Question 1

Consider the following average annual returns:
 
What is the excess return for the S&P 500?

Accepted Answer

A)  11.5% 
B)  16.3% 
C)  0% 
D)  9.3% 
A)  11.5% 
B)  16.3% 
C)  0% 
D)  9.3%

Question 2

Your investment over one year yielded a capital gains yield of 5% and no dividend yield. If the sale price was $114 per share, what was the cost of the investment?

Accepted Answer

A)  $119.43 
B)  $103.14 
C)  $108.57 
D)  $114.00 
A)  $119.43 
B)  $103.14 
C)  $108.57 
D)  $114.00

Question 3

Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $100. What was your dividend yield and capital gains yield on the investment?

Accepted Answer

A)  2%, 2% 
B)  0%, 2% 
C)  3%, 2% 
D)  2%, 0% 
A)  2%, 2% 
B)  0%, 2% 
C)  3%, 2% 
D)  2%, 0%

Question 4

Consider the following average annual returns:
 
What is the excess return for the portfolio of small stocks?

Accepted Answer

A)  11.7% 
B)  16.6% 
C)  19.5% 
D)  17.6% 
A)  11.7% 
B)  16.6% 
C)  19.5% 
D)  17.6%

Question 5

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 firms there is a 60% probability that the firm will have a 20% return and a 40% probability that the firm will have a -30% return.
The standard deviation for the return on a portfolio of 20 type I firms is closest to ________.

Accepted Answer

A)  0.00% 
B)  12.25% 
C)  5.48% 
D)  24.49% 
A)  0.00% 
B)  12.25% 
C)  5.48% 
D)  24.49%

Question 6

Which of the following statements is FALSE?

Accepted Answer

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

Question 7

If asset A's return is exactly two times asset B's return, then following risk return tradeoff, the standard deviation of asset A should be ________ times the standard deviation of asset B.

Accepted Answer

A)  3 
B)  2 
C)  1 
D)  4 
A)  3 
B)  2 
C)  1 
D)  4

Question 8

While ________ seems to be a reasonable measure of risk when evaluating a large portfolio, the ________ of an individual security does not explain the size of its average return.

Accepted Answer

A)  volatility, volatility 
B)  the mean return, standard deviation 
C)  mode, volatility 
D)  mode, mean return 
A)  volatility, volatility 
B)  the mean return, standard deviation 
C)  mode, volatility 
D)  mode, mean return

Question 9

The standard deviation of returns of ________.
I. small stocks is higher than that of large stocks
II. large stocks is lower than that of corporate bonds
III. corporate bonds is higher than that of Treasury bills
Which statement is true?

Accepted Answer

A)  I and III 
B)  I, II, and III 
C)  I and II 
D)  I only 
A)  I and III 
B)  I, II, and III 
C)  I and II 
D)  I only

Question 10

There is a clear link between the volatility of returns for individual stocks and the returns for individual stocks.

Accepted Answer

A) True 
 B)False

Question 11

Comment on the accuracy of the statement that as we put more stocks in a portfolio, its risk gets eliminated to zero.

Accepted Answer

This is an inaccurate statemen

Question 12

Investors should earn a risk premium for bearing unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is NOT a diversifiable risk?

Accepted Answer

A)  the risk that oil prices rise, increasing production costs 
B)  the risk that the CEO is killed in a plane crash 
C)  the risk of a key employee being hired away by a competitor 
D)  the risk of a product liability lawsuit 
A)  the risk that oil prices rise, increasing production costs 
B)  the risk that the CEO is killed in a plane crash 
C)  the risk of a key employee being hired away by a competitor 
D)  the risk of a product liability lawsuit

Question 14

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 ten 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. The probability of the FDA approving a drug is 40%.
What is the expected payoff for Big Cure's blockbuster drug?

Accepted Answer

A)  $100 million 
B)  $0 
C)  $1 billion 
D)  $400 million 
A)  $100 million 
B)  $0 
C)  $1 billion 
D)  $400 million

Question 15

Rational investors ________ fluctuations in the value of their investments.

Accepted Answer

A)  are averse to 
B)  prefer 
C)  are indifferent to 
D)  are in favor of 
A)  are averse to 
B)  prefer 
C)  are indifferent to 
D)  are in favor of

Question 16

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 firms 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 portfolio of 20 type S firms is closest to ________.

Accepted Answer

A)  13.75% 
B)  22.91% 
C)  5.00% 
D)  4.58% 
A)  13.75% 
B)  22.91% 
C)  5.00% 
D)  4.58%

Question 17

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

Accepted Answer

A)  Treasury bills 
B)  S&P 500 
C)  small stocks 
D)  corporate bonds 
A)  Treasury bills 
B)  S&P 500 
C)  small stocks 
D)  corporate bonds

Question 18

Consider the following realized annual returns:
 
The average annual return on IBM from 1996 to 2005 is closest to ________.

Accepted Answer

A)  18.48% 
B)  16.07% 
C)  19.28% 
D)  28.93% 
A)  18.48% 
B)  16.07% 
C)  19.28% 
D)  28.93%

Question 19

McCoy paid a one-time special dividend of $3.40 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $63.52. What was your realized return from holding McCoy?

Accepted Answer

A)  4.24% 
B)  6.36% 
C)  33.91% 
D)  42.38% 
A)  4.24% 
B)  6.36% 
C)  33.91% 
D)  42.38%

Question 20

What is the diversification achieved by an investor if he invests in Dell, IBM, and Microsoft?

Accepted Answer

There will not be much diversi

Exam 11: Risk and Return in Capital Markets

Consider the following average annual returns: What is the excess return for the S&P 500?

Your investment over one year yielded a capital gains yield of 5% and no dividend yield. If the sale price was $114 per share, what was the cost of the investment?

Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $100. What was your dividend yield and capital gains yield on the investment?

Consider the following average annual returns: What is the excess return for the portfolio of small stocks?

Which of the following statements is FALSE?

If asset A's return is exactly two times asset B's return, then following risk return tradeoff, the standard deviation of asset A should be ________ times the standard deviation of asset B.

While ________ seems to be a reasonable measure of risk when evaluating a large portfolio, the ________ of an individual security does not explain the size of its average return.

The standard deviation of returns of ________. I. small stocks is higher than that of large stocks II. large stocks is lower than that of corporate bonds III. corporate bonds is higher than that of Treasury bills Which statement is true?

There is a clear link between the volatility of returns for individual stocks and the returns for individual stocks.

Comment on the accuracy of the statement that as we put more stocks in a portfolio, its risk gets eliminated to zero.

Investors should earn a risk premium for bearing unsystematic risk.

Which of the following is NOT a diversifiable risk?

Rational investors ________ fluctuations in the value of their investments.

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

Consider the following realized annual returns: The average annual return on IBM from 1996 to 2005 is closest to ________.

McCoy paid a one-time special dividend of $3.40 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $63.52. What was your realized return from holding McCoy?

What is the diversification achieved by an investor if he invests in Dell, IBM, and Microsoft?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

While seems to be a reasonable measure of risk when evaluating a large portfolio, the of an individual security does not explain the size of its average return.