Question 1

The ___________is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.

Accepted Answer

A)  mean 
B)  coefficient of variation 
C)  chi square 
D)  standard deviation 
A)  mean 
B)  coefficient of variation 
C)  chi square 
D)  standard deviation B

Question 2

Diversifiable risk is the relevant portion of risk attributable to market factors that affect all firms.

Accepted Answer

A) True 
 B)False  False

Question 3

Carl is considering investing in a Canadian common stock with a 16.5% historic annual rate of return. The stock is 25% more risky than the portfolio of Canadian common stocks. Government of Canada t-bills currently yield 4%, and a portfolio of Canadian stock has a risk premium of 6%. What should be Carl's minimum acceptable rate of return if he invests in this stock?

Accepted Answer

A)  20.5% 
B)  11.5% 
C)  10.5% 
D)  22.5% 
A)  20.5% 
B)  11.5% 
C)  10.5% 
D)  22.5% B

Question 4

In general, the lower (less positive and more negative) the correlation between asset returns,

Accepted Answer

A)  the lower the potential profit. 
B)  the less the assets have to be monitored. 
C)  the less the potential diversification of risk. 
D)  the greater the potential diversification of risk. 
A)  the lower the potential profit. 
B)  the less the assets have to be monitored. 
C)  the less the potential diversification of risk. 
D)  the greater the potential diversification of risk.

Question 5

An increase in the beta of a corporation indicates ____________, and, all else being the same, results in___________.

Accepted Answer

A)  an increase in risk; a higher required rate of return and hence a lower share price. 
B)  an increase in risk; a lower required rate of return and hence a higher share price. 
C)  a decrease in risk; a lower required rate of return and hence a higher share price. 
D)  a decrease in risk; a higher required rate of return and hence a lower share price. 
A)  an increase in risk; a higher required rate of return and hence a lower share price. 
B)  an increase in risk; a lower required rate of return and hence a higher share price. 
C)  a decrease in risk; a lower required rate of return and hence a higher share price. 
D)  a decrease in risk; a higher required rate of return and hence a lower share price.

Question 6

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are both very risky assets.

Accepted Answer

A) True 
 B)False

Question 7

Prime-grade commercial paper will most likely have a higher annual return than

Accepted Answer

A)  a common stock. 
B)  an investment-grade bond. 
C)  a Treasury bill. 
D)  a preferred stock. 
A)  a common stock. 
B)  an investment-grade bond. 
C)  a Treasury bill. 
D)  a preferred stock.

Question 8

An example of an external factor that affects a corporation's risk or beta, and hence required rate of return would be

Accepted Answer

A)  a financing mix. 
B)  a change in top management. 
C)  an asset mix. 
D)  inflation. 
A)  a financing mix. 
B)  a change in top management. 
C)  an asset mix. 
D)  inflation.

Question 9

Perfectly __________correlated series move exactly together and have a correlation coefficient of__________, while perfectly __________correlated series move exactly in opposite directions and have acorrelation coefficient of__________ .

Accepted Answer

A)  negatively; -1; positively; +1 
B)  positively; +1; negatively; -1 
C)  negatively; +1; positively; -1 
D)  positively; -1; negatively; +1 
A)  negatively; -1; positively; +1 
B)  positively; +1; negatively; -1 
C)  negatively; +1; positively; -1 
D)  positively; -1; negatively; +1

Question 10

ABC Company's stock had an initial price of $50 per share and paid a dividend of $4 per share during the year. Calculate the total rate of return for ABC Company's stock assuming an ending share price of $45.

Accepted Answer

A)  8% 
B)  -2% 
C)  -10% 
D)  2% 
A)  8% 
B)  -2% 
C)  -10% 
D)  2%

Question 11

A portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

Accepted Answer

A) True 
 B)False

Question 12

Given the information in Figure 7.2, what is the expected annual return of this portfolio?

Accepted Answer

A)  11.7% 
B)  11.0% 
C)  11.4% 
D)  10.0% 
A)  11.7% 
B)  11.0% 
C)  11.4% 
D)  10.0%

Question 13

The risk of an asset may be found by subtracting the worst outcome from the best outcome.

Accepted Answer

A) True 
 B)False

Question 14

Combining negatively correlated assets can reduce the overall variability of returns.

Accepted Answer

A) True 
 B)False

Question 15

Mary is considering investing in Lensgate Industries Ltd., a Canadian common stock with a historic annual rate of return of 9%. The stock is as risky as the portfolio of Canadian common stocks. If Government of Canada t-bills currently yield 4% and a portfolio of Canadian common stocks has a risk premium of 6%, what should be Mary's minimum acceptable rate of return if she invests in this stock?

Accepted Answer

A)  14% 
B)  10% 
C)  9% 
D)  6% 
A)  14% 
B)  10% 
C)  9% 
D)  6%

Question 16

The purpose of adding an asset with a negative or low positive beta is to

Accepted Answer

A)  reduce profit. 
B)  reduce risk. 
C)  increase risk. 
D)  increase profit. 
A)  reduce profit. 
B)  reduce risk. 
C)  increase risk. 
D)  increase profit.

Question 17

The financial manager's goal for the firm is to create a portfolio that maximizes return in order to maximize the value of the firm.

Accepted Answer

A) True 
 B)False

Question 18

The larger the difference between an asset's worst outcome from its best outcome, the higher therisk of the asset.

Accepted Answer

A) True 
 B)False

Question 19

When the Canadian currency gains in value, the dollar value of a foreign-currency-denominated portfolio of assets decline.

Accepted Answer

A) True 
 B)False

Question 20

The___________ of an asset is the change in value plus any cash distributions expressed as apercentage of the initial price or amount invested.

Accepted Answer

A)  risk 
B)  return 
C)  probability 
D)  value 
A)  risk 
B)  return 
C)  probability 
D)  value

The ___________is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.

Diversifiable risk is the relevant portion of risk attributable to market factors that affect all firms.

In general, the lower (less positive and more negative) the correlation between asset returns,

An increase in the beta of a corporation indicates __, and, all else being the same, results in_.

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are both very risky assets.

Prime-grade commercial paper will most likely have a higher annual return than

An example of an external factor that affects a corporation's risk or beta, and hence required rate of return would be

Perfectly correlated series move exactly together and have a correlation coefficient of, while perfectly correlated series move exactly in opposite directions and have acorrelation coefficient of .

ABC Company's stock had an initial price of $50 per share and paid a dividend of $4 per share during the year. Calculate the total rate of return for ABC Company's stock assuming an ending share price of $45.

A portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

Given the information in Figure 7.2, what is the expected annual return of this portfolio?

The risk of an asset may be found by subtracting the worst outcome from the best outcome.

Combining negatively correlated assets can reduce the overall variability of returns.

The purpose of adding an asset with a negative or low positive beta is to

The financial manager's goal for the firm is to create a portfolio that maximizes return in order to maximize the value of the firm.

The larger the difference between an asset's worst outcome from its best outcome, the higher therisk of the asset.

When the Canadian currency gains in value, the dollar value of a foreign-currency-denominated portfolio of assets decline.

The___________ of an asset is the change in value plus any cash distributions expressed as apercentage of the initial price or amount invested.

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Valuation of Financial Securities

The Cost of Capital

Leverage and Capital Structure

Dividend Policy

Capital Budgeting: Principles and Techniques

Dealing With Project Risk and Other Topics in Capital Budgeting

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Corporate Securities, Derivatives, and Swaps

Mergers and Acquisitions, and Business Failure

International Corporate Finance

Filters

Exam 7: Risk and Return

The ___________is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.

Diversifiable risk is the relevant portion of risk attributable to market factors that affect all firms.

In general, the lower (less positive and more negative) the correlation between asset returns,

An increase in the beta of a corporation indicates ____________, and, all else being the same, results in___________.

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are both very risky assets.

Prime-grade commercial paper will most likely have a higher annual return than

An example of an external factor that affects a corporation's risk or beta, and hence required rate of return would be

Perfectly __________correlated series move exactly together and have a correlation coefficient of__________, while perfectly __________correlated series move exactly in opposite directions and have acorrelation coefficient of__________ .

ABC Company's stock had an initial price of $50 per share and paid a dividend of $4 per share during the year. Calculate the total rate of return for ABC Company's stock assuming an ending share price of $45.

A portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

Given the information in Figure 7.2, what is the expected annual return of this portfolio?

The risk of an asset may be found by subtracting the worst outcome from the best outcome.

Combining negatively correlated assets can reduce the overall variability of returns.

The purpose of adding an asset with a negative or low positive beta is to

The financial manager's goal for the firm is to create a portfolio that maximizes return in order to maximize the value of the firm.

The larger the difference between an asset's worst outcome from its best outcome, the higher therisk of the asset.

When the Canadian currency gains in value, the dollar value of a foreign-currency-denominated portfolio of assets decline.

The___________ of an asset is the change in value plus any cash distributions expressed as apercentage of the initial price or amount invested.

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Valuation of Financial Securities

The Cost of Capital

Leverage and Capital Structure

Dividend Policy

Capital Budgeting: Principles and Techniques

Dealing With Project Risk and Other Topics in Capital Budgeting

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Corporate Securities, Derivatives, and Swaps

Mergers and Acquisitions, and Business Failure

International Corporate Finance

Filters

An increase in the beta of a corporation indicates __, and, all else being the same, results in_.

Perfectly correlated series move exactly together and have a correlation coefficient of, while perfectly correlated series move exactly in opposite directions and have acorrelation coefficient of .