Question 1

The primary difference between the standard deviation and the coefficient of variation as measures of risk is:

Accepted Answer

A) the coefficient of variation is easier to compute. 
B) the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute risk. 
C) the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk. 
D) the standard deviation is rarely used in practice whereas the coefficient of variation is widely used. 
A) the coefficient of variation is easier to compute. 
B) the standard deviation is a measure of relative risk whereas the coefficient of variation is a measure of absolute risk. 
C) the coefficient of variation is a measure of relative risk whereas the standard deviation is a measure of absolute risk. 
D) the standard deviation is rarely used in practice whereas the coefficient of variation is widely used.

Question 2

The kind of probability distribution that shows all possible outcomes for a given event results in:

Accepted Answer

A) a bell curve 
B) a bar chart 
C) a synchronous table 
D) an a synchronous table 
A) a bell curve 
B) a bar chart 
C) a synchronous table 
D) an a synchronous table

Question 3

All of the following statements about risk are correct EXCEPT:

Accepted Answer

A) Risk can be defined as the chance for financial loss. 
B) The term risk is used interchangeably with uncertainty. 
C) Risk refers to the certainty of returns associated with a given asset. 
D) The more certain the return from an asset, the less variability and therefore less risk. 
A) Risk can be defined as the chance for financial loss. 
B) The term risk is used interchangeably with uncertainty. 
C) Risk refers to the certainty of returns associated with a given asset. 
D) The more certain the return from an asset, the less variability and therefore less risk.

Question 4

What kind of probability distribution shows all possible outcomes for a given event?

Accepted Answer

A) discrete 
B) expected value 
C) bar chart 
D) continuous 
A) discrete 
B) expected value 
C) bar chart 
D) continuous

Question 5

What will happen to the Security Market Line if: (1) inflation expectations increase, and (2) investors become more risk averse?

Accepted Answer

A) shift up and have a steeper slope 
B) shift down and have the same slope 
C) shift down and have a steeper slope 
D) shift up but have less slope 
A) shift up and have a steeper slope 
B) shift down and have the same slope 
C) shift down and have a steeper slope 
D) shift up but have less slope

Question 6

The is an absolute measure of risk, and the is a relative measure of risk.

Accepted Answer

A) systematic risk, unsystematic risk 
B) standard deviation, coefficient of variation 
C) correlation, covariance 
D) security market line, characteristic line 
A) systematic risk, unsystematic risk 
B) standard deviation, coefficient of variation 
C) correlation, covariance 
D) security market line, characteristic line

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

In the , the expected return on a security is equal to the risk-free rate plus a single risk premium that is equal to the product of the expected rate of return on the market portfolio less the risk-free rate times the sensitivity of the security's returns to the market return.

Accepted Answer

A) Arbitrage Pricing Theory 
B) Capital Asset Pricing Model 
C) Dividend Valuation Model 
D) Risk Premium on Debt Model 
A) Arbitrage Pricing Theory 
B) Capital Asset Pricing Model 
C) Dividend Valuation Model 
D) Risk Premium on Debt Model

Question 9

Investors generally are considered to be risk because they expect to be compensated for assuming risk.

Accepted Answer

A) inverse 
B) seekers 
C) averse 
D) takers 
A) inverse 
B) seekers 
C) averse 
D) takers

Question 10

Which of the following statements is/are correct?
I.Unsystematic risk can be eliminated through diversification.

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 11

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

Question 12

A portfolio is efficient if .

Accepted Answer

A) for a given standard deviation, there is no other portfolio with a higher expected return 
B) for a given expected return, there is no other portfolio with a lower standard deviation 
C) its standard deviation is equal to -1.0 
D) for a given standard deviation, there is no other portfolio with a higher expected return and if, for a given expected return, there is no other portfolio with a lower standard deviation 
A) for a given standard deviation, there is no other portfolio with a higher expected return 
B) for a given expected return, there is no other portfolio with a lower standard deviation 
C) its standard deviation is equal to -1.0 
D) for a given standard deviation, there is no other portfolio with a higher expected return and if, for a given expected return, there is no other portfolio with a lower standard deviation

Question 13

In order to completely eliminate the risk (i.e., a portfolio standard deviation of zero) in a two-asset portfolio, the correlation coefficient between the securities must be .

Accepted Answer

A) less than +1.0 
B) equal to 0.0 
C) less than 0.0 
D) equal to -1.0 
A) less than +1.0 
B) equal to 0.0 
C) less than 0.0 
D) equal to -1.0

Question 14

What is the beta of the following project?
$$\begin{array} { | c | c } 
\hline \text { Comparative Returns an Past Prajects } & \text { Praject' 5 Returns } \
\hline 12 \% & 15 \% \
\hline 1 [ 1 \% & 8 \% \
\hline 6.5 \% & 7 \% \
\hline 2 \% & - 1 \% \
\hline
\end{array}$$

Accepted Answer

A) 1.11 
B) .95 
C) 2.15 
D) 1.43 
A) 1.11 
B) .95 
C) 2.15 
D) 1.43

Question 15

The term structure of interest rates is the pattern of interest rate yields for securities that differ only in

Accepted Answer

A) default risk 
B) liquidity premiums 
C) the yield to maturity 
D) the length of time to maturity 
A) default risk 
B) liquidity premiums 
C) the yield to maturity 
D) the length of time to maturity

Question 16

Dana has a portfolio of 8 securities, each with a market value of $5,000.The current beta of the portfolio is 1.28 and the beta of the riskiest security is 1.75.Dana wishes to reduce her portfolio beta to 1.15 by selling the riskiest security and replacing it with another security with a lower beta.What must be the beta of the replacement security?

Accepted Answer

A) 1.21 
B) 0.91 
C) 0.73 
D) 1.62 
A) 1.21 
B) 0.91 
C) 0.73 
D) 1.62

Question 17

Compute the risk premium for the stock of Omega Tools if the risk-free rate is 6%, the expected market return is 12%, and Omega's stock has a beta of .8.

Accepted Answer

A) 10.8% 
B) 4.8% 
C) 48.0% 
D) 16.8% 
A) 10.8% 
B) 4.8% 
C) 48.0% 
D) 16.8%

Question 18

In general, when the correlation coefficient between the returns on two securities is , the risk of a portfolio is
The weighted average of the total risk of the two individual securities.

Accepted Answer

A) equal to +1.0;equal to 
B) less than +1.0;less than 
C) a and b 
D) none of these 
A) equal to +1.0;equal to 
B) less than +1.0;less than 
C) a and b 
D) none of these

Question 19

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

Accepted Answer

The risk elements include:
1.m

Question 20

Phoenix Company common stock is currently selling for $20 per share.Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now:
 
Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the expected rate of return on Phoenix Stock.

Accepted Answer

A) 8% 
B) 0% 
C) 10% 
D) 40% 
A) 8% 
B) 0% 
C) 10% 
D) 40%

Exam 8: Analysis of Risk and Return

The primary difference between the standard deviation and the coefficient of variation as measures of risk is:

The kind of probability distribution that shows all possible outcomes for a given event results in:

All of the following statements about risk are correct EXCEPT:

What kind of probability distribution shows all possible outcomes for a given event?

What will happen to the Security Market Line if: (1) inflation expectations increase, and (2) investors become more risk averse?

The is an absolute measure of risk, and the is a relative measure of risk.

In the , the expected return on a security is equal to the risk-free rate plus a single risk premium that is equal to the product of the expected rate of return on the market portfolio less the risk-free rate times the sensitivity of the security's returns to the market return.

Investors generally are considered to be risk because they expect to be compensated for assuming risk.

Which of the following statements is/are correct? I.Unsystematic risk can be eliminated through diversification.

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

A portfolio is efficient if .

In order to completely eliminate the risk (i.e., a portfolio standard deviation of zero) in a two-asset portfolio, the correlation coefficient between the securities must be .

What is the beta of the following project? Comparative Returns an Past Prajects Praject' 5 Returns 12\% 15\% 1[1\% 8\% 6.5\% 7\% 2\% -1\%

The term structure of interest rates is the pattern of interest rate yields for securities that differ only in

Compute the risk premium for the stock of Omega Tools if the risk-free rate is 6%, the expected market return is 12%, and Omega's stock has a beta of .8.

In general, when the correlation coefficient between the returns on two securities is , the risk of a portfolio is The weighted average of the total risk of the two individual securities.

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

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

A: The Time Value of Money

Fixed-Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Capital Budgeting and Cash Flow Analysis

Capital Budgeting: Decision Criteria and Real Option Considerations

A: Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital, Capital Structure, and Dividend Policy

Capital Structure Concepts

Capital Structure Management in Practice

A: Capital Structure Management in Practice

Dividend Policy

Working Capital Management

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate-Term Financing

Financing with Derivatives

A: Financing with Derivatives

Risk Management

International Financial Management

Corporate Restructuring

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