Question 1

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 2

Which of the following statements is false?

Accepted Answer

A)  The Capital Asset Pricing Model is the most important method for estimating the cost of capital that is used in practice. 
B)  Because the risk that determines expected returns is unsystematic risk, which is measured by beta, the cost of capital for an investment is the expected return available on securities with the same beta. 
C)  A common assumption is that the project has the same risk as the firm. 
D)  To determine a project's cost of capital we need to estimate its beta. 
A)  The Capital Asset Pricing Model is the most important method for estimating the cost of capital that is used in practice. 
B)  Because the risk that determines expected returns is unsystematic risk, which is measured by beta, the cost of capital for an investment is the expected return available on securities with the same beta. 
C)  A common assumption is that the project has the same risk as the firm. 
D)  To determine a project's cost of capital we need to estimate its beta.

Question 3

The ________ average return on stocks as compensation to investors for the ________ risk they are taking.

Accepted Answer

A)  higher; lower 
B)  higher; greater 
C)  lower; greater 
D)  lower; higher 
A)  higher; lower 
B)  higher; greater 
C)  lower; greater 
D)  lower; higher

Question 4

If a stock pays dividends at the end of each quarter,with realized returns of R1,R2,R3,and R4 each quarter,then the annual realized return is calculated as

Accepted Answer

A)  Rannual =   
B)  Rannual = (1 + R1)(1 + R2)(1 + R3)(1 + R4) 
C)  Rannual = (1 + R1)(1 + R2)(1 + R3)(1 + R4) - 1 
D)  Rannual = R1 + R2 + R3 + R4 
A)  Rannual =   
B)  Rannual = (1 + R1)(1 + R2)(1 + R3)(1 + R4) 
C)  Rannual = (1 + R1)(1 + R2)(1 + R3)(1 + R4) - 1 
D)  Rannual = R1 + R2 + R3 + R4

Question 5

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

Accepted Answer

A)  29.9% 
B)  16.45% 
C)  18.2% 
D)  18.7% 
A)  29.9% 
B)  16.45% 
C)  18.2% 
D)  18.7%

Question 6

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

Accepted Answer

A)  Idiosyncratic risk 
B)  Undiversifiable risk 
C)  Market risk 
D)  Systematic risk 
A)  Idiosyncratic risk 
B)  Undiversifiable risk 
C)  Market risk 
D)  Systematic risk

Question 7

Use the table for the question(s) below.
Consider the following Price and Dividend data for Ford Motor Company:
  
-Assume that you purchased Ford Motor Company stock at the closing price on December 31,2004 and sold it after the dividend had been paid at the closing price on January 26,2005.Your capital gains rate (yield)for this period is closest to:

Accepted Answer

A)  0.75% 
B)  0.70% 
C)  -8.80% 
D)  -8.15% 
A)  0.75% 
B)  0.70% 
C)  -8.80% 
D)  -8.15%

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%.
-The standard deviation of Little Cure's average net income for their ten new drugs is closest to:

Accepted Answer

A)  $50 million 
B)  $25 million 
C)  $16 million 
D)  $500 million 
A)  $50 million 
B)  $25 million 
C)  $16 million 
D)  $500 million

Question 9

Which of the following statements is false?

Accepted Answer

A)  Beta differs from volatility. 
B)  The risk premium investors can earn by holding the market portfolio is the difference between the market portfolio's expected return and the risk-free interest rate. 
C)  Stocks in cyclical industries, in which revenues tend to vary greatly over the business cycle, are likely to be more sensitive to systematic risk and have higher betas than stocks in less sensitive industries. 
D)  If we assume that the market portfolio (or the S&P 500) is efficient, then changes in the value of the market portfolio represent unsystematic shocks to the economy. 
A)  Beta differs from volatility. 
B)  The risk premium investors can earn by holding the market portfolio is the difference between the market portfolio's expected return and the risk-free interest rate. 
C)  Stocks in cyclical industries, in which revenues tend to vary greatly over the business cycle, are likely to be more sensitive to systematic risk and have higher betas than stocks in less sensitive industries. 
D)  If we assume that the market portfolio (or the S&P 500) is efficient, then changes in the value of the market portfolio represent unsystematic shocks to the economy.

Question 10

Suppose an investment is equally likely to have a 35% return or a - 20% return.The expected return for this investment is closest to:

Accepted Answer

A)  7.5% 
B)  15% 
C)  5% 
D)  10% 
A)  7.5% 
B)  15% 
C)  5% 
D)  10%

Question 11

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

Accepted Answer

A)  0.0500 
B)  0.0475 
C)  0.03625 
D)  0.0375 
A)  0.0500 
B)  0.0475 
C)  0.03625 
D)  0.0375

Question 12

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

Accepted Answer

A)  7.10% 
B)  4.00% 
C)  9.75% 
D)  8.82% 
A)  7.10% 
B)  4.00% 
C)  9.75% 
D)  8.82%

Question 13

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 95% confidence interval for your estimate of the expect return is closest to:

Accepted Answer

A)  -10.6% to 28.2% 
B)  6.8% to 10.7% 
C)  -37.0% to 47.6% 
D)  -3.5% to 21.1% 
A)  -10.6% to 28.2% 
B)  6.8% to 10.7% 
C)  -37.0% to 47.6% 
D)  -3.5% to 21.1%

Question 14

Do expected returns for individual stocks increase proportionately with volatility?

Accepted Answer

No,although there is a proport

Question 15

Which of the following statements is false?

Accepted Answer

A)  The variance increases with the magnitude of the deviations from the mean. 
B)  The variance is the expected squared deviation from the mean. 
C)  Two common measures of the risk of a probability distribution are its variance and standard deviation. 
D)  If the return is riskless and never deviates from its mean, the variance is equal to one. 
A)  The variance increases with the magnitude of the deviations from the mean. 
B)  The variance is the expected squared deviation from the mean. 
C)  Two common measures of the risk of a probability distribution are its variance and standard deviation. 
D)  If the return is riskless and never deviates from its mean, the variance is equal to one.

Question 16

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 the market from 1996 to 2005.

Accepted Answer

R_annual= @#IMG-DLM& = @#IMG-DLM& = 10.93% @#IMG-DLM& Variance = S

Question 17

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, it is 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, it is 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 18

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 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 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 expected payoff for Big Cure's blockbuster drug?

Accepted Answer

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

Exam 10: Capital Markets and the Pricing of Risk

Common risk is also called

Which of the following statements is false?

The ________ average return on stocks as compensation to investors for the ________ risk they are taking.

If a stock pays dividends at the end of each quarter,with realized returns of R1,R2,R3,and R4 each quarter,then the annual realized return is calculated as

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

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

Which of the following statements is false?

Suppose an investment is equally likely to have a 35% return or a - 20% return.The expected return for this investment is closest to:

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

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

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 95% confidence interval for your estimate of the expect return is closest to:

Do expected returns for individual stocks increase proportionately with volatility?

Which of the following statements is false?

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 the market from 1996 to 2005.

Which of the following statements is false?

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:

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

Filters

The average return on stocks as compensation to investors for the risk they are taking.

If a stock pays dividends at the end of each quarter,with realized returns of R₁,R₂,R₃,and R₄ each quarter,then the annual realized return is calculated as