Question 1

Independent risk is more closely related to ________.

Accepted Answer

A)  unsystematic risk 
B)  systematic risk 
C)  common risk 
D)  diversification risk 
A)  unsystematic risk 
B)  systematic risk 
C)  common risk 
D)  diversification risk

Question 2

Which type of investment has historically had the lowest volatility?

Accepted Answer

Investments in Treas

Question 3

What is the diversification achieved by an investor if he invests in Exxon Mobil, Dell, and Bank of America?

Accepted Answer

The three stocks Exxon Mobil, Dell, and

Question 4

You purchased Alpha Innovative Inc. stock at a price of $25 per share. Its price was $15 after six months and the company declared bankruptcy at the end of the next six months. The realized return over the last year is ________.

Accepted Answer

A)  -99% 
B)  -75% 
C)  -150% 
D)  -100% 
A)  -99% 
B)  -75% 
C)  -150% 
D)  -100%

Question 5

On average, stocks have delivered higher returns than bonds in the long run.

Accepted Answer

A) True 
 B)False

Question 6

Suppose you invested $79 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.41 today and then you sold it for $66. What was your return on the investment?

Accepted Answer

A)  -20.72% 
B)  -$15.94% 
C)  -18.33% 
D)  -17.53% 
A)  -20.72% 
B)  -$15.94% 
C)  -18.33% 
D)  -17.53%

Question 7

Because investors can eliminate unsystematic risk "for free" by diversifying their portfolios, they ________.

Accepted Answer

A)  do not require a risk premium for bearing it 
B)  require a risk premium for bearing it 
C)  are indifferent about credit spread and risk premium 
D)  do not require a credit spread 
A)  do not require a risk premium for bearing it 
B)  require a risk premium for bearing it 
C)  are indifferent about credit spread and risk premium 
D)  do not require a credit spread

Question 8

You purchase a 30-year, zero-coupon bond for a price of $25. The bond will pay back $100 after 30 years and make no interim payments. The annual compounded return (geometric average return) on this investment is ________.

Accepted Answer

A)  4.49% 
B)  5.68% 
C)  4.02% 
D)  4.73% 
A)  4.49% 
B)  5.68% 
C)  4.02% 
D)  4.73%

Question 9

A portfolio of stocks where each stock has a large component of independent risk benefits when such stocks are held in a portfolio, because the independent risks are averaged out. This is also referred to as diversification of risks.

Accepted Answer

A) True 
 B)False

Question 10

Suppose the quarterly arithmetic average return for a stock is 10% per quarter and the stock gives a return of 15% each over the next two quarters. The arithmetic average return over the six quarters is ________.

Accepted Answer

A)  15.17% 
B)  11.67% 
C)  12.83% 
D)  16.33% 
A)  15.17% 
B)  11.67% 
C)  12.83% 
D)  16.33%

Question 11

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

Question 12

The average annual return over the period 1926-2009 for the S&P 500 is 12.0%, and the standard deviation of returns is 21.3%. Based on these numbers, what is a 95% confidence interval for 2010 returns?

Accepted Answer

A)  -1.5%, 21.8% 
B)  -10.7%, 32.8% 
C)  -30.6%, 54.6% 
D)  -30.6%, 76.4% 
A)  -1.5%, 21.8% 
B)  -10.7%, 32.8% 
C)  -30.6%, 54.6% 
D)  -30.6%, 76.4%

Question 13

Bear Stearns' stock price closed at $98, $103, $58, $29, $4 over five successive weeks. The weekly standard deviation of the stock price calculated from this sample is ________.

Accepted Answer

A)  $30.07 
B)  $49.40 
C)  $42.96 
D)  $34.37 
A)  $30.07 
B)  $49.40 
C)  $42.96 
D)  $34.37

Question 14

In general, it is possible to eliminate ________ risk by holding a large portfolio of assets.

Accepted Answer

A)  unsystematic 
B)  systematic 
C)  unsystematic and systematic 
D)  market specific 
A)  unsystematic 
B)  systematic 
C)  unsystematic and systematic 
D)  market specific

Question 15

Amazon.com stock prices gave a realized return of 5%, -5%, 11%, and -11% over four successive quarters. What is the annual realized return for Amazon.com for the year?

