Question 1

If the return on U.S. Treasury bills is 7.02%, the risk premium is 2.32%, and the inflation rate is 4.16%, then the real rate of return is ____.

Accepted Answer

A)  2.86% 
B)  7.02% 
C)  4.70% 
D)  6.48% 
A)  2.86% 
B)  7.02% 
C)  4.70% 
D)  6.48%

Question 2

Why is risk an increasing function of time?

Accepted Answer

Investment decisions require that return

Question 3

The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%. Determine the probability of earning a negative rate of return (i.e. less than 0%) on FTC common stock. (Note: Table V is required to work this problem.)

Accepted Answer

A)  0.0228 
B)  2.00 
C)  0.5000 
D)  0.9772 
A)  0.0228 
B)  2.00 
C)  0.5000 
D)  0.9772

Question 4

The ____ of a portfolio of two or more securities is equal to the weighted average of the ____ of each of the individual securities in the portfolio.

Accepted Answer

A)  standard deviation; standard deviation 
B)  risk; risk 
C)  expected return; expected return 
D)  standard deviation; risk 
A)  standard deviation; standard deviation 
B)  risk; risk 
C)  expected return; expected return 
D)  standard deviation; risk

Question 5

What is an efficient portfolio?

Accepted Answer

A portfolio is efficient if, for a given

Question 6

The ____ is the ratio of ____ to the ____.

Accepted Answer

A)  standard deviation; covariance; expected value 
B)  covariance; expected value; standard deviation 
C)  coefficient of variation; standard deviation; expected value 
D)  coefficient of variation; systematic risk; expected value 
A)  standard deviation; covariance; expected value 
B)  covariance; expected value; standard deviation 
C)  coefficient of variation; standard deviation; expected value 
D)  coefficient of variation; systematic risk; expected value

Question 7

The beta of Sanafil is 1.2. Sanafil is evaluating a merger with Matra, a firm that has a beta of 0.95. Sanafil's stock sells for $40 per share, and there are 10 million shares outstanding. Matra's stock sells for $60, but there are only 2 million shares outstanding. If these two firms merge, what will be the merged firm's beta? MVS = $40(10,000,000) = $400,000,000
MVM = $60(2,000,000) = $120,000,000

Accepted Answer

A)  1.00 
B)  1.14 
C)  1.05 
D)  1.16 
A)  1.00 
B)  1.14 
C)  1.05 
D)  1.16

Question 8

The real rate of interest is expected to be 3%, and the expected rate of inflation for next year is expected to be 5.5%. If the default risk premium is 1.1 percentage points, and the seniority risk premium is 0.4 percentage points, what is the required return on a 1-year U.S. Treasury security?

Accepted Answer

A)  9.6% 
B)  10.0% 
C)  8.5% 
D)  8.9% 
A)  9.6% 
B)  10.0% 
C)  8.5% 
D)  8.9%

Question 9

Total risk of a security can be viewed as consisting of two parts. Which of the following apply?
 I. verifiable risk
II. non-verifiable risk

Accepted Answer

A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct. 
A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct.

Question 10

The normal probability distribution is characterized by a ____.

Accepted Answer

A)  bell curve 
B)  bar chart 
C)  logarithmic curve 
D)  step graph 
A)  bell curve 
B)  bar chart 
C)  logarithmic curve 
D)  step graph

Question 11

What is the beta of the following project? ? $$\begin{array} { | l | l | } 
\hline \text { Comparative Returns on Past Projects } & \text { Froject's Returns } \
\hline 12 \% & 15 \% \
\hline 10 \% & 8 \% \
\hline 6.5 \% & 7 \% \
\hline 2 \% & - 1 \% \
\hline
\end{array}$$

Accepted Answer

A)  1.11 
B)  0.95 
C)  2.15 
D)  1.43 
A)  1.11 
B)  0.95 
C)  2.15 
D)  1.43

Question 12

Find beta, and determine the risk premium. The market risk premium is 8%, and the risk-free rate is 2%. ? $$\begin{array} { | l | l | } 
\hline \text { Comparative Returns in the Market } & \text { Returns on the Stock } \
\hline 10 \% & 8 \% \
\hline 11 \% & 12 \% \
\hline 6 \% & 2 \% \
\hline 5 \% & 1 \% \
\hline
\end{array}$$

Accepted Answer

A)  16.82% 
B)  20.76% 
C)  10.15% 
D)  18.11% 
A)  16.82% 
B)  20.76% 
C)  10.15% 
D)  18.11%

Question 13

Jim Bowles is an investor who believes the economy is gaining strength and therefore wishes to increase the risk of his 14-security portfolio. Each security has a current market value of $5,000, and the current beta of the portfolio is 1.02. The beta of the least risky security is 0.76. If Jim replaces the least risky security with another security with the same market value but a beta of 1.45, what will the portfolio beta be then?

