Question 1

Which of the following statements is false?

Accepted Answer

A)  Fluctuations of a stock's returns that are due to firm-specific news are common risks. 
B)  The volatility in a large portfolio will decline until only the systematic risk remains. 
C)  When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified. 
D)  The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk. 
A)  Fluctuations of a stock's returns that are due to firm-specific news are common risks. 
B)  The volatility in a large portfolio will decline until only the systematic risk remains. 
C)  When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified. 
D)  The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk.

Question 2

The geometric average annual return on the S&P 500 from 1996 to 2005 is closest to:

Accepted Answer

A)  9.75% 
B)  8.75% 
C)  7.15% 
D)  8.35% 
A)  9.75% 
B)  8.75% 
C)  7.15% 
D)  8.35%

Question 3

Which of the following statements is false?

Accepted Answer

A)  The standard error provides an indication of how far the sample average might deviate from the expected return. 
B)  The 95% confidence interval for the expected return is defined as the Historical Average Return plus or minus three standard errors. 
C)  We can use a security's historical average return to estimate its actual expected return. 
D)  The standard error is the standard deviation of the average return. 
A)  The standard error provides an indication of how far the sample average might deviate from the expected return. 
B)  The 95% confidence interval for the expected return is defined as the Historical Average Return plus or minus three standard errors. 
C)  We can use a security's historical average return to estimate its actual expected return. 
D)  The standard error is the standard deviation of the average return.

Question 4

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 dividend yield for this period is closest to:

Accepted Answer

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

Question 5

It is only those risks that ________ by holding a large portfolio that determine the ________ required by investors.

Accepted Answer

A)  can be eliminated; risk premium 
B)  can't be eliminated; rate of return 
C)  can be eliminated; rate of return 
D)  can't be eliminated; risk premium 
A)  can be eliminated; risk premium 
B)  can't be eliminated; rate of return 
C)  can be eliminated; rate of return 
D)  can't be eliminated; risk premium

Question 6

Which of the following statements is false?

Accepted Answer

A)  The compounded geometric average return is most often used for comparative purposes. 
B)  We should use the arithmetic average return when we are trying to estimate an investment's expected return over a future horizon based on its past performance. 
C)  The geometric average return will always be above the arithmetic average return and the difference grows with the volatility of the annual returns. 
D)  The geometric average return is a better description of the long-run historical performance of an investment. 
A)  The compounded geometric average return is most often used for comparative purposes. 
B)  We should use the arithmetic average return when we are trying to estimate an investment's expected return over a future horizon based on its past performance. 
C)  The geometric average return will always be above the arithmetic average return and the difference grows with the volatility of the annual returns. 
D)  The geometric average return is a better description of the long-run historical performance of an investment.

Question 7

The beta is the expected percent change in the excess return of a security for a 1% change in the ________ of the market portfolio.

Accepted Answer

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

Question 8

The excess return is the difference between the average return on a security and the average return for

Accepted Answer

A)  Treasury Bonds. 
B)  a portfolio of securities with similar risk. 
C)  a broad based market portfolio like the S&P/TSX Composite Index. 
D)  Treasury Bills. 
A)  Treasury Bonds. 
B)  a portfolio of securities with similar risk. 
C)  a broad based market portfolio like the S&P/TSX Composite Index. 
D)  Treasury Bills.

Question 9

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 Little Cure's ten drugs?

Accepted Answer

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

Question 10

Use the table for the question(s) below.
Consider the following average annual returns:
  
-What is the excess return for the portfolio of small stocks?

Accepted Answer

A)  10.0% 
B)  15.7% 
C)  18.4% 
D)  17.0% 
A)  10.0% 
B)  15.7% 
C)  18.4% 
D)  17.0%

Question 11

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 KAN's beta is 1.5.If the market risk premium is 8% and the risk-free interest rate is 4%,then then expected return for KAN stock is:

Accepted Answer

A)  8.0% 
B)  16.0% 
C)  13.5% 
D)  10.0% 
A)  8.0% 
B)  16.0% 
C)  13.5% 
D)  10.0%

Question 12

Which of the following statements is false?

Accepted Answer

A)  Because diversification improves with the number of stocks held in a portfolio, an efficient portfolio should be a large portfolio containing many different stocks. 
B)  The beta of a security is the sensitivity of the security's return to the return of the overall market. 
C)  An efficient portfolio cannot be diversified further; that is, there is no way to reduce the risk of the portfolio without lowering its expected return. 
D)  We call a portfolio that contains only unsystematic risk an efficient portfolio. 
A)  Because diversification improves with the number of stocks held in a portfolio, an efficient portfolio should be a large portfolio containing many different stocks. 
B)  The beta of a security is the sensitivity of the security's return to the return of the overall market. 
C)  An efficient portfolio cannot be diversified further; that is, there is no way to reduce the risk of the portfolio without lowering its expected return. 
D)  We call a portfolio that contains only unsystematic risk an efficient portfolio.

Question 13

Which of the following statements is false?

Accepted Answer

A)  Firm-specific news is good or bad news about the company itself. 
B)  Firms are affected by both systematic and firm-specific risk. 
C)  When firms carry both types of risk, only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio. 
D)  The risk premium for a stock is affected by its idiosyncratic risk. 
A)  Firm-specific news is good or bad news about the company itself. 
B)  Firms are affected by both systematic and firm-specific risk. 
C)  When firms carry both types of risk, only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio. 
D)  The risk premium for a stock is affected by its idiosyncratic risk.

Question 14

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 at the closing price on December 30,2005.Your realized annual return for the year 2005 is closest to:

Accepted Answer

A)  -45.1% 
B)  -44.5% 
C)  -48.5% 
D)  -47.3% 
A)  -45.1% 
B)  -44.5% 
C)  -48.5% 
D)  -47.3%

Question 15

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

Accepted Answer

A)  6.67% 
B)  5.00% 
C)  10% 
D)  0.00% 
A)  6.67% 
B)  5.00% 
C)  10% 
D)  0.00%

Question 16

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 Luther Corporation's beta is 0.9.If the market risk premium is 8% and the risk-free interest rate is 4%,then then expected return for Luther stock is:

Accepted Answer

A)  7.6% 
B)  11.6% 
C)  11.2% 
D)  12.9% 
A)  7.6% 
B)  11.6% 
C)  11.2% 
D)  12.9%

Question 17

Which of the following investments had the largest fluctuations in overall return over the past fifty years?

Accepted Answer

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

Question 18

Common risk is also called

Accepted Answer

A)  firm-specific risk. 
B)  unsystematic risk. 
C)  undiversifiable risk. 
D)  idiosyncratic risk. 
A)  firm-specific risk. 
B)  unsystematic risk. 
C)  undiversifiable risk. 
D)  idiosyncratic risk.

Question 19

Independent risk is also called

Accepted Answer

A)  market risk. 
B)  systematic risk. 
C)  undiversifiable risk. 
D)  idiosyncratic risk. 
A)  market risk. 
B)  systematic risk. 
C)  undiversifiable risk. 
D)  idiosyncratic risk.

Question 20

The standard deviation of the returns on IBM from 1996 to 2005 is closest to:

Accepted Answer

A)  33.2% 
B)  16.4% 
C)  31.5% 
D)  11.0% 
A)  33.2% 
B)  16.4% 
C)  31.5% 
D)  11.0%

Exam 10: Capital Markets and the Pricing of Risk

Which of the following statements is false?

The geometric average annual return on the S&P 500 from 1996 to 2005 is closest to:

Which of the following statements is false?

It is only those risks that ________ by holding a large portfolio that determine the ________ required by investors.

Which of the following statements is false?

The beta is the expected percent change in the excess return of a security for a 1% change in the ________ of the market portfolio.

The excess return is the difference between the average return on a security and the average return for

Use the table for the question(s) below. Consider the following average annual returns: -What is the excess return for the portfolio of small stocks?

Which of the following statements is false?

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: -The expected return for Alpha Corporation is closest to:

Which of the following investments had the largest fluctuations in overall return over the past fifty years?

Common risk is also called

Independent risk is also called

The standard deviation 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

Filters

It is only those risks that by holding a large portfolio that determine the required by investors.