Question 1

Which of the following security portfolios should offer the highest maturity premium?

Accepted Answer

A) Common stocks, because they never mature 
B) Long-term Treasury bonds, because of potential fluctuations in interest rates 
C) Treasury bills, because of fluctuations in inflation rates 
D) The Dow, because it is the oldest and most stable index 
A) Common stocks, because they never mature 
B) Long-term Treasury bonds, because of potential fluctuations in interest rates 
C) Treasury bills, because of fluctuations in inflation rates 
D) The Dow, because it is the oldest and most stable index

Question 2

Calculate the nominal rate if the real rate is 4.25% and the inflation rate is 3%.

Accepted Answer

A) 10.18% 
B) 9.28% 
C) 8.83% 
D) 7.38% 
A) 10.18% 
B) 9.28% 
C) 8.83% 
D) 7.38%

Question 3

Cyclical stocks tend to perform well when other stocks are performing well also.

Accepted Answer

A) True 
 B)False

Question 4

The appropriate opportunity cost of capital is the return that investors give up on alternative investments with:

Accepted Answer

A) The same risk 
B) The risk-free return 
C) The expected return on the TSX 300 
D) The normal, common stock risk premium 
A) The same risk 
B) The risk-free return 
C) The expected return on the TSX 300 
D) The normal, common stock risk premium

Question 5

An analyst predicts three economic states of a Boom, Average and Bust economic states, with probabilities of 40%, 50% and 10% respectively.If a boom economic state occurs, stock A will provide a 10% return and stock B will provide a 2% return; if an average economy occurs, stock A will provide a 6% return and stock B will provide a 5% return.During a bust economy, stock A will provide a -5% return and stock B a 12% return.Given this information, determine which stock is riskier.

Accepted Answer

Stock A is riskier b

Question 6

How is it possible for real rates of return to increase during times when the rate of inflation increases?

Accepted Answer

A) Inflation increased more than the real return 
B) Nominal returns actually decreased 
C) Nominal returns increased more than inflation 
D) Nominal returns increased less than inflation 
A) Inflation increased more than the real return 
B) Nominal returns actually decreased 
C) Nominal returns increased more than inflation 
D) Nominal returns increased less than inflation

Question 7

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 8

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

Accepted Answer

Over the years total return index value

Question 9

What is the approximate variance of returns if over the past three years an investment returned 8.0 percent, -12.0 percent, and 15.0 percent?

Accepted Answer

A) 31 
B) 131 
C) 182 
D) 961 Mean = 
A) 31 
B) 131 
C) 182 
D) 961 Mean =

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

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

Accepted Answer

A) True 
 B)False

Question 12

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 13

The major benefit of diversification is to:

Accepted Answer

A) Increase the expected return 
B) Remove negative risk assets from the portfolio 
C) Reduce the portfolio's systematic risk 
D) Reduce the expected risk 
A) Increase the expected return 
B) Remove negative risk assets from the portfolio 
C) Reduce the portfolio's systematic risk 
D) Reduce the expected risk

Question 14

Common stocks have offered an annual risk premium in nominal terms, but they have:

Accepted Answer

A) Also offered the risk premium in real terms 
B) Not offered a risk premium in real terms 
C) Not offered more than corporate bonds in real terms 
D) offered only slightly more than Treasury bonds in real terms 
A) Also offered the risk premium in real terms 
B) Not offered a risk premium in real terms 
C) Not offered more than corporate bonds in real terms 
D) offered only slightly more than Treasury bonds in real terms

Question 15

Long-term corporate bonds are the only portfolio of securities found to be riskier than common stocks.

Accepted Answer

A) True 
 B)False

Question 16

Market interest rates have risen substantially in the five years since an investor purchased Treasury bonds that were offering a 7 percent return.If the investor sells now she is likely to receive:

Accepted Answer

A) Greater than a 7 percent total return 
B) Less than a 7 percent total return 
C) A 7 percent total rate of return 
D) A 7 percent nominal return but less than a 7 percent real return 
A) Greater than a 7 percent total return 
B) Less than a 7 percent total return 
C) A 7 percent total rate of return 
D) A 7 percent nominal return but less than a 7 percent real return

Question 17

Discuss the statement, "Only market risk matters to a diversified investor."

Accepted Answer

It is relatively easy for an investor to

Question 18

The variance of a stock's returns can be calculated as the:

Accepted Answer

A) Average value of deviations from the mean 
B) Average value of squared deviations from the mean 
C) Square root of average value of deviations from the mean 
D) Sum of the deviations from the mean 
A) Average value of deviations from the mean 
B) Average value of squared deviations from the mean 
C) Square root of average value of deviations from the mean 
D) Sum of the deviations from the mean

Question 19

If a stock is purchased for $25 per share and held one year, during which time a $3.50 dividend is paid and the price climbs to $28.25, the nominal rate of return is:

Accepted Answer

A) 13.00 percent 
B) 14.00 percent 
C) 23.01 percent 
D) 27.00 percent 
A) 13.00 percent 
B) 14.00 percent 
C) 23.01 percent 
D) 27.00 percent

Question 20

Investment risk can best be described as the:

Accepted Answer

A) Dispersion of possible returns 
B) Elimination of macro risk through diversification 
C) Possibility of changes in the cost of capital 
D) Level of systematic risk for an undiversified investor 
A) Dispersion of possible returns 
B) Elimination of macro risk through diversification 
C) Possibility of changes in the cost of capital 
D) Level of systematic risk for an undiversified investor

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

Which of the following security portfolios should offer the highest maturity premium?

Calculate the nominal rate if the real rate is 4.25% and the inflation rate is 3%.

Cyclical stocks tend to perform well when other stocks are performing well also.

The appropriate opportunity cost of capital is the return that investors give up on alternative investments with:

How is it possible for real rates of return to increase during times when the rate of inflation increases?

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

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

What is the approximate variance of returns if over the past three years an investment returned 8.0 percent, -12.0 percent, and 15.0 percent?

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?

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

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

The major benefit of diversification is to:

Common stocks have offered an annual risk premium in nominal terms, but they have:

Long-term corporate bonds are the only portfolio of securities found to be riskier than common stocks.

Market interest rates have risen substantially in the five years since an investor purchased Treasury bonds that were offering a 7 percent return.If the investor sells now she is likely to receive:

Discuss the statement, "Only market risk matters to a diversified investor."

The variance of a stock's returns can be calculated as the:

If a stock is purchased for $25 per share and held one year, during which time a $3.50 dividend is paid and the price climbs to $28.25, the nominal rate of return is:

Investment risk can best be described as the:

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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