Question 1

The returns on your portfolio over the last 5 years were -5%, 20%, 0%, 10% and 5%.What is the standard deviation of your return?

Accepted Answer

A) 2.74% 
B) 5.21% 
C) 9.62% 
D) 10.12% 
E) 12.70% 
A) 2.74% 
B) 5.21% 
C) 9.62% 
D) 10.12% 
E) 12.70%

Question 2

Suppose you own a risky asset with an expected return of 12% and a standard deviation of 20%.If the returns are normally distributed, the approximate probability of receiving a return greater than
32% is approximately:

Accepted Answer

A) 2%. 
B) 5%. 
C) 16%. 
D) 33%. 
E) 67%. 
A) 2%. 
B) 5%. 
C) 16%. 
D) 33%. 
E) 67%.

Question 3

An equity has an expected rate of return of 8.3% and a standard deviation of 6.4%.Which one of the following best describes the probability that this equity will lose 11% or more in any one given year?

Accepted Answer

A) Less than 0.5%. 
B) Less than 1.0%. 
C) Less than 1.5%. 
D) Less than 2.5%. 
E) Less than 5%. 
A) Less than 0.5%. 
B) Less than 1.0%. 
C) Less than 1.5%. 
D) Less than 2.5%. 
E) Less than 5%.

Question 4

Which one of the following is a correct statement concerning risk premium?

Accepted Answer

A) The greater the volatility of returns, the greater the risk premium. 
B) The lower the volatility of returns, the greater the risk premium. 
C) The lower the average rate of return, the greater the risk premium. 
D) The risk premium is not correlated to the average rate of return. 
E) The risk premium is not affected by the volatility of returns. 
A) The greater the volatility of returns, the greater the risk premium. 
B) The lower the volatility of returns, the greater the risk premium. 
C) The lower the average rate of return, the greater the risk premium. 
D) The risk premium is not correlated to the average rate of return. 
E) The risk premium is not affected by the volatility of returns.

Question 5

Suppose you have £30,000 invested in the stock market and your banker comes to you and tries to get you to move that money into the bank's certiﬁcates of deposit (CDs).He explains that the CDs are 100% government insured and that you are taking unnecessary risks by being in the stock market.How would you respond?

Accepted Answer

The usual response is that bank CDs typi

Question 6

Which of the following statements concerning the standard deviation are correct? I.The greater the standard deviation, the lower the risk.
II)The standard deviation is a measure of volatility.
III)The higher the standard deviation, the less certain the rate of return in any one given year.
IV)The higher the standard deviation, the higher the expected return.

Accepted Answer

A) I and III only. 
B) II, III, and IV only. 
C) I, III, and IV only. 
D) I, II, and III only. 
E) I, II, III, and IV. 
A) I and III only. 
B) II, III, and IV only. 
C) I, III, and IV only. 
D) I, II, and III only. 
E) I, II, III, and IV.

Question 7

Accepted Answer

A) 3.2% 
B) 3.4% 
C) 3.6% 
D) 3.8% 
E) 4.0% 
A) 3.2% 
B) 3.4% 
C) 3.6% 
D) 3.8% 
E) 4.0%

Question 8

A year ago, you purchased 300 shares of IXC Technologies at a price of £9.03 per share.The shares pay an annual dividend of £.10 per share.Today, you sold all of your shares for £28.14 per
Share.What is your total monetary return on this investment?

Accepted Answer

A) £5,703 
B) £5,733 
C) £5,753 
D) £5,763 
E) £5,853 
A) £5,703 
B) £5,733 
C) £5,753 
D) £5,763 
E) £5,853

Question 9

If we assume that the standard deviation on Company A's shares is greater than that on Company B's shares, this indicates that:
I.the required rate of return on Company A's shares is higher than that on Company B's shares.
II.the required rate of return on Company A's shares is lower than that on Company B's shares.
III.the potential loss from Company A's shares is greater than that from Company B's shares.
IV.the potential loss from Company A's shares is smaller than that from Company B's shares.
V.there is no difference between the required rate of return on and potential loss from Company A's
Shares and those associated with Company B's shares.

Accepted Answer

A) I and III only. 
B) I and II only. 
C) II and III only. 
D) II and IV only. 
E) V only. 
A) I and III only. 
B) I and II only. 
C) II and III only. 
D) II and IV only. 
E) V only.

Question 10

Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.

Accepted Answer

A) overestimate; overestimate 
B) overestimate; underestimate 
C) underestimate; overestimate 
D) underestimate; underestimate 
E) accurately; accurately 
A) overestimate; overestimate 
B) overestimate; underestimate 
C) underestimate; overestimate 
D) underestimate; underestimate 
E) accurately; accurately

Question 11

The average compound return earned per year over a multi-year period is called the _____ average return.

Accepted Answer

A) arithmetic 
B) standard 
C) variant 
D) geometric 
E) real 
A) arithmetic 
B) standard 
C) variant 
D) geometric 
E) real

Question 12

In theory, the return you earn from government bonds (Treasury bills, or T-bills) which virtually have no default risk over a short time (one year or less) is called the:

Accepted Answer

A) geometric average return. 
B) inﬂation premium. 
C) risk premium. 
D) risk-free return. 
E) arithmetic average return. 
A) geometric average return. 
B) inﬂation premium. 
C) risk premium. 
D) risk-free return. 
E) arithmetic average return.

Question 13

You earned a total return of -5% on NoDotCom this year, earned -40% last year, and earned 30% two years ago.Calculate both the three-year holding period return and the average three year return.