Accepted Answer

A)  1.03 
B)  1.07 
C)  1.08 
D)  1.04 
A)  1.03 
B)  1.07 
C)  1.08 
D)  1.04

Question 14

All other things being equal, what is the major impact that an increase in the expected inflation rate would be anticipated to have on the security market line?

Accepted Answer

A)  reduce its slope 
B)  shift it down and to the right 
C)  shift it up and to the left 
D)  reduce required returns for investors in any individual asset 
A)  reduce its slope 
B)  shift it down and to the right 
C)  shift it up and to the left 
D)  reduce required returns for investors in any individual asset

Question 15

The security market line ____.

Accepted Answer

A)  is defined as the slope of a line relating an individual security's return to the returns of other securities in that firm's primary industry 
B)  provides a picture of the risk-return tradeoff required by diversified investors considering various risky assets 
C)  has as its slope the beta of the security 
D)  is determined by the prevailing level of risk-free interest rates minus a risk premium 
A)  is defined as the slope of a line relating an individual security's return to the returns of other securities in that firm's primary industry 
B)  provides a picture of the risk-return tradeoff required by diversified investors considering various risky assets 
C)  has as its slope the beta of the security 
D)  is determined by the prevailing level of risk-free interest rates minus a risk premium

Question 16

List the various risk elements that are considered when determining the risk premium.

Accepted Answer

The risk elements include: 1.

Question 17

The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%. Determine the probability of earning more than 21% on FTC common stock. (Note: Table V is required to work this problem.)

Accepted Answer

A)  1.00 
B)  0.8413 
C)  0.0013 
D)  0.1587 
A)  1.00 
B)  0.8413 
C)  0.0013 
D)  0.1587

Question 18

The portion of the risk premium that is based on the ability of the borrower to repay principal and interest is the ____ risk.

Accepted Answer

A)  maturity 
B)  default 
C)  seniority 
D)  marketability 
A)  maturity 
B)  default 
C)  seniority 
D)  marketability

Question 19

An increase in the expected future inflation rate has the effect of ____.

Accepted Answer

A)  increasing the slope of the security market line 
B)  shifting the security market line upward by the amount of the expected increase in inflation 
C)  increasing systematic risk 
D)  None of these are correct 
A)  increasing the slope of the security market line 
B)  shifting the security market line upward by the amount of the expected increase in inflation 
C)  increasing systematic risk 
D)  None of these are correct

Question 20

The yield to maturity on ACL bonds maturing in 2025 is 8.75%. The yield to maturity on a similar maturity U.S. Government Treasury bond is 7.06%, and the yield on Treasury bills is 6.51%. What is the default risk premium on the ACL bond?

Accepted Answer

A)  2.24% 
B)  1.69% 
C)  0.55% 
D)  8.75% 
A)  2.24% 
B)  1.69% 
C)  0.55% 
D)  8.75%

Exam 9: Analysis of Risk and Return

If the return on U.S. Treasury bills is 7.02%, the risk premium is 2.32%, and the inflation rate is 4.16%, then the real rate of return is ____.

Why is risk an increasing function of time?

The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%. Determine the probability of earning a negative rate of return (i.e. less than 0%) on FTC common stock. (Note: Table V is required to work this problem.)

The ____ of a portfolio of two or more securities is equal to the weighted average of the ____ of each of the individual securities in the portfolio.

What is an efficient portfolio?

The ____ is the ratio of ____ to the ____.

The real rate of interest is expected to be 3%, and the expected rate of inflation for next year is expected to be 5.5%. If the default risk premium is 1.1 percentage points, and the seniority risk premium is 0.4 percentage points, what is the required return on a 1-year U.S. Treasury security?

Total risk of a security can be viewed as consisting of two parts. Which of the following apply? I. verifiable risk II. non-verifiable risk

The normal probability distribution is characterized by a ____.

What is the beta of the following project? ? Comparative Returns on Past Projects Froject's Returns 12\% 15\% 10\% 8\% 6.5\% 7\% 2\% -1\%

Find beta, and determine the risk premium. The market risk premium is 8%, and the risk-free rate is 2%. ? Comparative Returns in the Market Returns on the Stock 10\% 8\% 11\% 12\% 6\% 2\% 5\% 1\%

All other things being equal, what is the major impact that an increase in the expected inflation rate would be anticipated to have on the security market line?

The security market line ____.

List the various risk elements that are considered when determining the risk premium.

The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%. Determine the probability of earning more than 21% on FTC common stock. (Note: Table V is required to work this problem.)

The portion of the risk premium that is based on the ability of the borrower to repay principal and interest is the ____ risk.

An increase in the expected future inflation rate has the effect of ____.

The yield to maturity on ACL bonds maturing in 2025 is 8.75%. The yield to maturity on a similar maturity U.S. Government Treasury bond is 7.06%, and the yield on Treasury bills is 6.51%. What is the default risk premium on the ACL bond?

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

Filters

The of a portfolio of two or more securities is equal to the weighted average of the of each of the individual securities in the portfolio.

The is the ratio of to the .