Question 1

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 2

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

Accepted Answer

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

Question 3

From historical data,it has been evident in investment that the average annual return has ________ relationship with the volatility.

Accepted Answer

A)  a positive 
B)  a negative 
C)  no 
D)  none of the above 
A)  a positive 
B)  a negative 
C)  no 
D)  none of the above

Question 4

Which of the following statements is correct?

Accepted Answer

A)  The return indicates the percentage increase in the value of an investment per dollar initially invested in the security. 
B)  The return indicates the average increase in the value of an investment per dollar initially invested in the security. 
C)  The return indicates the weighted average increase in the value of an investment per dollar initially invested in the security. 
D)  The return indicates the exponential increase in the value of an investment per dollar initially invested in the security. 
A)  The return indicates the percentage increase in the value of an investment per dollar initially invested in the security. 
B)  The return indicates the average increase in the value of an investment per dollar initially invested in the security. 
C)  The return indicates the weighted average increase in the value of an investment per dollar initially invested in the security. 
D)  The return indicates the exponential increase in the value of an investment per dollar initially invested in the security.

Question 5

Which pharmaceutical company faces less risk?

Accepted Answer

Little Cure,because it has a lower stand

Question 6

Which of the following statements is false?

Accepted Answer

A)  Beta measures the sensitivity of a security to market-wide risk factors. 
B)  Volatility measures total risk, while beta measures only systematic risk. 
C)  The beta is the expected percentage change in the excess return of the market portfolio for a 1% change in the excess return of a security. 
D)  Utilities tend to be stable and highly regulated, and thus are insensitive to fluctuations in the overall market. 
A)  Beta measures the sensitivity of a security to market-wide risk factors. 
B)  Volatility measures total risk, while beta measures only systematic risk. 
C)  The beta is the expected percentage change in the excess return of the market portfolio for a 1% change in the excess return of a security. 
D)  Utilities tend to be stable and highly regulated, and thus are insensitive to fluctuations in the overall market.

Question 7

Suppose that you want to use the 10 year historical average return on the S&P 500 to forecast the expected future return on the S&P 500.The standard error of your estimate of the expect return is closest to:

Accepted Answer

A)  19.4% 
B)  3.8% 
C)  8.8% 
D)  6.15% 
A)  19.4% 
B)  3.8% 
C)  8.8% 
D)  6.15%

Question 8

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%.
-What is the standard deviation of Big Cure's average net income for their new blockbuster drug?

Accepted Answer

A)  $0 
B)  $1 billion 
C)  $100 million 
D)  $500 million 
A)  $0 
B)  $1 billion 
C)  $100 million 
D)  $500 million

Question 9

Which of the following is NOT a systematic risk?

Accepted Answer

A)  The risk that oil prices rise, increasing production costs 
B)  The risk that the Bank of Canada raises interest rates 
C)  The risk that the economy slows, reducing demand for your firm's products 
D)  The risk that your new product will not receive regulatory approval 
A)  The risk that oil prices rise, increasing production costs 
B)  The risk that the Bank of Canada raises interest rates 
C)  The risk that the economy slows, reducing demand for your firm's products 
D)  The risk that your new product will not receive regulatory approval

Question 10

Independent risk is also called

Accepted Answer

A)  undiversifiable risk. 
B)  systematic risk. 
C)  uncorrelated risk. 
D)  autocorrelated risk. 
A)  undiversifiable risk. 
B)  systematic risk. 
C)  uncorrelated risk. 
D)  autocorrelated risk.

Question 11

Use the table for the question(s) below.
Consider the following average annual returns:
  
-What is the excess return for Treasury Bills?

Accepted Answer

A)  0% 
B)  -8.4% 
C)  -2.7% 
D)  -1.4% 
A)  0% 
B)  -8.4% 
C)  -2.7% 
D)  -1.4%

Question 12

Use the table for the question(s) below.
Consider the following realized annual returns:
  
-Using the data provided in the table,calculate the average annual return,the variance of the annual returns,and the standard deviation of the average returns for Microsoft from 1996 to 2005.

Accepted Answer

R_annual= @#IMG-DLM& = @#IMG-DLM& = 31.1% @#IMG-DLM& Variance = SU

Question 13

Use the information for the question(s) below.
Suppose that in the coming year, you expect Exxon-Mobil stock to have a volatility of 42% and a beta of 0.9, and Merck's stock to have a volatility of 24% and a beta of 1.1. The risk free interest rate is 4% and the market's expected return is 12%.
-Which stock has the highest total risk?