Accepted Answer

3-year holding period return =

Question 14

Assuming no dividends were paid, what was the 3-year holding period return on a share given the following information: Year 1 return = 10%, Year 2 return = 15%, Year 3 return = 12%.

Accepted Answer

A) 12.3% 
B) 13.9% 
C) 15.8% 
D) 41.7% 
E) 46.5% 
A) 12.3% 
B) 13.9% 
C) 15.8% 
D) 41.7% 
E) 46.5%

Question 15

Little John Industries sold for £1.90 on January 1 and ended the year at a price of £2.50.In addition, the equity paid dividends of £0.20 per share.Calculate Little John's dividend yield, capital gain yield, and total rate of return for the year.

Accepted Answer

Dividend yield = £0.20/£1.90 =

Question 16

Capital market history shows us that the average return relationship from lowest to highest between securities is:

Accepted Answer

A) inﬂation, corporate bonds, Treasuries, small company shares, large company shares. 
B) Treasury bills, small company shares, large company shares. 
C) Treasury bills, corporate bonds, government bonds, large common shares, small company
Shares. 
D) Treasury bills, government bonds, corporate bonds, large common shares, small company
Shares. 
E) There is no ordering. 
A) inﬂation, corporate bonds, Treasuries, small company shares, large company shares. 
B) Treasury bills, small company shares, large company shares. 
C) Treasury bills, corporate bonds, government bonds, large common shares, small company
Shares. 
D) Treasury bills, government bonds, corporate bonds, large common shares, small company
Shares. 
E) There is no ordering.

Question 17

The excess return required from a risky asset over that required from a risk-free asset is called the:

Accepted Answer

A) risk premium. 
B) geometric premium. 
C) excess return. 
D) average return. 
E) variance. 
A) risk premium. 
B) geometric premium. 
C) excess return. 
D) average return. 
E) variance.

Question 18

A equity had returns of 11%, 1%, 9%, 15%, and -6% for the past ﬁve years.Based on these returns, what is the approximate probability that this equity will earn at least 23% in any one given year?

Accepted Answer

A) 0.5% 
B) 1.0% 
C) 2.5% 
D) 5.0% 
E) 16.0% 
A) 0.5% 
B) 1.0% 
C) 2.5% 
D) 5.0% 
E) 16.0%

Question 19

A share had returns of 6%, 13%, -11%, and 17% over the past four years.What is the geometric average return for this time period?

Accepted Answer

A) 4.5% 
B) 5.7% 
C) 6.2% 
D) 7.3% 
E) 8.2% 
A) 4.5% 
B) 5.7% 
C) 6.2% 
D) 7.3% 
E) 8.2%

Question 20

One year ago, you purchased an equity at a price of £32 a share.Today, you sold the equity and realized a total return of 25%.Your capital gain was £6 a share.What was your dividend yield?

Accepted Answer

A) 1.25% 
B) 3.75% 
C) 6.25% 
D) 18.75% 
E) 21.25% 
A) 1.25% 
B) 3.75% 
C) 6.25% 
D) 18.75% 
E) 21.25%

Exam 9: Risk and Return: Lessons From Market History

The returns on your portfolio over the last 5 years were -5%, 20%, 0%, 10% and 5%.What is the standard deviation of your return?

Suppose you own a risky asset with an expected return of 12% and a standard deviation of 20%.If the returns are normally distributed, the approximate probability of receiving a return greater than 32% is approximately:

An equity has an expected rate of return of 8.3% and a standard deviation of 6.4%.Which one of the following best describes the probability that this equity will lose 11% or more in any one given year?

Which one of the following is a correct statement concerning risk premium?

A year ago, you purchased 300 shares of IXC Technologies at a price of £9.03 per share.The shares pay an annual dividend of £.10 per share.Today, you sold all of your shares for £28.14 per Share.What is your total monetary return on this investment?

Estimates using the arithmetic average will probably tend to _____ values over the long-term while estimates using the geometric average will probably tend to _____ values over the short-term.

The average compound return earned per year over a multi-year period is called the _____ average return.

In theory, the return you earn from government bonds (Treasury bills, or T-bills) which virtually have no default risk over a short time (one year or less) is called the:

You earned a total return of -5% on NoDotCom this year, earned -40% last year, and earned 30% two years ago.Calculate both the three-year holding period return and the average three year return.

Assuming no dividends were paid, what was the 3-year holding period return on a share given the following information: Year 1 return = 10%, Year 2 return = 15%, Year 3 return = 12%.

Little John Industries sold for £1.90 on January 1 and ended the year at a price of £2.50.In addition, the equity paid dividends of £0.20 per share.Calculate Little John's dividend yield, capital gain yield, and total rate of return for the year.

Capital market history shows us that the average return relationship from lowest to highest between securities is:

The excess return required from a risky asset over that required from a risk-free asset is called the:

A equity had returns of 11%, 1%, 9%, 15%, and -6% for the past ﬁve years.Based on these returns, what is the approximate probability that this equity will earn at least 23% in any one given year?

A share had returns of 6%, 13%, -11%, and 17% over the past four years.What is the geometric average return for this time period?

One year ago, you purchased an equity at a price of £32 a share.Today, you sold the equity and realized a total return of 25%.Your capital gain was £6 a share.What was your dividend yield?

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: the Capital Asset Pricing Model

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

Filters

Estimates using the arithmetic average will probably tend to _ values over the long-term while estimates using the geometric average will probably tend to _ values over the short-term.