Question 1

The benefits of portfolio diversification are highest when the individual securities have returns that:

Accepted Answer

A) Vary directly with the rest of the portfolio 
B) Vary indirectly with the rest of the portfolio 
C) Are uncorrelated with the rest of the portfolio 
D) Are countercyclical 
A) Vary directly with the rest of the portfolio 
B) Vary indirectly with the rest of the portfolio 
C) Are uncorrelated with the rest of the portfolio 
D) Are countercyclical

Question 2

Which of the following companies might you expect to be exposed to less macro risk?

Accepted Answer

A) A large producer of flour 
B) A regional airline 
C) A major commercial bank 
D) An electric utility 
A) A large producer of flour 
B) A regional airline 
C) A major commercial bank 
D) An electric utility

Question 3

The idea that investors in common stock may expect a lower total return when prices are relatively stable suggests that:

Accepted Answer

A) Investors are irrational 
B) Risk premiums decline with inflation 
C) Real rates of return will be lower during periods of price stability 
D) Stocks should be avoided when inflation is low 
A) Investors are irrational 
B) Risk premiums decline with inflation 
C) Real rates of return will be lower during periods of price stability 
D) Stocks should be avoided when inflation is low

Question 4

Market risk can be eliminated in a stock portfolio through diversification.

Accepted Answer

A) True 
 B)False

Question 5

Real rates of return are typically less than nominal rates of return due to:

Accepted Answer

A) Inflation 
B) Capital gains 
C) Dividend payments 
D) Depreciation 
A) Inflation 
B) Capital gains 
C) Dividend payments 
D) Depreciation

Question 6

Calculate the nominal and real returns for the following corporate bond investment: Purchased for $840 one year ago, 4 percent coupon rate, sold for $894.The inflation rate was 5.0 percent during the year.Would you consider this an appropriate investment if Treasury bills had yielded 6.0 percent over the same period? Why?

Accepted Answer

Nominal yield = @#IMG-DLM& = @#IMG-DLM& = 11.19%
Real yield

Question 7

If the standard deviation of a portfolio's returns is known to be 30 percent, then its variance is:

Accepted Answer

A) 5.48 percent 
B) 5.48 percent squared 
C) 900.00 percent 
D) 900.00 percent squared 
A) 5.48 percent 
B) 5.48 percent squared 
C) 900.00 percent 
D) 900.00 percent squared

Question 8

What is the expected return on a portfolio that will decline in value by 13 percent in a recession, will increase by 16 percent in normal times, and will increase by 23 percent during boom times if each scenario has equal likelihood?

Accepted Answer

A) 8.67 percent 
B) 13.00 percent 
C) 13.43 percent 
D) 17.33 percent Expected return = 
A) 8.67 percent 
B) 13.00 percent 
C) 13.43 percent 
D) 17.33 percent Expected return =

Question 9

Calculate risk for the two stocks and the portfolio, given the following information:

Accepted Answer

@#IMG-DLM& Answers g

Question 10

When high growth is expected in the economy, an investor should receive higher returns from:

Accepted Answer

A) Cyclical investments 
B) Countercyclical investments 
C) Stocks with negative correlations 
D) Stocks with low standard deviations 
A) Cyclical investments 
B) Countercyclical investments 
C) Stocks with negative correlations 
D) Stocks with low standard deviations

Question 11

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 12

Calculate the real rate of interest if the nominal rate of interest is 8.65% and the inflation rate is 2.24%.

Accepted Answer

A) 9.50% 
B) 8.49% 
C) 7.38% 
D) 6.27% 
A) 9.50% 
B) 8.49% 
C) 7.38% 
D) 6.27%

Question 13

If a stock's returns are volatile, then the stock:

Accepted Answer

A) Cannot be considered a negative risk asset 
B) Can still be considered a negative risk asset 
C) Has macro risk, but no unique risk 
D) Does not offer diversification potential 
A) Cannot be considered a negative risk asset 
B) Can still be considered a negative risk asset 
C) Has macro risk, but no unique risk 
D) Does not offer diversification potential

Question 14

Most of the beneficial effects of diversification will have been received by the time a portfolio of common stocks contains _____ stocks.

Accepted Answer

A) 2 
B) 5 
C) 20 
D) 50 
A) 2 
B) 5 
C) 20 
D) 50

Question 15

Calculate the nominal return, real return, and risk premium for the following common stock investment:

Accepted Answer

@#IMG-DLM& Nominal return = @#IMG-DLM& = @#IMG-DLM& = @#IMG-DLM& = @#IMG-DLM& = 27.5%
Real

Question 16

Which of the following concerns is likely to be most important to portfolio investors seeking diversification?

Accepted Answer

A) Total volatility of individual securities 
B) Standard deviation of individual securities 
C) Correlation of returns between securities 
D) Achieving the risk-free rate of return 
A) Total volatility of individual securities 
B) Standard deviation of individual securities 
C) Correlation of returns between securities 
D) Achieving the risk-free rate of return

Question 17

The risk premium that is offered on common stock is equal to the:

Accepted Answer

A) Expected return on the stock 
B) Real rate of return on the stock 
C) Excess of expected return over a risk-free return 
D) Expected return on the S&P 500 index 
A) Expected return on the stock 
B) Real rate of return on the stock 
C) Excess of expected return over a risk-free return 
D) Expected return on the S&P 500 index

Question 18

An investor is considering purchasing two stocks for a portfolio.Both stocks will have equal weighting in the portfolio.It is expected that three economic states may occur, each with equal probability of occurring.If a boom economy transpires, stock A will yield a 20% return and stock B 10%.An average economy will see a 10% and 5% returns for stocks A and B respectively.In a bust economy, stock A will have a return of -5% and stock B 1%.Given the above information, calculate the standard deviations of each stock along with the portfolio.

Accepted Answer

10.27%, 3.

Question 19

"TSX up 14.Story at 6:00 p.m." This means that:

Accepted Answer

A) The TSX was up 14 percent during today's trading 
B) 14 of the TSX's 300 stocks increased in price today 
C) A share of TSX stock went up by $14 today 
D) The TSX index increased by 14 points in today's trading 
A) The TSX was up 14 percent during today's trading 
B) 14 of the TSX's 300 stocks increased in price today 
C) A share of TSX stock went up by $14 today 
D) The TSX index increased by 14 points in today's trading

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

The benefits of portfolio diversification are highest when the individual securities have returns that:

Which of the following companies might you expect to be exposed to less macro risk?

The idea that investors in common stock may expect a lower total return when prices are relatively stable suggests that:

Market risk can be eliminated in a stock portfolio through diversification.

Real rates of return are typically less than nominal rates of return due to:

If the standard deviation of a portfolio's returns is known to be 30 percent, then its variance is:

What is the expected return on a portfolio that will decline in value by 13 percent in a recession, will increase by 16 percent in normal times, and will increase by 23 percent during boom times if each scenario has equal likelihood?

Calculate risk for the two stocks and the portfolio, given the following information:

When high growth is expected in the economy, an investor should receive higher returns from:

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

Calculate the real rate of interest if the nominal rate of interest is 8.65% and the inflation rate is 2.24%.

If a stock's returns are volatile, then the stock:

Most of the beneficial effects of diversification will have been received by the time a portfolio of common stocks contains _____ stocks.

Calculate the nominal return, real return, and risk premium for the following common stock investment:

Which of the following concerns is likely to be most important to portfolio investors seeking diversification?

The risk premium that is offered on common stock is equal to the:

"TSX up 14.Story at 6:00 p.m." This means that:

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 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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