Question 1

The major benefit of diversification is the:

Accepted Answer

A)  increased expected return. 
B)  removal of all negative risk assets from the portfolio. 
C)  reduction in the portfolio's market risk. 
D)  reduction in the portfolio's total risk. 
A)  increased expected return. 
B)  removal of all negative risk assets from the portfolio. 
C)  reduction in the portfolio's market risk. 
D)  reduction in the portfolio's total risk.

Question 2

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

Accepted Answer

A)  vary directly with the rest of the portfolio. 
B)  vary proportionally with the rest of the portfolio. 
C)  are largely uncorrelated with the rest of the portfolio. 
D)  are perfectly correlated with the market portfolio. 
A)  vary directly with the rest of the portfolio. 
B)  vary proportionally with the rest of the portfolio. 
C)  are largely uncorrelated with the rest of the portfolio. 
D)  are perfectly correlated with the market portfolio.

Question 3

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the expected 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 4

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 5

Which one of these is the safest investment?

Accepted Answer

A)  Corporate bonds 
B)  Common stock 
C)  U.S. Treasury bills 
D)  Preferred stock 
A)  Corporate bonds 
B)  Common stock 
C)  U.S. Treasury bills 
D)  Preferred stock

Question 6

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

Accepted Answer

A)  Market risk 
B)  Specific risk 
C)  Unsystematic risk 
D)  Diversifiable risk 
A)  Market risk 
B)  Specific risk 
C)  Unsystematic risk 
D)  Diversifiable risk

Question 7

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

Accepted Answer

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

Question 8

When viewing the long-term trend of the price volatility of U.S.stocks,it is readily apparent that volatility has:

Accepted Answer

A)  continually increased. 
B)  continually decreased. 
C)  increased and decreased but has no specific pattern. 
D)  remained constant for years. 
A)  continually increased. 
B)  continually decreased. 
C)  increased and decreased but has no specific pattern. 
D)  remained constant for years.

Question 9

Which one of the following companies is most likely to be exposed to the least amount of macro risk?

Accepted Answer

A)  A producer of dog biscuits 
B)  A regional airline 
C)  A major commercial bank 
D)  A machine tool manufacturer 
A)  A producer of dog biscuits 
B)  A regional airline 
C)  A major commercial bank 
D)  A machine tool manufacturer

Question 10

Which one of the following security classes has the highest standard deviation of returns?

Accepted Answer

A)  Common stocks 
B)  Long-term Treasury bonds 
C)  Treasury bills 
D)  Corporate bonds 
A)  Common stocks 
B)  Long-term Treasury bonds 
C)  Treasury bills 
D)  Corporate bonds

Question 11

Over the past 3 years an investment returned 18%,−12%,and 15%.What is the variance of returns?

Accepted Answer

A)  231 
B)  182 
C)  546 
D)  961 
A)  231 
B)  182 
C)  546 
D)  961

Question 12

The S&P 500 accounts for most of the total market value of stocks traded in the United States.

Accepted Answer

A) True 
 B)False

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 specific 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 specific risk. 
D)  does not offer diversification potential.

Question 14

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 15

What was the percentage return on a non-dividend-paying stock that was purchased for $40.00 and then sold after one year for $39.00?

Accepted Answer

A)  −2.50% 
B)  −0.39% 
C)  −0.04% 
D)  −2.56% 
A)  −2.50% 
B)  −0.39% 
C)  −0.04% 
D)  −2.56%

Question 16

As you add more stocks to a portfolio:

Accepted Answer

A)  specific risk at first falls, then rises. 
B)  market risk is increasingly diversified away. 
C)  specific risk is increasingly diversified away. 
D)  market risk declines but specific risk rises. 
A)  specific risk at first falls, then rises. 
B)  market risk is increasingly diversified away. 
C)  specific risk is increasingly diversified away. 
D)  market risk declines but specific risk rises.

Question 17

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)  outperform when most stocks do poorly. 
D)  are negative in real terms. 
A)  continue to decrease, year after year. 
B)  continue to increase, year after year. 
C)  outperform when most stocks do poorly. 
D)  are negative in real terms.

Question 18

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

Accepted Answer

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

Question 19

Stock market indexes are found in many countries outside the United States.

Accepted Answer

A) True 
 B)False

Question 20

The wider the dispersion of returns on a stock,the:

Accepted Answer

A)  lower the expected rate of return. 
B)  higher the standard deviation. 
C)  lower the real rate of return. 
D)  lower the variance. 
A)  lower the expected rate of return. 
B)  higher the standard deviation. 
C)  lower the real rate of return. 
D)  lower the variance.

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

The major benefit of diversification is the:

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

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

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

Which one of these is the safest investment?

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

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

When viewing the long-term trend of the price volatility of U.S.stocks,it is readily apparent that volatility has:

Which one of the following companies is most likely to be exposed to the least amount of macro risk?

Which one of the following security classes has the highest standard deviation of returns?

Over the past 3 years an investment returned 18%,−12%,and 15%.What is the variance of returns?

The S&P 500 accounts for most of the total market value of stocks traded in the United States.

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

Which statement is correct concerning macro risk exposure?

What was the percentage return on a non-dividend-paying stock that was purchased for $40.00 and then sold after one year for $39.00?

As you add more stocks to a portfolio:

A firm is said to be countercyclical if its returns:

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

Stock market indexes are found in many countries outside the United States.

The wider the dispersion of returns on a stock,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

Filters