Question 1

Use the table for the question(s)below.
Consider the following realized annual returns:  
-Which of the following statements is FALSE?

Accepted Answer

A) Expected return should rise proportionately with volatility. 
B) Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return. 
C) Smaller stocks have lower volatility than larger stocks. 
D) The largest stocks are typically more volatile than a portfolio of large stocks. 
A) Expected return should rise proportionately with volatility. 
B) Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return. 
C) Smaller stocks have lower volatility than larger stocks. 
D) The largest stocks are typically more volatile than a portfolio of large stocks.

Question 2

Use the following information to answer the question(s)below.
Suppose that the market portfolio is equally likely to increase by 24% or decrease by 8%.Security "X" goes up on average by 29% when the market goes up and goes down by 11% when the market goes down.Security "Y" goes down on average by 16% when the market goes up and goes up by 16% when the market goes down.Security "Z" goes up on average by 4% when the market goes up and goes up by 4% when the market goes down.
-The beta for security "Y" is closest to:

Accepted Answer

A) -1.00 
B) -0.25 
C) 0.00 
D) 0.25 
A) -1.00 
B) -0.25 
C) 0.00 
D) 0.25

Question 3

The cost of capital for a project with the same beta as Merck's stock is closest to:

Accepted Answer

A) 11.2% 
B) 12.8% 
C) 12.4% 
D) 11.6% 
A) 11.2% 
B) 12.8% 
C) 12.4% 
D) 11.6%

Question 4

Use the table for the question(s)below.
Consider the following average annual returns:  
-Common risk is also called:

Accepted Answer

A) diversifiable risk. 
B) correlated risk. 
C) uncorrelated risk. 
D) independent risk. 
A) diversifiable risk. 
B) correlated risk. 
C) uncorrelated risk. 
D) independent risk.

Question 5

Use the table for the question(s)below.
Consider the following realized annual returns:  
-The variance of the returns on the Index from 2000 to 2009 is closest to:

Accepted Answer

A) .0450 
B) .3400 
C) .1935 
D) .0375 
A) .0450 
B) .3400 
C) .1935 
D) .0375

Question 6

Use the information for the question(s)below.
Consider an economy with two types of firms,S and I.S firms always move together,but I firms move independently of each other.For both types of firm there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.
-What is the expected return for an individual firm?

Accepted Answer

A) 14% 
B) 3% 
C) 5% 
D) -5% 
A) 14% 
B) 3% 
C) 5% 
D) -5%

Question 7

Use the table for the question(s)below.
Consider the following probability distribution of returns for Alpha Corporation:  
-Which of the following statements is FALSE?

Accepted Answer

A) We measure the degree of estimation error statistically through the standard error of the estimate. 
B) When focusing on the returns of a single security,its common practice to assume that all dividends are immediately invested at the risk-free rate. 
C) We estimate the standard deviation or volatility as the square root of the variance. 
D) We estimate the variance by computing the average squared deviation from the average realized return. 
A) We measure the degree of estimation error statistically through the standard error of the estimate. 
B) When focusing on the returns of a single security,its common practice to assume that all dividends are immediately invested at the risk-free rate. 
C) We estimate the standard deviation or volatility as the square root of the variance. 
D) We estimate the variance by computing the average squared deviation from the average realized return.

Question 8

Use the table for the question(s)below.
Consider the following three individuals portfolios consisting of investments in four stocks:  
-Which of the following investments had the largest fluctuations in overall return over the past eighty years?

Accepted Answer

A) Small stocks 
B) S&P 500 
C) Corporate bonds 
D) Treasury Bills 
A) Small stocks 
B) S&P 500 
C) Corporate bonds 
D) Treasury Bills

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) If the market portfolio were not efficient,investors could find strategies that would "beat the market" with higher average returns and lower risk. 
B) The CAPM states that the cost of capital depends only on systematic risk. 
C) Efficient capital markets is a much stronger hypothesis than the CAPM. 
D) The market portfolio is an efficient portfolio. 
A) If the market portfolio were not efficient,investors could find strategies that would "beat the market" with higher average returns and lower risk. 
B) The CAPM states that the cost of capital depends only on systematic risk. 
C) Efficient capital markets is a much stronger hypothesis than the CAPM. 
D) The market portfolio is an efficient portfolio.

Question 10

Use the table for the question(s)below.
Consider the following Price and Dividend data for J.P.Morgan Chase:  
-Assume that you purchased J.P.Morgan Chase stock at the closing price on December 31,2008 and sold it at the closing price on December 30,2009.Calculate your realized annual return is for the year 2005.

Accepted Answer

@#IMG-DLM& 
The Product of (1 + returns)

Question 11

Use the table for the question(s)below.
Consider the following probability distribution of returns for Alpha Corporation:  
-Suppose an investment is equally likely to have a 35% return or a -20% return.The standard deviation on the return for this investment is closest to:

Accepted Answer

A) 38.9% 
B) 0% 
C) 19.4% 
D) 27.5% 
A) 38.9% 
B) 0% 
C) 19.4% 
D) 27.5%

Question 12

If the expected return on the market is 11% and the risk-free rate is 4%,then the expected return of investing in IBM is closest to:

Accepted Answer

A) 9.1% 
B) 10.3% 
C) 11.0% 
D) 12.0% 
A) 9.1% 
B) 10.3% 
C) 11.0% 
D) 12.0%

Question 13

Use the table for the question(s)below.
Consider the following probability distribution of returns for Alpha Corporation:  
-Suppose an investment is equally likely to have a 35% return or a -20% return.The variance on the return for this investment is closest to:

Accepted Answer

A) .151 
B) .0378 
C) 0 
D) .075 
A) .151 
B) .0378 
C) 0 
D) .075

Question 14

Use the table for the question(s)below.
Consider the following average annual returns:  
-Do expected returns for individual stocks increase proportionately with volatility?

Accepted Answer

No,although there is a proport

Question 15

Use the information for the question(s)below.
Big Cure and Little Cure are both pharmaceutical companies.Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA)waiting for approval.If approved,Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure.Little Cure has 10 separate less important drugs before the FDA waiting for approval.If approved,each of Little Cure's drugs would produce $100 million in net income for Little Cure.The probability of the FDA approving a drug is 50%.
-Which of the following types of risk doesn't belong?

Accepted Answer

A) Market risk 
B) Unique risk 
C) Idiosyncratic risk 
D) Unsystematic risk 
A) Market risk 
B) Unique risk 
C) Idiosyncratic risk 
D) Unsystematic risk

Question 16

Use the information for the question(s)below.
Consider an economy with two types of firms,S and I.S firms always move together,but I firms move independently of each other.For both types of firm there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.
-The standard deviation for the return on an individual firm is closest to:

Accepted Answer

A) 23.0% 
B) 5.25% 
C) 15.0% 
D) 10.0% 
A) 23.0% 
B) 5.25% 
C) 15.0% 
D) 10.0%

Question 17

Use the table for the question(s)below.
Consider the following realized annual returns:  
-The standard deviation of the returns on the Index from 2000 to 2009 is closest to:

Accepted Answer

A) 19.5% 
B) 20.5% 
C) 3.8% 
D) 8.8% 
A) 19.5% 
B) 20.5% 
C) 3.8% 
D) 8.8%

Question 18

Use the table for the question(s)below.
Consider the following realized annual returns:  
-Suppose that you want to use the 10 year historical average return on Stock A to forecast the expected future return on Stock A.The standard error of your estimate of the expected return is closest to:

Accepted Answer

A) 16.4% 
B) 3.32% 
C) 10.49% 
D) 33.20% 
A) 16.4% 
B) 3.32% 
C) 10.49% 
D) 33.20%

Question 19

The cost of capital for a project with the same beta as Exxon Mobil's stock is closest to:

Accepted Answer

A) 11.6% 
B) 11.2% 
C) 12.8% 
D) 7.6% 
A) 11.6% 
B) 11.2% 
C) 12.8% 
D) 7.6%

Question 20

Use the table for the question(s)below.
Consider the following realized annual returns:  
-The geometric average annual return on the Index from 2000 to 2009 is closest to:

Accepted Answer

A) 9.75% 
B) 8.75% 
C) 7.10% 
D) 8.35% 
A) 9.75% 
B) 8.75% 
C) 7.10% 
D) 8.35%

Exam 10: Capital Markets and the Pricing of Risk

Use the table for the question(s)below. Consider the following realized annual returns: -Which of the following statements is FALSE?

The cost of capital for a project with the same beta as Merck's stock is closest to:

Use the table for the question(s)below. Consider the following average annual returns: -Common risk is also called:

Use the table for the question(s)below. Consider the following realized annual returns: -The variance of the returns on the Index from 2000 to 2009 is closest to:

Use the table for the question(s)below. Consider the following probability distribution of returns for Alpha Corporation: -Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following three individuals portfolios consisting of investments in four stocks: -Which of the following investments had the largest fluctuations in overall return over the past eighty years?

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following probability distribution of returns for Alpha Corporation: -Suppose an investment is equally likely to have a 35% return or a -20% return.The standard deviation on the return for this investment is closest to:

If the expected return on the market is 11% and the risk-free rate is 4%,then the expected return of investing in IBM is closest to:

Use the table for the question(s)below. Consider the following probability distribution of returns for Alpha Corporation: -Suppose an investment is equally likely to have a 35% return or a -20% return.The variance on the return for this investment is closest to:

Use the table for the question(s)below. Consider the following average annual returns: -Do expected returns for individual stocks increase proportionately with volatility?

Use the table for the question(s)below. Consider the following realized annual returns: -The standard deviation of the returns on the Index from 2000 to 2009 is closest to:

Use the table for the question(s)below. Consider the following realized annual returns: -Suppose that you want to use the 10 year historical average return on Stock A to forecast the expected future return on Stock A.The standard error of your estimate of the expected return is closest to:

The cost of capital for a project with the same beta as Exxon Mobil's stock is closest to:

Use the table for the question(s)below. Consider the following realized annual returns: -The geometric average annual return on the Index from 2000 to 2009 is closest to:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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