Question 1

The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.

Accepted Answer

A) True 
 B)False

Question 2

Cash flows is the most relevant variable to measure the returns on debt instruments,while GAAP net income is the most relevant variable to measure the returns on common stock.

Accepted Answer

A) True 
 B)False

Question 3

You hold a portfolio with the following securities:
 
What is the expected return for the portfolio?

Accepted Answer

A)  17.60% 
B)  20.67% 
C)  23.54% 
D)  28.59% 
A)  17.60% 
B)  20.67% 
C)  23.54% 
D)  28.59%

Question 4

You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year.Historical data suggests the following probability distribution for your commission income.Which job has the higher expected income?

Accepted Answer

A)  The salary of $50,000 is greater than the expected commission of $49,630. 
B)  The salary of $50,000 is greater than the expected commission of $48,400. 
C)  The salary of $50,000 is less than the expected commission of $50,050. 
D)  The salary of $50,000 is less than the expected commission of $52,720. 
A)  The salary of $50,000 is greater than the expected commission of $49,630. 
B)  The salary of $50,000 is greater than the expected commission of $48,400. 
C)  The salary of $50,000 is less than the expected commission of $50,050. 
D)  The salary of $50,000 is less than the expected commission of $52,720.

Question 5

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the least risky investment?

Accepted Answer

A)  common stock of large firms 
B)  U.S. Treasury bills 
C)  common stock of small firms 
D)  long-term government bonds 
A)  common stock of large firms 
B)  U.S. Treasury bills 
C)  common stock of small firms 
D)  long-term government bonds

Question 6

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?

Accepted Answer

A)  Wait until the stock market rises. 
B)  Increase the amount of money invested in the portfolio. 
C)  Purchase a variety of securities; i.e., diversify. 
D)  Purchase stocks that have exceptionally high standard deviations. 
A)  Wait until the stock market rises. 
B)  Increase the amount of money invested in the portfolio. 
C)  Purchase a variety of securities; i.e., diversify. 
D)  Purchase stocks that have exceptionally high standard deviations.

Question 7

Accounting profits is the most relevant variable the financial manager uses to measure returns.

Accepted Answer

A) True 
 B)False

Question 8

Changes in the general economy,like changes in interest rates or tax laws,represent what type of risk?

Accepted Answer

A)  company-unique risk 
B)  market risk 
C)  unsystematic risk 
D)  diversifiable risk 
A)  company-unique risk 
B)  market risk 
C)  unsystematic risk 
D)  diversifiable risk

Question 9

An investor currently holds the following portfolio:
 
If the risk-free rate of return is 2% and the market risk premium is 7%,then the required return on the portfolio is

Accepted Answer

A)  14.91%. 
B)  15.93%. 
C)  21.91%. 
D)  23.93%. 
A)  14.91%. 
B)  15.93%. 
C)  21.91%. 
D)  23.93%.

Question 10

A typical measure for the risk-free rate of return is the

Accepted Answer

A)  U.S. Treasury bill rate. 
B)  prime lending rate. 
C)  money-market rate. 
D)  short-term AAA-rated bond rate. 
A)  U.S. Treasury bill rate. 
B)  prime lending rate. 
C)  money-market rate. 
D)  short-term AAA-rated bond rate.

Question 11

Redesign Corp.is considering a new strategy that would increase its expected return from 12% to 13.9%,but would also increase its beta from 1.2 to 1.8.If the risk-free rate is 5% and the return on the market is expected to be 10%,should Redesign change its strategy?

Accepted Answer

No.Currently the company's required retu

Question 12

A rational investor will always prefer an investment with a lower standard deviation of returns,because such investments are less risky.

Accepted Answer

A) True 
 B)False

Question 13

Bay Land,Inc.has the following distribution of returns:
   
Assuming that these returns are normally distributed,what is the probability that Bay Land,Inc.will return less than 7.25%? Show all work,and clearly explain and state your answer.

Accepted Answer

Exp.Return = (.3 × .25)+ (.4 × .15)+ (.3

Question 14

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk-free rate is 4%.According to CAPM,what is the required rate of return on Collectible's stock?

Accepted Answer

A)  37.5% 
B)  31.5% 
C)  26.5% 
D)  23.5% 
A)  37.5% 
B)  31.5% 
C)  26.5% 
D)  23.5%

Question 15

Which of the following statements is MOST correct regarding beta?

Accepted Answer

A)  Beta must be calculated using at least 5 years of monthly returns data to be accurate. 
B)  Beta can only be measured properly using daily returns. 
C)  Beta for a particular company remains constant over time. 
D)  Even professionals may not agree on the measurement of beta. 
A)  Beta must be calculated using at least 5 years of monthly returns data to be accurate. 
B)  Beta can only be measured properly using daily returns. 
C)  Beta for a particular company remains constant over time. 
D)  Even professionals may not agree on the measurement of beta.

Question 16

Assume that you expect to hold a $20,000 investment for one year.It is forecasted to have a year end value of $21,000 with a 30% probability; a year end value of $24,000 with a 45% probability; and a year end value of $30,000 with a 25% probability.What is the standard deviation of the holding period return for this investment?

Accepted Answer

A)  12.06% 
B)  14.36% 
C)  16.36% 
D)  33.45% 
A)  12.06% 
B)  14.36% 
C)  16.36% 
D)  33.45%

Question 17

Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

Accepted Answer

A) True 
 B)False

Question 18

An investor currently holds the following portfolio:
 
The investor is worried that the beta of his portfolio is too high,so he wants to sell some stock C and add stock D,which has a beta of 1.0,to his portfolio.If the investor wants his portfolio to have a beta of 1.72,how much stock C must he replace with stock D?

Accepted Answer

A)  $18,000 
B)  $24,000 
C)  $31,000 
D)  $36,000 
A)  $18,000 
B)  $24,000 
C)  $31,000 
D)  $36,000

Question 19

Of the following,which differs in meaning from the other three?

Accepted Answer

A)  systematic risk 
B)  market risk 
C)  undiversifiable risk 
D)  asset-unique risk 
A)  systematic risk 
B)  market risk 
C)  undiversifiable risk 
D)  asset-unique risk

Question 20

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

Accepted Answer

A) True 
 B)False

The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.

Cash flows is the most relevant variable to measure the returns on debt instruments,while GAAP net income is the most relevant variable to measure the returns on common stock.

You hold a portfolio with the following securities: What is the expected return for the portfolio?

You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year.Historical data suggests the following probability distribution for your commission income.Which job has the higher expected income?

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the least risky investment?

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?

Accounting profits is the most relevant variable the financial manager uses to measure returns.

Changes in the general economy,like changes in interest rates or tax laws,represent what type of risk?

An investor currently holds the following portfolio: If the risk-free rate of return is 2% and the market risk premium is 7%,then the required return on the portfolio is

A typical measure for the risk-free rate of return is the

Redesign Corp.is considering a new strategy that would increase its expected return from 12% to 13.9%,but would also increase its beta from 1.2 to 1.8.If the risk-free rate is 5% and the return on the market is expected to be 10%,should Redesign change its strategy?

A rational investor will always prefer an investment with a lower standard deviation of returns,because such investments are less risky.

Bay Land,Inc.has the following distribution of returns: Assuming that these returns are normally distributed,what is the probability that Bay Land,Inc.will return less than 7.25%? Show all work,and clearly explain and state your answer.

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk-free rate is 4%.According to CAPM,what is the required rate of return on Collectible's stock?

Which of the following statements is MOST correct regarding beta?

Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

Of the following,which differs in meaning from the other three?

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

Exam 6: The Meaning and Measurement of Risk and Return

The expected rate of return from an investment is equal to the expected cash flows divided by the initial investment.

Cash flows is the most relevant variable to measure the returns on debt instruments,while GAAP net income is the most relevant variable to measure the returns on common stock.

You hold a portfolio with the following securities: What is the expected return for the portfolio?

You are considering a sales job that pays you on a commission basis or a salaried position that pays you $50,000 per year.Historical data suggests the following probability distribution for your commission income.Which job has the higher expected income?

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the least risky investment?

How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return?

Accounting profits is the most relevant variable the financial manager uses to measure returns.

Changes in the general economy,like changes in interest rates or tax laws,represent what type of risk?

An investor currently holds the following portfolio: If the risk-free rate of return is 2% and the market risk premium is 7%,then the required return on the portfolio is

A typical measure for the risk-free rate of return is the

Redesign Corp.is considering a new strategy that would increase its expected return from 12% to 13.9%,but would also increase its beta from 1.2 to 1.8.If the risk-free rate is 5% and the return on the market is expected to be 10%,should Redesign change its strategy?

A rational investor will always prefer an investment with a lower standard deviation of returns,because such investments are less risky.

Bay Land,Inc.has the following distribution of returns: Assuming that these returns are normally distributed,what is the probability that Bay Land,Inc.will return less than 7.25%? Show all work,and clearly explain and state your answer.

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk-free rate is 4%.According to CAPM,what is the required rate of return on Collectible's stock?

Which of the following statements is MOST correct regarding beta?

Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

Of the following,which differs in meaning from the other three?

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters