Question 1

The TSX 300 index is:

Accepted Answer

A) the most representative of stock market indexes. 
B) an index of Canada's major corporations. 
C) an index of 300 major stocks. 
D) an equally weighted index of all stocks traded on the New York Stock Exchange. 
A) the most representative of stock market indexes. 
B) an index of Canada's major corporations. 
C) an index of 300 major stocks. 
D) an equally weighted index of all stocks traded on the New York Stock Exchange. C

Question 2

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the rate of return on:

Accepted Answer

A) treasury bills. 
B) the market portfolio. 
C) the market portfolio minus the rate of return on treasury bills. 
D) treasury bonds plus a maturity premium. 
A) treasury bills. 
B) the market portfolio. 
C) the market portfolio minus the rate of return on treasury bills. 
D) treasury bonds plus a maturity premium. B

Question 3

What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks?

Accepted Answer

A) individual stock's standard deviation will be lower 
B) individual stock's standard deviation will be higher 
C) the standard deviations should be equal 
D) there is no way to predict this relationship 
A) individual stock's standard deviation will be lower 
B) individual stock's standard deviation will be higher 
C) the standard deviations should be equal 
D) there is no way to predict this relationship B

Question 4

Stock A has 10 million shares issued and Stock B has 5 million shares issued.What is their relative weighting if both stocks are represented in the S&P 500?

Accepted Answer

A) equal-weightings, like all S&P 500 stocks. 
B) B has twice the weighting, to account for having fewer shares. 
C) A has twice the weighting, to account for having more shares. 
D) they are weighted according to their expected performance. 
A) equal-weightings, like all S&P 500 stocks. 
B) B has twice the weighting, to account for having fewer shares. 
C) A has twice the weighting, to account for having more shares. 
D) they are weighted according to their expected performance.

Question 5

The TSX 300 accounts for nearly 50 percent of the total value of stocks traded in Canada.

Accepted Answer

A) True 
 B)False

Question 6

If when a coin is tossed the observance of a head rewards you with a dollar and the observance of a tail costs you fifty cents, how much would you expect to gain after twenty tosses?

Accepted Answer

A) $5.00 
B) $7.50 
C) $10.00 
D) $15.00 
A) $5.00 
B) $7.50 
C) $10.00 
D) $15.00

Question 7

The benefits of portfolio diversification are highest when the individual securities have returns that:

Accepted Answer

A) vary directly with the rest of the portfolio. 
B) vary indirectly with the rest of the portfolio. 
C) are uncorrelated with the rest of the portfolio. 
D) are countercyclical. 
A) vary directly with the rest of the portfolio. 
B) vary indirectly with the rest of the portfolio. 
C) are uncorrelated with the rest of the portfolio. 
D) are countercyclical.

Question 8

Explain the concepts of unique risk, market risk, and how the total level of portfolio risk can change by adding additional securities.

Accepted Answer

Unique or diversifiable risks affect spe

Question 9

What is the difference between unique risk, which can be diversified away, and market risk, which cannot?

Accepted Answer

Even if you hold a well-diversified port

Question 10

Which of the following firms is likely to exhibit the least macro risk exposure?

Accepted Answer

A) furniture manufacturer 
B) oil driller 
C) dog food processor 
D) auto manufacturer 
A) furniture manufacturer 
B) oil driller 
C) dog food processor 
D) auto manufacturer

Question 11

How can one estimate the opportunity cost of capital for an "average risk" project?

Accepted Answer

Over the years total return index value

Question 12

Common stocks have offered an annual risk premium in nominal terms, but they have:

Accepted Answer

A) also offered the risk premium in real terms. 
B) not offered a risk premium in real terms. 
C) not offered more than corporate bonds in real terms. 
D) offered only slightly more than Treasury bonds in real terms. 
A) also offered the risk premium in real terms. 
B) not offered a risk premium in real terms. 
C) not offered more than corporate bonds in real terms. 
D) offered only slightly more than Treasury bonds in real terms.

Question 13

A stock is held one year, during which time its dividend yield was greater than its capital gains yield.For this stock, the percentage return:

Accepted Answer

A) is positive. 
B) is negative. 
C) equals the dividend yield. 
D) cannot be determined. 
A) is positive. 
B) is negative. 
C) equals the dividend yield. 
D) cannot be determined.

Question 14

If a stock is purchased for $25 per share and held one year, during which time a $3.50 dividend is paid and the price climbs to $28.25, the nominal rate of return is:

Accepted Answer

A) 13.00 percent. 
B) 14.00 percent. 
C) 23.01 percent 
D) 27.00 percent. 
A) 13.00 percent. 
B) 14.00 percent. 
C) 23.01 percent 
D) 27.00 percent.

Question 15

How is the calculation of a variance affected by an observation with a negative rate of return when other returns are positive?

Accepted Answer

A) it reduces the variance. 
B) it increases the variance. 
C) variance is not affected by negatives or positives. 
D) the effect cannot be determined from this information. 
A) it reduces the variance. 
B) it increases the variance. 
C) variance is not affected by negatives or positives. 
D) the effect cannot be determined from this information.

Question 16

Investment risk can best be described as the:

Accepted Answer

A) dispersion of possible returns. 
B) elimination of macro risk through diversification. 
C) possibility of changes in the cost of capital. 
D) level of systematic risk for an undiversified investor. 
A) dispersion of possible returns. 
B) elimination of macro risk through diversification. 
C) possibility of changes in the cost of capital. 
D) level of systematic risk for an undiversified investor.

Question 17

Calculate the real rate of interest if the nominal rate of interest is 9.3% and the inflation rate is 3.25%.

Accepted Answer

A) 7.86% 
B) 6.86% 
C) 5.86% 
D) 4.86% 
A) 7.86% 
B) 6.86% 
C) 5.86% 
D) 4.86%

Question 18

If the standard deviation of a portfolio's returns is known to be 30 percent, then its variance is:

Accepted Answer

A) 5.48 percent. 
B) 5.48 percent squared. 
C) 900.00 percent. 
D) 900.00 percent squared. 
A) 5.48 percent. 
B) 5.48 percent squared. 
C) 900.00 percent. 
D) 900.00 percent squared.

Question 19

Calculate the nominal and real returns for the following corporate bond investment: Purchased for $840 one year ago, 4 percent coupon rate, sold for $894.The inflation rate was 5.0 percent during the year.Would you consider this an appropriate investment if Treasury bills had yielded 6.0 percent over the same period? Why?

Accepted Answer

Nominal yield = @#IMG-DLM& = @#IMG-DLM& = 11.19%
Real yield

Question 20

Calculate the expected return, variance, and standard deviation for the following portfolio of four stocks:
 $$\begin{array} { | c | c | } 
\hline \text { Stock 1 } & 16.4 \% \text { retum } \
\hline \text { Stock 2 } & - 9.2 \% \text { retum } \
\hline \text { Stock 3 } & 7.9 \% \text { retum } \
\hline \text { Stock 4 } & 22.0 \% \text { retum } \
\hline
\end{array}$$

Accepted Answer

Expected return = @#IMG-DLM& = 9.28%
Var

Exam 11: Introduction to Risk, Return, and the Opportunity Cost of Capital

The TSX 300 index is:

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the rate of return on:

What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks?

Stock A has 10 million shares issued and Stock B has 5 million shares issued.What is their relative weighting if both stocks are represented in the S&P 500?

The TSX 300 accounts for nearly 50 percent of the total value of stocks traded in Canada.

If when a coin is tossed the observance of a head rewards you with a dollar and the observance of a tail costs you fifty cents, how much would you expect to gain after twenty tosses?

The benefits of portfolio diversification are highest when the individual securities have returns that:

Explain the concepts of unique risk, market risk, and how the total level of portfolio risk can change by adding additional securities.

What is the difference between unique risk, which can be diversified away, and market risk, which cannot?

Which of the following firms is likely to exhibit the least macro risk exposure?

How can one estimate the opportunity cost of capital for an "average risk" project?

Common stocks have offered an annual risk premium in nominal terms, but they have:

A stock is held one year, during which time its dividend yield was greater than its capital gains yield.For this stock, the percentage return:

If a stock is purchased for $25 per share and held one year, during which time a $3.50 dividend is paid and the price climbs to $28.25, the nominal rate of return is:

How is the calculation of a variance affected by an observation with a negative rate of return when other returns are positive?

Investment risk can best be described as the:

Calculate the real rate of interest if the nominal rate of interest is 9.3% and the inflation rate is 3.25%.

If the standard deviation of a portfolio's returns is known to be 30 percent, then its variance is:

Calculate the expected return, variance, and standard deviation for the following portfolio of four stocks: Stock 1 16.4\% retum Stock 2 -9.2\% retum Stock 3 7.9\% retum Stock 4 22.0\% retum

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters