Question 1

Why does diversification reduce risk?

Accepted Answer

The standard deviation of returns is gen

Question 2

Perhaps the best way to reduce macro risk in a stock portfolio is to invest in stocks that:

Accepted Answer

A) Have only unique risks 
B) Have diversified away the macro risk 
C) Have low exposure to business cycles 
D) Pay guaranteed dividends 
A) Have only unique risks 
B) Have diversified away the macro risk 
C) Have low exposure to business cycles 
D) Pay guaranteed dividends

Question 3

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 4

A firm is said to be countercyclical if its returns:

Accepted Answer

A) Continue to decrease, year after year 
B) Continue to increase, year after year 
C) Are better when most firms do poorly 
D) Are negative in real terms 
A) Continue to decrease, year after year 
B) Continue to increase, year after year 
C) Are better when most firms do poorly 
D) Are negative in real terms

Question 5

Which of the following statements is true for a stock that sells now for $60, pays an annual dividend of $3.00, and experienced a 30 percent return on investment over the past year? Its price one year ago was:

Accepted Answer

A) $42.00 
B) $46.15 
C) $48.46 
D) $56.10 
A) $42.00 
B) $46.15 
C) $48.46 
D) $56.10

Question 6

An investor receives a 15 percent total return by purchasing a stock for $40 and selling it after one year with a 10 percent capital gain.How much was received in dividend income during the year?

Accepted Answer

A) $2.00 
B) $2.20 
C) $4.00 
D) $6.00 
A) $2.00 
B) $2.20 
C) $4.00 
D) $6.00

Question 7

Common stock is held for two years, during which time it receives an annual dividend of $10.The stock was sold for $100 and generated an average annual return of 16 percent.What price was paid for the stock?

Accepted Answer

A) $61.60 
B) $64.80 
C) $88.00 
D) $90.90 .32 = 
A) $61.60 
B) $64.80 
C) $88.00 
D) $90.90 .32 =

Question 8

Stock A has 10 million shares issued and Stock B has 5 million shares issued.What is their relative weighting if both stocks are represented in the S&P 500?

Accepted Answer

A) Equal-weightings, like all S&P 500 stocks 
B) B has twice the weighting, to account for having fewer shares 
C) A has twice the weighting, to account for having more shares 
D) They are weighted according to their expected performance 
A) Equal-weightings, like all S&P 500 stocks 
B) B has twice the weighting, to account for having fewer shares 
C) A has twice the weighting, to account for having more shares 
D) They are weighted according to their expected performance

Question 9

In general, which stocks should be combined in a portfolio if the goal is to reduce overall risk?

Accepted Answer

A) Stocks with returns that are positively correlated 
B) Stocks with returns that are negatively correlated 
C) Stocks with returns that are not correlated 
D) Stocks that have the highest expected returns 
A) Stocks with returns that are positively correlated 
B) Stocks with returns that are negatively correlated 
C) Stocks with returns that are not correlated 
D) Stocks that have the highest expected returns

Question 10

The addition of a negative risk asset to a portfolio of assets will:

Accepted Answer

A) Increase the portfolio's expected return 
B) Decrease the portfolio's expected return 
C) Increase the portfolio's expected volatility 
D) Decrease the portfolio's expected volatility 
A) Increase the portfolio's expected return 
B) Decrease the portfolio's expected return 
C) Increase the portfolio's expected volatility 
D) Decrease the portfolio's expected volatility

Question 11

If a stock is purchased for $12.50 per share and held one year, during which time a $1.50 dividend is paid and the price drops to $10.75, the percentage return is:

Accepted Answer

A) -2% 
B) -1% 
C) 1% 
D) 2% 
A) -2% 
B) -1% 
C) 1% 
D) 2%

Question 12

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the rate of return on:

Accepted Answer

A) Treasury bills 
B) The market portfolio 
C) The market portfolio minus the rate of return on Treasury bills 
D) Treasury bonds plus a maturity premium 
A) Treasury bills 
B) The market portfolio 
C) The market portfolio minus the rate of return on Treasury bills 
D) Treasury bonds plus a maturity premium

Question 13

What are the components of total return and total risk?

Accepted Answer

Total return equals the yield

Question 14

Contrast the U.S.Dow Jones Industrial Average and the Standard & Poor's Composite Index on the issue of representativeness.

Accepted Answer

The Dow Jones Industrial Average contain

Question 15

Which statement is correct concerning macro risk exposure?

Accepted Answer

A) All firms face equal macro risk exposure 
B) Only portfolios of stocks face macro risk exposure 
C) Macro risk exposure affects the cost of capital 
D) Macro risk exposure is less important to diversified investors than micro risk exposure 
A) All firms face equal macro risk exposure 
B) Only portfolios of stocks face macro risk exposure 
C) Macro risk exposure affects the cost of capital 
D) Macro risk exposure is less important to diversified investors than micro risk exposure

Question 16

How is the calculation of a variance affected by an observation with a negative rate of return when other returns are positive?

Accepted Answer

A) It reduces the variance 
B) It increases the variance 
C) Variance is not affected by negatives or positives 
D) The effect cannot be determined from this information 
A) It reduces the variance 
B) It increases the variance 
C) Variance is not affected by negatives or positives 
D) The effect cannot be determined from this information

Question 17

The TSX 300 accounts for nearly 50 percent of the total value of stocks traded in Canada.

Accepted Answer

A) True 
 B)False

Question 18

A stock investor owns a diversified portfolio of 15 stocks.What will be the likely effect on portfolio standard deviation from adding one more stock?

Accepted Answer

A) A slight increase will occur 
B) A large increase will occur 
C) A slight decrease will occur 
D) A large decrease will occur 
A) A slight increase will occur 
B) A large increase will occur 
C) A slight decrease will occur 
D) A large decrease will occur

Question 19

The TSX 300 index is:

Accepted Answer

A) The most representative of stock market indexes 
B) An index of Canada's major corporations 
C) An index of 300 major stocks 
D) An equally weighted index of all stocks traded on the New York Stock Exchange 
A) The most representative of stock market indexes 
B) An index of Canada's major corporations 
C) An index of 300 major stocks 
D) An equally weighted index of all stocks traded on the New York Stock Exchange

Question 20

Discuss the concept of a "negative risk asset."

Accepted Answer

A negative risk asset is one that reduce

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

Why does diversification reduce risk?

Perhaps the best way to reduce macro risk in a stock portfolio is to invest in stocks that:

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

A firm is said to be countercyclical if its returns:

Which of the following statements is true for a stock that sells now for $60, pays an annual dividend of $3.00, and experienced a 30 percent return on investment over the past year? Its price one year ago was:

An investor receives a 15 percent total return by purchasing a stock for $40 and selling it after one year with a 10 percent capital gain.How much was received in dividend income during the year?

Common stock is held for two years, during which time it receives an annual dividend of $10.The stock was sold for $100 and generated an average annual return of 16 percent.What price was paid for the stock?

Stock A has 10 million shares issued and Stock B has 5 million shares issued.What is their relative weighting if both stocks are represented in the S&P 500?

In general, which stocks should be combined in a portfolio if the goal is to reduce overall risk?

The addition of a negative risk asset to a portfolio of assets will:

If a stock is purchased for $12.50 per share and held one year, during which time a $1.50 dividend is paid and the price drops to $10.75, the percentage return is:

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the rate of return on:

What are the components of total return and total risk?

Contrast the U.S.Dow Jones Industrial Average and the Standard & Poor's Composite Index on the issue of representativeness.

Which statement is correct concerning macro risk exposure?

How is the calculation of a variance affected by an observation with a negative rate of return when other returns are positive?

The TSX 300 accounts for nearly 50 percent of the total value of stocks traded in Canada.

A stock investor owns a diversified portfolio of 15 stocks.What will be the likely effect on portfolio standard deviation from adding one more stock?

The TSX 300 index is:

Discuss the concept of a "negative risk asset."

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 Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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