Question 1

The opportunity set of portfolios is:

Accepted Answer

A) all possible return combinations of those securities. 
B) all possible risk combinations of those securities. 
C) all possible risk-return combinations of those securities. 
D) the best or highest risk-return combination. 
E) the lowest risk-return combination. 
A) all possible return combinations of those securities. 
B) all possible risk combinations of those securities. 
C) all possible risk-return combinations of those securities. 
D) the best or highest risk-return combination. 
E) the lowest risk-return combination. C

Question 2

GenLabs has been a hot share the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows:

The expected return on GenLabs is:

Accepted Answer

A) 3.3% 
B) 8.5% 
C) 12.5% 
D) 20.5% 
E) None of the above. 
A) 3.3% 
B) 8.5% 
C) 12.5% 
D) 20.5% 
E) None of the above. C

Question 3

The total number of variance and covariance terms in portfolio is N2.How many of these would be (including non-unique) covariance's?

Accepted Answer

A) N 
B) N2 
C) N2 - N 
D) N2 - N/2 
E) None of the above. 
A) N 
B) N2 
C) N2 - N 
D) N2 - N/2 
E) None of the above. C

Question 4

GenLabs has been a hot share the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows:

The standard deviation of GenLabs returns is

Accepted Answer

A) .0845 
B) .2071 
C) .3065 
D) .3358 
E) None of the above. 
A) .0845 
B) .2071 
C) .3065 
D) .3358 
E) None of the above.

Question 5

The characteristic line is graphically depicted as:

Accepted Answer

A) the plot of the relationship between beta and expected return. 
B) the plot of the returns of the security against the beta. 
C) the plot of the security returns against the market index returns. 
D) the plot of the beta against the market index returns. 
E) None of the above. 
A) the plot of the relationship between beta and expected return. 
B) the plot of the returns of the security against the beta. 
C) the plot of the security returns against the market index returns. 
D) the plot of the beta against the market index returns. 
E) None of the above.

Question 6

The elements in the off-diagonal positions of the variance/covariance matrix are:

Accepted Answer

A) covariances. 
B) security selections. 
C) variances. 
D) security weights. 
E) None of the above. 
A) covariances. 
B) security selections. 
C) variances. 
D) security weights. 
E) None of the above.

Question 7

You are considering purchasing share S.This share has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period.The overall expected rate of return
On this share will:

Accepted Answer

A) be equal to one-half of 8% if there is a 50% chance of an economic boom. 
B) vary inversely with the growth of the economy. 
C) increase as the probability of a recession increases. 
D) be equal to 75% of 8% if there is a 75% chance of a boom economy. 
E) increase as the probability of a boom economy increases. 
A) be equal to one-half of 8% if there is a 50% chance of an economic boom. 
B) vary inversely with the growth of the economy. 
C) increase as the probability of a recession increases. 
D) be equal to 75% of 8% if there is a 75% chance of a boom economy. 
E) increase as the probability of a boom economy increases.

Question 8

A portfolio is made up of 75% of share 1, and 25% of share 2.Share 1 has a variance of .08, and share 2 has a variance of .035.The covariance between the shares is -.001.Calculate both the variance and the standard deviation of the portfolio.

Accepted Answer

σ2 = (.75)2(.08) + (

Question 9

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversiﬁable risk.

Accepted Answer

A) Eﬃcient Markets Hypothesis (EMH) 
B) Systematic Risk Principle 
C) Open Markets Theorem 
D) Law of One Price 
E) Principle of Diversiﬁcation 
A) Eﬃcient Markets Hypothesis (EMH) 
B) Systematic Risk Principle 
C) Open Markets Theorem 
D) Law of One Price 
E) Principle of Diversiﬁcation

Question 10

The linear relation between an asset's expected return and its beta coeﬃcient is the:

Accepted Answer

A) reward-to-risk ratio. 
B) portfolio weight. 
C) portfolio risk. 
D) security market line. 
E) market risk premium. 
A) reward-to-risk ratio. 
B) portfolio weight. 
C) portfolio risk. 
D) security market line. 
E) market risk premium.

Question 11

Explain in words what beta is and why it is important.

Accepted Answer

This is a concept check question that re

Question 12

Beta measures:

Accepted Answer

A) the ability to diversify risk. 
B) how an asset covaries with the market. 
C) the actual return on an asset. 
D) the standard of the assets' returns. 
E) All of the above. 
A) the ability to diversify risk. 
B) how an asset covaries with the market. 
C) the actual return on an asset. 
D) the standard of the assets' returns. 
E) All of the above.

Question 13

A portfolio has 50% of its funds invested in Security One and 50% of its funds invested in Security Two.Security One has a standard deviation of 6%.Security Two has a standard deviation of 12%.
The securities have a coeﬃcient of correlation of 0.5.Which of the following values is the portfolio
Variance?

Accepted Answer

A) .0027 
B) .0063 
C) .0095 
D) .0104 
E) One must have covariance to calculate expected value. 
A) .0027 
B) .0063 
C) .0095 
D) .0104 
E) One must have covariance to calculate expected value.

Question 14

Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk.

Accepted Answer

A) idiosyncratic 
B) diversiﬁable 
C) systematic 
D) asset-speciﬁc 
E) total 
A) idiosyncratic 
B) diversiﬁable 
C) systematic 
D) asset-speciﬁc 
E) total

Question 15

What is the standard deviation of a portfolio which is invested 20% in share A, 30% in share B and 50% in share C?
$\begin{array} { | l | l | l | l | l | } 
\hline & & \multicolumn{3}{|l|} { \text { Returns if State Occurs } } \
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { Share A } & \text { Share B } & \text { Share C } \
\hline \text { Boom } & 10 \% & 15 \% & 10 \% & 5 \% \
\hline \text { Normal } & 70 \% & 9 \% & 6 \% & 7 \% \
\hline \text { Recession } & 20 \% & 14 \% & 2 \% & 8 \% \
\hline
\end{array}$

Accepted Answer

A) 0.6% 
B) 0.9% 
C) 1.8% 
D) 2.2% 
E) 4.9% 
A) 0.6% 
B) 0.9% 
C) 1.8% 
D) 2.2% 
E) 4.9%

Question 16

You own the following portfolio of shares. what is the portfolio weight of share C?
$\begin{array} { | l | l | l | } 
\hline \text { Share } & \text { Number of Shares } & \text { Price per Share } \
\hline \text { A } & 100 & € 22 \
\hline \text { B } & 600 & \text { C17 } \
\hline \text { C } & 400 & € 46 \
\hline \text { D } & 200 & € 38 \
\hline
\end{array}$

Accepted Answer

A) 30.8% 
B) 37.4% 
C) 42.3% 
D) 45.2% 
E) 47.9% 
A) 30.8% 
B) 37.4% 
C) 42.3% 
D) 45.2% 
E) 47.9%

Question 17

You have plotted the data for two securities over time on the same graph, i.e., the month return of each security for the last 5 years.If the pattern of the movements of the two securities rose and fell
As the other did, these two securities would have:

Accepted Answer

A) no correlation at all. 
B) a weak negative correlation. 
C) a strong negative correlation. 
D) a strong positive correlation. 
E) one can not get any idea of the correlation from a graph. 
A) no correlation at all. 
B) a weak negative correlation. 
C) a strong negative correlation. 
D) a strong positive correlation. 
E) one can not get any idea of the correlation from a graph.

Question 18

In previous chapters, it was stated that ﬁnancial managers should act to maximize shareholder wealth.Why are the eﬃcient markets hypothesis (EMH), the CAPM, and the SML so important in the accomplishment of this objective?

Accepted Answer

In simple terms, one could say that maxi

Question 19

Which one of the following is an example of a nondiversiﬁable risk?

Accepted Answer

A) a well respected chief executive of a ﬁrm suddenly resigns 
B) a well respected chairman of the European Central Bank suddenly resigns 
C) a key employee suddenly resigns and accepts employment with a key competitor 
D) a well managed ﬁrm reduces its work force and automates several jobs 
E) a poorly managed ﬁrm suddenly goes out of business due to lack of sales 
A) a well respected chief executive of a ﬁrm suddenly resigns 
B) a well respected chairman of the European Central Bank suddenly resigns 
C) a key employee suddenly resigns and accepts employment with a key competitor 
D) a well managed ﬁrm reduces its work force and automates several jobs 
E) a poorly managed ﬁrm suddenly goes out of business due to lack of sales

Question 20

The expected return on HiLo equity is 13.69% while the expected return on the market is 11.5%.The beta of HiLo is 1.3.What is the risk-free rate of return?

Accepted Answer

A) 2.8% 
B) 3.1% 
C) 3.7% 
D) 4.2% 
E) 4.5% 
A) 2.8% 
B) 3.1% 
C) 3.7% 
D) 4.2% 
E) 4.5%

Exam 10: Risk and Return: the Capital Asset Pricing Model

The opportunity set of portfolios is:

GenLabs has been a hot share the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows: The expected return on GenLabs is:

The total number of variance and covariance terms in portfolio is N2.How many of these would be (including non-unique) covariance's?

GenLabs has been a hot share the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows: The standard deviation of GenLabs returns is

The characteristic line is graphically depicted as:

The elements in the off-diagonal positions of the variance/covariance matrix are:

You are considering purchasing share S.This share has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period.The overall expected rate of return On this share will:

A portfolio is made up of 75% of share 1, and 25% of share 2.Share 1 has a variance of .08, and share 2 has a variance of .035.The covariance between the shares is -.001.Calculate both the variance and the standard deviation of the portfolio.

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversiﬁable risk.

The linear relation between an asset's expected return and its beta coeﬃcient is the:

Explain in words what beta is and why it is important.

Beta measures:

Risk that affects a large number of assets, each to a greater or lesser degree, is called _____ risk.

You own the following portfolio of shares. what is the portfolio weight of share C? Share Number of Shares Price per Share A 100 22 B 600 C17 C 400 46 D 200 38

You have plotted the data for two securities over time on the same graph, i.e., the month return of each security for the last 5 years.If the pattern of the movements of the two securities rose and fell As the other did, these two securities would have:

In previous chapters, it was stated that ﬁnancial managers should act to maximize shareholder wealth.Why are the eﬃcient markets hypothesis (EMH), the CAPM, and the SML so important in the accomplishment of this objective?

Which one of the following is an example of a nondiversiﬁable risk?

The expected return on HiLo equity is 13.69% while the expected return on the market is 11.5%.The beta of HiLo is 1.3.What is the risk-free rate of return?

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis

Discounted Cash Flow Valuation

Bond, Equity and Firm Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options and Capital Budgeting

Risk and Return: Lessons From Market History

Factor Models and the Arbitrage Pricing Theory

Risk, Cost of Capital and Capital Budgeting

Efficient Capital Markets and Behavioural Finance

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Equity Financing

Debt Financing

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Short-Term Capital Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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