Accepted Answer

A)  Merck, since it has a lower volatility. 
B)  Merck, since it has a higher beta. 
C)  Exxon-Mobil, since it has a higher volatility. 
D)  Exxon-Mobil, since it has a lower beta. 
A)  Merck, since it has a lower volatility. 
B)  Merck, since it has a higher beta. 
C)  Exxon-Mobil, since it has a higher volatility. 
D)  Exxon-Mobil, since it has a lower beta.

Question 14

In ________,in terms of realized return 3-month Canadian T-Bills performed better than both Barrick stock and the S&P/TSX Composite Index.

Accepted Answer

A)  1998 
B)  1999 
C)  2002 
D)  2007 
A)  1998 
B)  1999 
C)  2002 
D)  2007

Question 15

Suppose that you want to use the 10 year historical average return on IBM to forecast the expected future return on IBM.The standard error of your estimate of the expect return is closest to:

Accepted Answer

A)  16.4% 
B)  10.50% 
C)  3.15% 
D)  33.20% 
A)  16.4% 
B)  10.50% 
C)  3.15% 
D)  33.20%

Question 16

Which of the following statements is false?

Accepted Answer

A)  When an investment is risky, there are different returns it may earn. 
B)  In finance, the variance of a return is also referred to as its volatility. 
C)  The expected or mean return is calculated as a weighted average of the possible returns, where the weights correspond to the probabilities. 
D)  The variance is a measure of how "spread out" the distribution of the return is. 
A)  When an investment is risky, there are different returns it may earn. 
B)  In finance, the variance of a return is also referred to as its volatility. 
C)  The expected or mean return is calculated as a weighted average of the possible returns, where the weights correspond to the probabilities. 
D)  The variance is a measure of how "spread out" the distribution of the return is.

Question 17

The average capitalization of the firms in the S&P/TSX Composite Index is about

Accepted Answer

A)  $5.67 billion. 
B)  $400 million. 
C)  $60 billion. 
D)  $25 billion. 
A)  $5.67 billion. 
B)  $400 million. 
C)  $60 billion. 
D)  $25 billion.

Question 18

Which of the following statements is false?

Accepted Answer

A)  The portfolio that contains all shares of all stocks and securities in the market is called the efficient portfolio. 
B)  The market portfolio is an efficient portfolio. 
C)  We can measure the systematic risk of a security's return by its beta. 
D)  Because it is difficult to find data for the returns of many bonds and small stocks, it is common practice to use the S&P 500 portfolio as a proxy for the market portfolio, under the assumption that the S&P 500 is large enough to be essentially fully diversified. 
A)  The portfolio that contains all shares of all stocks and securities in the market is called the efficient portfolio. 
B)  The market portfolio is an efficient portfolio. 
C)  We can measure the systematic risk of a security's return by its beta. 
D)  Because it is difficult to find data for the returns of many bonds and small stocks, it is common practice to use the S&P 500 portfolio as a proxy for the market portfolio, under the assumption that the S&P 500 is large enough to be essentially fully diversified.

Question 19

Use the table for the question(s) below.
Consider the following realized annual returns:
  
-The variance of the returns on the S&P 500 from 1996 to 2005 is closest to:

Accepted Answer

A)  0.0450 
B)  0.3400 
C)  0.1935 
D)  0.0375 
A)  0.0450 
B)  0.3400 
C)  0.1935 
D)  0.0375

Question 20

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

Accepted Answer

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

Exam 10: Capital Markets and the Pricing of Risk

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

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

From historical data,it has been evident in investment that the average annual return has ________ relationship with the volatility.

Which of the following statements is correct?

Which pharmaceutical company faces less risk?

Which of the following statements is false?

Suppose that you want to use the 10 year historical average return on the S&P 500 to forecast the expected future return on the S&P 500.The standard error of your estimate of the expect return is closest to:

Which of the following is NOT a systematic risk?

Independent risk is also called

Use the table for the question(s) below. Consider the following average annual returns: -What is the excess return for Treasury Bills?

Use the table for the question(s) below. Consider the following realized annual returns: -Using the data provided in the table,calculate the average annual return,the variance of the annual returns,and the standard deviation of the average returns for Microsoft from 1996 to 2005.

In ________,in terms of realized return 3-month Canadian T-Bills performed better than both Barrick stock and the S&P/TSX Composite Index.

Suppose that you want to use the 10 year historical average return on IBM to forecast the expected future return on IBM.The standard error of your estimate of the expect return is closest to:

Which of the following statements is false?

The average capitalization of the firms in the S&P/TSX Composite Index is about

Which of the following statements is false?

Use the table for the question(s) below. Consider the following realized annual returns: -The variance of the returns on the S&P 500 from 1996 to 2005 is closest to:

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

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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