the stock.

Accepted Answer

A) 3.47 
B) 0.44 
C) 40.98 
D) 0.29 
E) 1.86 
A) 3.47 
B) 0.44 
C) 40.98 
D) 0.29 
E) 1.86

Question 17

The part of a security's risk associated with economic factors that affect all firms to some extent is known as the _____.

Accepted Answer

A) diversifiable risk 
B) unsystematic risk 
C) stand-alone risk 
D) market risk 
E) business risk 
A) diversifiable risk 
B) unsystematic risk 
C) stand-alone risk 
D) market risk 
E) business risk

Question 18

Short-term investments have higher maturity risks than long-term investments.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements about correlation is correct?

Accepted Answer

A) If the returns from two stocks are perfectly positively correlated and the two stocks have equal variance, an equally weighted portfolio of the two stocks will have a variance that is less than that of the individual stocks. 
B) If a stock has a negative correlation with market, its systematic risk is more than the market risk. 
C) Stocks that have correlation coefficients equal to zero will have minimum diversification benefits. 
D) The weaker the positive correlation two stocks exhibit, the more risk can be reduced when they are combined in a portfolio. 
E) Risk is reduced when positively-related stocks are combined to form portfolios, especially when the correlation coefficients are equal to +1. 
A) If the returns from two stocks are perfectly positively correlated and the two stocks have equal variance, an equally weighted portfolio of the two stocks will have a variance that is less than that of the individual stocks. 
B) If a stock has a negative correlation with market, its systematic risk is more than the market risk. 
C) Stocks that have correlation coefficients equal to zero will have minimum diversification benefits. 
D) The weaker the positive correlation two stocks exhibit, the more risk can be reduced when they are combined in a portfolio. 
E) Risk is reduced when positively-related stocks are combined to form portfolios, especially when the correlation coefficients are equal to +1.

Question 20

The next expected dividend for Stock P is $2.50, the current price of the stock is $32.50, and the firm is expected to grow at a constant rate of 4 percent per year forever. The risk free rate is 3 percent, the market risk premium is 5.5 percent, and the stock's beta is 1.2. Based on the given information, which of the following statements is correct?

Accepted Answer

A) An investor should buy this stock because its expected rate of return, 11.69 percent, is greater than its required rate of return, 9.6 percent. 
B) An investor should not buy this stock because its expected rate of return, 9.6 percent, is greater than its required rate of return, 11.69 percent. 
C) An investor should not buy this stock because its intrinsic value, $44.64, is greater than its current price of $32.50. 
D) An investor should not buy this stock because its current price, $32.50, is not equal to its intrinsic value, $44.64. 
E) An investor should be indifferent toward buying or selling the stock because its required rate of return is equal to its expected rate of return, 11.69 percent. 
A) An investor should buy this stock because its expected rate of return, 11.69 percent, is greater than its required rate of return, 9.6 percent. 
B) An investor should not buy this stock because its expected rate of return, 9.6 percent, is greater than its required rate of return, 11.69 percent. 
C) An investor should not buy this stock because its intrinsic value, $44.64, is greater than its current price of $32.50. 
D) An investor should not buy this stock because its current price, $32.50, is not equal to its intrinsic value, $44.64. 
E) An investor should be indifferent toward buying or selling the stock because its required rate of return is equal to its expected rate of return, 11.69 percent.

Which of the following securities generates a return that is closest to a risk-free rate of return?

The total risk associated with an investment can be divided into _____.

The _____ of an investment is a measure of the tightness, or variability, of its set of returns.

Which of the following statements about the various types of risks is true?

Which of the following statements about risk measures is correct?

The part of a security's risk associated with random outcomes generated by events or behaviors specific to the firm is known as _____.

Risk is indicated by variability of returns, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.

Other things held constant, if investors become less risk averse, the new security market line (SML) would _____.

Which of the following is the relevant risk of an investment, for which investors should be rewarded?

The expected rate of return of an investment _____.

A stock has a beta coefficient, β, equal to 1.20. The risk premium associated with the market is 9 percent, and the risk-free rate is 5 percent. Application of the capital asset pricing model indicates that the stock's appropriate return should be _____.

Which of the following statements is correct?

Which of the following statements is true about the beta of a portfolio?

The variance of the returns of Stock X is 62.5 percent, and the expected return from the stock is 18 percent. Calculate the coefficient of variation of the stock.

The part of a security's risk associated with economic factors that affect all firms to some extent is known as the _____.

Short-term investments have higher maturity risks than long-term investments.

Which of the following statements about correlation is correct?

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debt Characteristics and Valuation

Stocks Equity Characteristics and Valuation

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 8: Risk and Rates of Return

Which of the following securities generates a return that is closest to a risk-free rate of return?

The total risk associated with an investment can be divided into _____.

The _____ of an investment is a measure of the tightness, or variability, of its set of returns.

Which of the following statements about the various types of risks is true?

Which of the following statements about risk measures is correct?

The part of a security's risk associated with random outcomes generated by events or behaviors specific to the firm is known as _____.

Risk is indicated by variability of returns, whether the variability is considered positive or negative. Both the positive and negative outcomes must be evaluated when considering risk.

Other things held constant, if investors become less risk averse, the new security market line (SML) would _____.

Which of the following is the relevant risk of an investment, for which investors should be rewarded?

The expected rate of return of an investment _____.

A stock has a beta coefficient, β, equal to 1.20. The risk premium associated with the market is 9 percent, and the risk-free rate is 5 percent. Application of the capital asset pricing model indicates that the stock's appropriate return should be _____.

Which of the following statements is correct?

Which of the following statements is true about the beta of a portfolio?

The variance of the returns of Stock X is 62.5 percent, and the expected return from the stock is 18 percent. Calculate the coefficient of variation of the stock.

The part of a security's risk associated with economic factors that affect all firms to some extent is known as the _____.

Short-term investments have higher maturity risks than long-term investments.

Which of the following statements about correlation is correct?

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debt Characteristics and Valuation

Stocks Equity Characteristics and Valuation

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters