Question 1

A maturity premium is offered on long-term Treasury bonds due to:

Accepted Answer

A)  the risk of changing interest rates. 
B)  the risk of default. 
C)  their unique risk. 
D)  their systematic risk. 
A)  the risk of changing interest rates. 
B)  the risk of default. 
C)  their unique risk. 
D)  their systematic risk.

Question 2

The incremental risk to a portfolio from adding another stock:

Accepted Answer

A)  is always greater than the average portfolio risk. 
B)  is always less than the average portfolio risk. 
C)  is always positive. 
D)  is often positive but can be negative. 
A)  is always greater than the average portfolio risk. 
B)  is always less than the average portfolio risk. 
C)  is always positive. 
D)  is often positive but can be negative.

Question 3

Justify the historic ranking of returns for the following three categories of investment,listed from highest to lowest return: Common stocks,long-term Treasury bonds,and Treasury bills.

Accepted Answer

Common stocks offer the highest historic

Question 4

Calculate the inflation rate,given a nominal rate of 10.2% and a real rate of 8.05%.

Accepted Answer

A)  2.99% 
B)  2.49% 
C)  1.99% 
D)  1.06% 
A)  2.99% 
B)  2.49% 
C)  1.99% 
D)  1.06%

Question 5

What are the components of total return and total risk?

Accepted Answer

Total return equals the yield

Question 6

Which of the following risks is most important to a well-diversified investor in common stocks?

Accepted Answer

A)  market risk 
B)  unique risk 
C)  total risk 
D)  diversifiable risk 
A)  market risk 
B)  unique risk 
C)  total risk 
D)  diversifiable risk

Question 7

A stock that is considered to be a positive risk asset is added to a portfolio.As a result,the portfolio will:

Accepted Answer

A)  have lower average returns. 
B)  have a lower variance of returns. 
C)  have a higher volatility of returns. 
D)  have a lower correlation of returns with stock market indexes. 
A)  have lower average returns. 
B)  have a lower variance of returns. 
C)  have a higher volatility of returns. 
D)  have a lower correlation of returns with stock market indexes.

Question 8

Average returns on high-risk assets are higher than those on low-risk assets.

Accepted Answer

A) True 
 B)False

Question 9

If the stock market return in 2008 turns out to be 30 percent,what will happen to our estimate of the "normal" risk premium? Does this make sense?

Accepted Answer

If we use historical averages to compute

Question 10

What percentage return is achieved by an investor who purchases a stock for $30,receives a $1.50 dividend,and sells the share one year later for $28.50?

Accepted Answer

A)  -5 percent 
B)  0 percent 
C)  5 percent 
D)  10 percent 
A)  -5 percent 
B)  0 percent 
C)  5 percent 
D)  10 percent

Question 11

A market index is used to measure performance of a broad-based portfolio of stocks.

Accepted Answer

A) True 
 B)False

Question 12

How can one estimate the opportunity cost of capital for an "average risk" project?

Accepted Answer

Over the years total return index value

Question 13

One common reason for reporting standard deviations rather than variances is that standard deviations:

Accepted Answer

A)  are lower. 
B)  are stated in understandable units. 
C)  account properly for negative returns. 
D)  take probability estimates into consideration. 
A)  are lower. 
B)  are stated in understandable units. 
C)  account properly for negative returns. 
D)  take probability estimates into consideration.

Question 14

In addition to the number of stocks represented,a difference between the TSX 300 and the Dow is that the TSX 300:

Accepted Answer

A)  dates back to the 19th century while the Dow is a recent innovation. 
B)  is value-weighted while the Dow is an equal-weighted index. 
C)  includes foreign stocks while the Dow is domestic. 
D)  index includes dividends in its return while the Dow does not. 
A)  dates back to the 19th century while the Dow is a recent innovation. 
B)  is value-weighted while the Dow is an equal-weighted index. 
C)  includes foreign stocks while the Dow is domestic. 
D)  index includes dividends in its return while the Dow does not.

Question 15

Which of the following risk types can be diversified by adding stocks to a portfolio?

Accepted Answer

A)  systematic risk 
B)  unique risk 
C)  default risk 
D)  market risk 
A)  systematic risk 
B)  unique risk 
C)  default risk 
D)  market risk

Question 16

When inflation is expected to be low,the risk premium on common stocks is expected to be low.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following guarantees is offered to common stock investors?

Accepted Answer

A)  guaranteed to receive dividends 
B)  guaranteed to receive capital gains 
C)  guaranteed only to receive a refund of principal 
D)  no guarantees of any form 
A)  guaranteed to receive dividends 
B)  guaranteed to receive capital gains 
C)  guaranteed only to receive a refund of principal 
D)  no guarantees of any form

Question 18

Which of the following statements seems most appropriate when the TSX 300 increases by 2 percent?

Accepted Answer

A)  all stocks on the exchange increased by 2 percent. 
B)  only 2 percent of the TSX index's stocks increased. 
C)  a broad-based market indicator was up by 2 percent. 
D)  The S&P 500 index increased by 2 percent. 
A)  all stocks on the exchange increased by 2 percent. 
B)  only 2 percent of the TSX index's stocks increased. 
C)  a broad-based market indicator was up by 2 percent. 
D)  The S&P 500 index increased by 2 percent.

Question 19

For investment horizons greater than 20 years,long-term corporate bonds traditionally have outperformed common stocks.

Accepted Answer

A) True 
 B)False

Question 20

Although the TSX 300 contains a small proportion of Canadian publicly traded stocks,it represents:

Accepted Answer

A)  all stocks that prefer to be equal-weighted. 
B)  all stocks that prefer to be value-weighted. 
C)  approximately 50 percent of Canadian stocks traded, in value. 
D)  approximately 70 percent of Canadian stocks traded, in value. 
A)  all stocks that prefer to be equal-weighted. 
B)  all stocks that prefer to be value-weighted. 
C)  approximately 50 percent of Canadian stocks traded, in value. 
D)  approximately 70 percent of Canadian stocks traded, in value.

Exam 11: Introduction to Risk, Return, and the Opportunity Cost of Capital

A maturity premium is offered on long-term Treasury bonds due to:

The incremental risk to a portfolio from adding another stock:

Justify the historic ranking of returns for the following three categories of investment,listed from highest to lowest return: Common stocks,long-term Treasury bonds,and Treasury bills.

Calculate the inflation rate,given a nominal rate of 10.2% and a real rate of 8.05%.

What are the components of total return and total risk?

Which of the following risks is most important to a well-diversified investor in common stocks?

A stock that is considered to be a positive risk asset is added to a portfolio.As a result,the portfolio will:

Average returns on high-risk assets are higher than those on low-risk assets.

If the stock market return in 2008 turns out to be 30 percent,what will happen to our estimate of the "normal" risk premium? Does this make sense?

What percentage return is achieved by an investor who purchases a stock for $30,receives a $1.50 dividend,and sells the share one year later for $28.50?

A market index is used to measure performance of a broad-based portfolio of stocks.

How can one estimate the opportunity cost of capital for an "average risk" project?

One common reason for reporting standard deviations rather than variances is that standard deviations:

In addition to the number of stocks represented,a difference between the TSX 300 and the Dow is that the TSX 300:

Which of the following risk types can be diversified by adding stocks to a portfolio?

When inflation is expected to be low,the risk premium on common stocks is expected to be low.

Which of the following guarantees is offered to common stock investors?

Which of the following statements seems most appropriate when the TSX 300 increases by 2 percent?

For investment horizons greater than 20 years,long-term corporate bonds traditionally have outperformed common stocks.

Although the TSX 300 contains a small proportion of Canadian publicly traded stocks,it represents:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt and Payout Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters