Question 1

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 A

Question 2

The geometric average annual return on IBM from 1996 to 2005 is closest to:

Accepted Answer

A)  12.5% 
B)  16.7% 
C)  13.2% 
D)  17.8% 
A)  12.5% 
B)  16.7% 
C)  13.2% 
D)  17.8% A

Question 3

Which of the following statements is false?

Accepted Answer

A)  The expected return is the return that actually occurs over a particular time period. 
B)  If you hold the stock beyond the date of the first dividend, then to compute your return you must specify how you invest any dividends you receive in the interim. 
C)  The average annual return of an investment during some historical period is simply the average of the realized returns for each year. 
D)  The realized return is the total return we earn from dividends and capital gains, expressed as a percentage of the initial stock price. 
A)  The expected return is the return that actually occurs over a particular time period. 
B)  If you hold the stock beyond the date of the first dividend, then to compute your return you must specify how you invest any dividends you receive in the interim. 
C)  The average annual return of an investment during some historical period is simply the average of the realized returns for each year. 
D)  The realized return is the total return we earn from dividends and capital gains, expressed as a percentage of the initial stock price. A

Question 4

The standard deviation of the returns on the S&P 500 from 1996 to 2005 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 5

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)  0.151 
B)  0.0378 
C)  0 
D)  0.075 
A)  0.151 
B)  0.0378 
C)  0 
D)  0.075

Question 6

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 7

Which of the following investment opportunities provides lowest average annual return?

Accepted Answer

A)  S&P/TSX Composite Index 
B)  S&P 500 Index in Canadian Dollars 
C)  Canadian Treasury Bills 
D)  Long-Term Government of Canada Bonds 
A)  S&P/TSX Composite Index 
B)  S&P 500 Index in Canadian Dollars 
C)  Canadian Treasury Bills 
D)  Long-Term Government of Canada Bonds

Question 8

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 the Market to forecast the expected future return on the S&P 500.Calculate the 95% confidence interval for your estimate of the expect return.

Accepted Answer

R_annual= @#IMG-DLM& = @#IMG-DLM& = 10.93% @#IMG-DLM& Variance = SUM of (R -

Question 9

Use the table for the question(s) below.
Consider the following probability distribution of returns for Alpha Corporation:
  
-The standard deviation of the return on Alpha Corporation is closest to:

Accepted Answer

A)  22.4% 
B)  19.0% 
C)  21.8% 
D)  19.4% 
A)  22.4% 
B)  19.0% 
C)  21.8% 
D)  19.4%

Question 10

Which of the following statements is false?

Accepted Answer

A)  The standard deviation is the square root of the variance. 
B)  Because investors dislike only negative resolutions of uncertainty, alternative measures that focus solely on downside risk have been developed, such as the semi-variance and the expected tail loss. 
C)  While the variance and the standard deviation are the most common measures of risk, they do not differentiate between upside and downside risk. 
D)  While the variance and the standard deviation both measure the variability of the returns, the variance is easier to interpret because it is in the same units as the returns themselves. 
A)  The standard deviation is the square root of the variance. 
B)  Because investors dislike only negative resolutions of uncertainty, alternative measures that focus solely on downside risk have been developed, such as the semi-variance and the expected tail loss. 
C)  While the variance and the standard deviation are the most common measures of risk, they do not differentiate between upside and downside risk. 
D)  While the variance and the standard deviation both measure the variability of the returns, the variance is easier to interpret because it is in the same units as the returns themselves.

Question 11

Which of the following investments offered the highest overall return over the past fifty years?

Accepted Answer

A)  Canadian Treasury Bills 
B)  S&P 500 index in Canadian dollars 
C)  S&P/TSX Composite Index 
D)  Long-Term Government of Canada Bonds 
A)  Canadian Treasury Bills 
B)  S&P 500 index in Canadian dollars 
C)  S&P/TSX Composite Index 
D)  Long-Term Government of Canada Bonds

Question 12

Which of the following investment opportunities provides highest average annual return?

Accepted Answer

A)  Barrick Gold Corp. 
B)  S&P/TSX Composite Index 
C)  Long-Term Government of Canada Bonds 
D)  Canadian Treasury Bills 
A)  Barrick Gold Corp. 
B)  S&P/TSX Composite Index 
C)  Long-Term Government of Canada Bonds 
D)  Canadian Treasury Bills

Question 13

The standard deviation for the return on an portfolio of 20 type S firms is closest to:

Accepted Answer

A)  5.10% 
B)  23.0% 
C)  15.0% 
D)  5.25% 
A)  5.10% 
B)  23.0% 
C)  15.0% 
D)  5.25%

Question 14

Suppose that you want to use the 10 year historical average return on IBM to forecast the expected future return on IBM.The 95% confidence interval for your estimate of the expect return is closest to:

Accepted Answer

A)  13.2% to 19.5% 
B)  -4.5% to 37.4% 
C)  6.5% to 26.3% 
D)  -15.1% to 47.8% 
A)  13.2% to 19.5% 
B)  -4.5% to 37.4% 
C)  6.5% to 26.3% 
D)  -15.1% to 47.8%

Question 15

What is the market portfolio?

Accepted Answer

The portfolio that contains al

Question 16

Which of the following statements is false?

Accepted Answer

A)  For large portfolios of stocks, 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)  For large portfolios of stocks, 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 17

Which of the following equations is incorrect?

Accepted Answer

A)  Var(R) =   
B)  SD(R) =   
C)  Var(R) =   PR × (R - E[R])2 
D)  E[R] =   PR × R 
A)  Var(R) =   
B)  SD(R) =   
C)  Var(R) =   PR × (R - E[R])2 
D)  E[R] =   PR × R

Question 18

Use the information for the question(s) below.
Suppose the market portfolio's excess return tends to increase by 30% when the economy is strong and decline by 20% when the economy is weak. A type S firm has excess returns increase by 45% when the economy is strong and decrease by 30% when the economy is weak. A type I firm will also have excess returns of either 45% or -30%, but the type I firm's excess returns will depend only upon firm-specific events and will be completely independent of the state of the economy.
-Suppose that Gold Digger's beta is -0.8.If the market risk premium is 8% and the risk-free interest rate is 4%,then then expected return for Gold Digger's stock is:

Accepted Answer

A)  -2.4% 
B)  4.8% 
C)  2.4% 
D)  10.4% 
A)  -2.4% 
B)  4.8% 
C)  2.4% 
D)  10.4%

Question 19

The Capital Asset Pricing Model (CAPM)is mainly used to estimate the ________ and cost of capital.

Accepted Answer

A)  expected return 
B)  excess return 
C)  average return 
D)  annual return 
A)  expected return 
B)  excess return 
C)  average return 
D)  annual return

Question 20

Use the table for the question(s) below.
Consider the following realized annual returns:
  
-The variance of the returns on IBM from 1996 to 2005 is closest to:

Accepted Answer

A)  0.3145 
B)  0.0990 
C)  0.1100 
D)  0.9890 
A)  0.3145 
B)  0.0990 
C)  0.1100 
D)  0.9890

Exam 10: Capital Markets and the Pricing of Risk

Which of the following types of risk doesn't belong?

The geometric average annual return on IBM from 1996 to 2005 is closest to:

Which of the following statements is false?

The standard deviation of the returns on the S&P 500 from 1996 to 2005 is closest to:

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:

The standard deviation for the return on an individual firm is closest to:

Which of the following investment opportunities provides lowest average annual return?

Use the table for the question(s) below. Consider the following probability distribution of returns for Alpha Corporation: -The standard deviation of the return on Alpha Corporation is closest to:

Which of the following statements is false?

Which of the following investments offered the highest overall return over the past fifty years?

Which of the following investment opportunities provides highest average annual return?

The standard deviation for the return on an portfolio of 20 type S firms is closest to:

Suppose that you want to use the 10 year historical average return on IBM to forecast the expected future return on IBM.The 95% confidence interval for your estimate of the expect return is closest to:

What is the market portfolio?

Which of the following statements is false?

Which of the following equations is incorrect?

The Capital Asset Pricing Model (CAPM)is mainly used to estimate the ________ and cost of capital.

Use the table for the question(s) below. Consider the following realized annual returns: -The variance of the returns on IBM from 1996 to 2005 is closest to:

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

The Mechanics of 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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