Accepted Answer

A)  -1.46% 
B)  2.91% 
C)  0.00% 
D)  1.46% 
A)  -1.46% 
B)  2.91% 
C)  0.00% 
D)  1.46%

Question 16

The risk that inflation rates are likely to increase in the next year is an example of common risk.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is FALSE?

Accepted Answer

A)  Investments with higher volatility have rewarded investors with higher average returns. 
B)  Investments with higher volatility should have a higher risk premium and, therefore, higher returns. 
C)  Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities. 
D)  Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on. 
A)  Investments with higher volatility have rewarded investors with higher average returns. 
B)  Investments with higher volatility should have a higher risk premium and, therefore, higher returns. 
C)  Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities. 
D)  Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on.

Question 18

If the Federal Reserve were to change from an expansionary to a contractionary monetary policy, this would be an example of ________.

Accepted Answer

A)  unsystematic risk 
B)  systematic risk 
C)  independent risk 
D)  diversification risk 
A)  unsystematic risk 
B)  systematic risk 
C)  independent risk 
D)  diversification risk

Question 19

McCoy paid a one-time special dividend of $3.20 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 $62.93. What was your capital gain yield from holding McCoy?

Accepted Answer

A)  4.07% 
B)  6.11% 
C)  33.89% 
D)  40.70% 
A)  4.07% 
B)  6.11% 
C)  33.89% 
D)  40.70%

Question 20

You own shares in Supernova Inc. that were purchased at a price of $23 per share. Quicksilver Inc. has offered to purchase Supernova Inc. and buy your shares at a price of $34 per share. What will be your return if you tender your shares to Quicksilver Inc. and the deal is completed?

Accepted Answer

A)  47.83% 
B)  33.48% 
C)  50.22% 
D)  45.43% 
A)  47.83% 
B)  33.48% 
C)  50.22% 
D)  45.43%

Exam 11: Risk and Return in Capital Markets

Independent risk is more closely related to ________.

Which type of investment has historically had the lowest volatility?

What is the diversification achieved by an investor if he invests in Exxon Mobil, Dell, and Bank of America?

You purchased Alpha Innovative Inc. stock at a price of $25 per share. Its price was $15 after six months and the company declared bankruptcy at the end of the next six months. The realized return over the last year is ________.

On average, stocks have delivered higher returns than bonds in the long run.

Suppose you invested $79 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.41 today and then you sold it for $66. What was your return on the investment?

Because investors can eliminate unsystematic risk "for free" by diversifying their portfolios, they ________.

You purchase a 30-year, zero-coupon bond for a price of $25. The bond will pay back $100 after 30 years and make no interim payments. The annual compounded return (geometric average return) on this investment is ________.

A portfolio of stocks where each stock has a large component of independent risk benefits when such stocks are held in a portfolio, because the independent risks are averaged out. This is also referred to as diversification of risks.

Suppose the quarterly arithmetic average return for a stock is 10% per quarter and the stock gives a return of 15% each over the next two quarters. The arithmetic average return over the six quarters is ________.

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 ________.

The average annual return over the period 1926-2009 for the S&P 500 is 12.0%, and the standard deviation of returns is 21.3%. Based on these numbers, what is a 95% confidence interval for 2010 returns?

Bear Stearns' stock price closed at $98, $103, $58, $29, $4 over five successive weeks. The weekly standard deviation of the stock price calculated from this sample is ________.

In general, it is possible to eliminate ________ risk by holding a large portfolio of assets.

Amazon.com stock prices gave a realized return of 5%, -5%, 11%, and -11% over four successive quarters. What is the annual realized return for Amazon.com for the year?

The risk that inflation rates are likely to increase in the next year is an example of common risk.

Which of the following statements is FALSE?

If the Federal Reserve were to change from an expansionary to a contractionary monetary policy, this would be an example of ________.

McCoy paid a one-time special dividend of $3.20 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 $62.93. What was your capital gain yield from holding McCoy?

You own shares in Supernova Inc. that were purchased at a price of $23 per share. Quicksilver Inc. has offered to purchase Supernova Inc. and buy your shares at a price of $34 per share. What will be your return if you tender your shares to Quicksilver Inc. and the deal is completed?

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

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