Question 1

How can standard deviation, a statistical measure of dispersion, be used in investment analysis?

Accepted Answer

The standard deviation can be used to me

Question 2

The expectations, liquidity premium, and market segmentation theories all attempt to ____.

Accepted Answer

A)  account for the differences between systematic and unsystematic risks in the securities market 
B)  define investors' required rates of return 
C)  predict the values of effective interest rates 
D)  explain the shape of the yield curve 
A)  account for the differences between systematic and unsystematic risks in the securities market 
B)  define investors' required rates of return 
C)  predict the values of effective interest rates 
D)  explain the shape of the yield curve

Question 3

Micromatic is considering expanding into a new product area. Micromatic's current beta is 1.2 and its beta is expected to increase to 1.45 after the expansion. The long-term growth rate of the firm's earnings is expected to increase from 6.5% to 10%. Micromatic's current dividend is $1.70 per share, the current risk-free rate is 9.1%, and the expected market return is 12.9%. Should Micromatic undertake the planned expansion?

Accepted Answer

A)  No, stock price decreases $10.15. 
B)  Yes, stock price increases $15.27. 
C)  Yes, stock price increases $0.45. 
D)  No, stock price decreases $15.27. 
A)  No, stock price decreases $10.15. 
B)  Yes, stock price increases $15.27. 
C)  Yes, stock price increases $0.45. 
D)  No, stock price decreases $15.27.

Question 4

What is the standard deviation of {5, 5, 5, 5, 5}?

Accepted Answer

A)  2.5 
B)  5 
C)  1 
D)  0 
A)  2.5 
B)  5 
C)  1 
D)  0

Question 5

Which of the following is NOT an example of a source of systematic risk?

Accepted Answer

A)  interest rate changes 
B)  foreign competition with an industry's products 
C)  changes in the overall economic outlook 
D)  changes in the inflation rate 
A)  interest rate changes 
B)  foreign competition with an industry's products 
C)  changes in the overall economic outlook 
D)  changes in the inflation rate

Question 6

The ability of an investor to buy and sell a company's securities quickly and without a significant loss of value is known as the ____ risk.

Accepted Answer

A)  financial 
B)  marketability 
C)  business 
D)  security 
A)  financial 
B)  marketability 
C)  business 
D)  security

Question 7

Explain marketability risk and marketability premium.

Accepted Answer

Marketability risk refers to the ability

Question 8

Determine the beta of a portfolio consisting of the following common stocks: $$\begin{array} { l c c } 
\text { Security } & \text { Market Value } & \text { Beta } \
\text { Glaxo } & \$ 2,600 & 1.24 \
\text { SCANA } & 3,700 & 0.88 \
\text { BancOne } & 2,900 & 0.95 \
\text { Pepsi } & 3,400 & 1.05 \
\text { AFLAC } & 3,000 & 1.09 \
\text { Votec } & 4,400 & 1.41
\end{array}$$

Accepted Answer

A)  1.00 
B)  1.12 
C)  1.09 
D)  1.11 
A)  1.00 
B)  1.12 
C)  1.09 
D)  1.11

Question 9

Assume you want to construct a portfolio with a 14% return from the following two securities: $$\begin{array} { l l l } 
\text { Security } & \text { Expected Return } & \text { Beta } \
1 & 16 \% & 1.12 \
2 & 12.5 \% & 0.94
\end{array}$$ What percentage of your portfolio should be invested in Security 1?

Accepted Answer

A)  57% 
B)  47% 
C)  43% 
D)  53% 
A)  57% 
B)  47% 
C)  43% 
D)  53%

Question 10

The ____ theory holds that the securities markets are demarcated by maturity.

Accepted Answer

A)  boondoggle 
B)  liquidity premium 
C)  expectations 
D)  market segmentation 
A)  boondoggle 
B)  liquidity premium 
C)  expectations 
D)  market segmentation

Question 11

The return expected from a risky investment is 24%, and the standard deviation of this return is 17%. If returns from this investment are normally distributed, what is the probability that the investment may earn a negative rate of return? (Note: Table V is required to work this problem.)

Accepted Answer

A)  8.33% 
B)  7.93% 
C)  6.88% 
D)  5.44% 
A)  8.33% 
B)  7.93% 
C)  6.88% 
D)  5.44%

Question 12

An investor, by investing in combinations of stocks, develops a ____ portfolio.

Accepted Answer

A)  simple 
B)  structured 
C)  diversified 
D)  energetic 
A)  simple 
B)  structured 
C)  diversified 
D)  energetic

Question 13

Unsystematic risk ____.

Accepted Answer

A)  is caused by factors affecting the market as a whole 
B)  is the predominant determinant of individual security risk premium 
C)  cannot be mitigated via diversification 
D)  can be mitigated via diversification 
A)  is caused by factors affecting the market as a whole 
B)  is the predominant determinant of individual security risk premium 
C)  cannot be mitigated via diversification 
D)  can be mitigated via diversification

Question 14

Systematic risk ____.

Accepted Answer

A)  cannot be mitigated via diversification 
B)  can be mitigated via diversification 
C)  is unique to each firm 
D)  is affected by factors such as strikes 
A)  cannot be mitigated via diversification 
B)  can be mitigated via diversification 
C)  is unique to each firm 
D)  is affected by factors such as strikes

Question 15

Lotte Group is planning on diversifying into the transportation industry. As a result, Lotte's beta would rise to 1.3 from 1.1 and the expected long-term growth rate in the firm's earnings would increase from 11% to 14%. Currently the risk-free rate is 5.0% and the market risk premium is 8.6%. If Lotte's current dividend is $1.30, should Lotte diversify into the transportation industry?

Accepted Answer

A)  No, stock price does not increase. 
B)  No, stock price declines about $10.11. 
C)  Yes, stock price increases about $19.42. 
D)  Yes, stock price increases by about $26.27. 
A)  No, stock price does not increase. 
B)  No, stock price declines about $10.11. 
C)  Yes, stock price increases about $19.42. 
D)  Yes, stock price increases by about $26.27.

Question 16

An investor plans to invest 75% of her funds in the common stock of Gamma Industries and 25% in Epsilon Company. The expected return on Gamma is 12%, and the expected return on Epsilon is 16%. The standard deviation of returns for Gamma is 8% and for Epsilon is 12%. The correlation between the returns for Gamma and Epsilon is +0.8. Determine the standard deviation of returns for this investor's portfolio.

Accepted Answer

A)  73.8% 
B)  6.71% 
C)  3.00% 
D)  8.59% 
A)  73.8% 
B)  6.71% 
C)  3.00% 
D)  8.59%

Question 17

The risk remaining after extensive diversification is primarily ____.

Accepted Answer

A)  unsystematic risk 
B)  systematic risk 
C)  coefficient of variation risk 
D)  standard deviation risk 
A)  unsystematic risk 
B)  systematic risk 
C)  coefficient of variation risk 
D)  standard deviation risk

Question 18

A college student owns two securities: Apple and Coca- Cola. Apple has an expected return of 15%, with a standard deviation of those returns being 11%. Coca-Cola has an expected return of 12% and a standard deviation of 7%. The correlation of returns between Apple and Coca-Cola is 0.81. If the portfolio consist of $6,000 in Coca-Cola and $4,000 in Apple, what is the expected standard deviation of portfolio returns?

Accepted Answer

A)  8.18% 
B)  13.20% 
C)  8.60% 
D)  9.71% 
A)  8.18% 
B)  13.20% 
C)  8.60% 
D)  9.71%

Question 19

When comparing two equal-sized investments, the ____ is an appropriate measure of total risk.

Accepted Answer

A)  standard deviation 
B)  coefficient of variation 
C)  correlation 
D)  covariance 
A)  standard deviation 
B)  coefficient of variation 
C)  correlation 
D)  covariance

Question 20

When looking at measures of risk and return, the notation "σ" represents ____.

Accepted Answer

A)  risk 
B)  return 
C)  standard deviation 
D)  probability 
A)  risk 
B)  return 
C)  standard deviation 
D)  probability

Exam 9: Analysis of Risk and Return

How can standard deviation, a statistical measure of dispersion, be used in investment analysis?

The expectations, liquidity premium, and market segmentation theories all attempt to ____.

What is the standard deviation of {5, 5, 5, 5, 5}?

Which of the following is NOT an example of a source of systematic risk?

The ability of an investor to buy and sell a company's securities quickly and without a significant loss of value is known as the ____ risk.

Explain marketability risk and marketability premium.

Determine the beta of a portfolio consisting of the following common stocks: Security Market Value Beta Glaxo \ 2,600 1.24 SCANA 3,700 0.88 BancOne 2,900 0.95 Pepsi 3,400 1.05 AFLAC 3,000 1.09 Votec 4,400 1.41

Assume you want to construct a portfolio with a 14% return from the following two securities: Security Expected Return Beta 1 16\% 1.12 2 12.5\% 0.94 What percentage of your portfolio should be invested in Security 1?

The ____ theory holds that the securities markets are demarcated by maturity.

The return expected from a risky investment is 24%, and the standard deviation of this return is 17%. If returns from this investment are normally distributed, what is the probability that the investment may earn a negative rate of return? (Note: Table V is required to work this problem.)

An investor, by investing in combinations of stocks, develops a ____ portfolio.

Unsystematic risk ____.

Systematic risk ____.

The risk remaining after extensive diversification is primarily ____.

When comparing two equal-sized investments, the ____ is an appropriate measure of total risk.

When looking at measures of risk and return, the notation "σ" represents ____.

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Continuous Compounding and Discounting

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Capital Budgeting and Cash Flow Analysis

Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Breakeven Analysis

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-Term Financing

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate Term Financing

Financing With Derivatives

Bond Refunding Analysis

Risk Management

International Financial Management

Corporate Restructuring

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