Question 1

According to the ____, long-term interest rates are a function of expected short-term interest rates.

Accepted Answer

A)  Maturity theory 
B)  Expectations theory 
C)  Market segmentation theory 
D)  Preferred habitat theory 
A)  Maturity theory 
B)  Expectations theory 
C)  Market segmentation theory 
D)  Preferred habitat theory

Question 2

The ____ the standard deviation, the ____ the investment.

Accepted Answer

A)  smaller, larger the expected return on 
B)  larger, riskier 
C)  smaller, riskier 
D)  larger, smaller the expected return on 
A)  smaller, larger the expected return on 
B)  larger, riskier 
C)  smaller, riskier 
D)  larger, smaller the expected return on

Question 3

The following yields on 20 year bonds prevailed in January for the three securities shown:  
The difference in yields is due primarily to

Accepted Answer

A)  maturity risk premium 
B)  default risk premium 
C)  seniority risk premium 
D)  financial risk premium 
A)  maturity risk premium 
B)  default risk premium 
C)  seniority risk premium 
D)  financial risk premium

Question 4

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

Accepted Answer

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

Question 5

An increase in uncertainty regarding the future economic outlook has the effect of ____.

Accepted Answer

A)  increasing the slope of the security market line 
B)  shifting the security market line upward 
C)  reducing risk 
D)  none of the above 
A)  increasing the slope of the security market line 
B)  shifting the security market line upward 
C)  reducing risk 
D)  none of the above

Question 6

An investor, who believes the economy is slowing down, wishes to reduce the risk of her portfolio. She currently owns 12 securities, each with a market value of $3,000. The current beta of the portfolio is 1.21 and the beta of the riskiest security is 1.62. What will the portfolio beta be if the riskiest security is replaced with a security of equal market value but a beta of 0.80?

Accepted Answer

A)  1.14 
B)  1.18 
C)  1.05 
D)  1.10 
A)  1.14 
B)  1.18 
C)  1.05 
D)  1.10

Question 7

Security A offers an expected return of 14% with a standard deviation of 8%. Security B offers an expected return of 11% with a standard deviation of 6%. If you wish to construct a portfolio with a 12.8% expected return, what percentage of the portfolio will consist of security A?

Accepted Answer

A)  55% 
B)  60% 
C)  65% 
D)  45% 
A)  55% 
B)  60% 
C)  65% 
D)  45%

Question 8

Lotte Group is planing on diversifying into the transportation industry. As a result, Lotte's beta would rise to 1.3 from 1.1 and the expected long-term growth rate in the firm's earnings would increase from 11% to 14%. Currently the risk-free rate is 5.0% and the market risk premium is 8.6%. If Lotte's current dividend is $1.30, should Lotte diversify into the transportation industry?

Accepted Answer

A)  No, stock price does not increase 
B)  No, stock price declines about $10.11 
C)  Yes, stock price increases about $19.42 
D)  Yes, stock price increases by about $26.27 
A)  No, stock price does not increase 
B)  No, stock price declines about $10.11 
C)  Yes, stock price increases about $19.42 
D)  Yes, stock price increases by about $26.27

Question 9

Why is risk an increasing function of time?

Accepted Answer

Investment decisions require that return

Question 10

Users of the CAPM should be aware of some of the problems in its practical application. These problems include which of the following?

Accepted Answer

A)  estimating expected future market returns 
B)  determining the most appropriate measure of the risk- free rate 
C)  determining an asset's future beta 
D)  all of the above are problems in application of the CAPM 
A)  estimating expected future market returns 
B)  determining the most appropriate measure of the risk- free rate 
C)  determining an asset's future beta 
D)  all of the above are problems in application of the CAPM

Question 11

Texas Computers (TC) stock has a beta of 1.5 and American Water (AW) stock has a beta of 0.5. Which of the following statements will be true about these securities?

Accepted Answer

A)  The addition of TC would reduce portfolio risk more than the addition of AW. 
B)  The addition of AW would reduce total portfolio risk more than the addition of TC. 
C)  The required return for TC is greater than the required return for AW. 
D)  The required return for AW is greater than the required return of TC. 
A)  The addition of TC would reduce portfolio risk more than the addition of AW. 
B)  The addition of AW would reduce total portfolio risk more than the addition of TC. 
C)  The required return for TC is greater than the required return for AW. 
D)  The required return for AW is greater than the required return of TC.

Question 12

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 13

An increase in the expected future inflation rate has the effect of ____.

Accepted Answer

A)  increasing the slope of the security market line 
B)  shifting the security market line upward by the amount of the expected increase in inflation 
C)  increasing systematic risk 
D)  none of the above 
A)  increasing the slope of the security market line 
B)  shifting the security market line upward by the amount of the expected increase in inflation 
C)  increasing systematic risk 
D)  none of the above

Question 14

Recalling the meaning and calculation of beta, a security that is completely uncorrelated (pi,m = 0) with the market portfolio would have a beta of

Accepted Answer

A)  -1 
B)  0 
C)  +1 
D)  -100 
A)  -1 
B)  0 
C)  +1 
D)  -100

Question 15

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 16

The default risk premium reflects the fact that

Accepted Answer

A)  the premium remains constant over time 
B)  there is a positive relationship between risk and maturity 
C)  there is a positive relationship between default risk and required returns 
D)  the premium varies depending on the time to maturity 
A)  the premium remains constant over time 
B)  there is a positive relationship between risk and maturity 
C)  there is a positive relationship between default risk and required returns 
D)  the premium varies depending on the time to maturity

Question 17

____ refers to the ability of an investor to buy and sell a company's securities quickly and without a significant loss of value.

Accepted Answer

A)  Default risk 
B)  Business and financial risk 
C)  Maturity risk 
D)  Marketability risk 
A)  Default risk 
B)  Business and financial risk 
C)  Maturity risk 
D)  Marketability risk

Question 18

The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%. Determine the probability of earning a negative rate of return (i.e. less than 0%) on FTC common stock.

Accepted Answer

A)  0.0228 
B)  2.00 
C)  0.5000 
D)  0.9772
(Note: Table V is required to work this problem.) 
A)  0.0228 
B)  2.00 
C)  0.5000 
D)  0.9772
(Note: Table V is required to work this problem.)

Question 19

The security market line can be thought of as expressing relationships between required rates of return and

Accepted Answer

A)  the time value of money 
B)  beta 
C)  total risk 
D)  portfolio diversification 
A)  the time value of money 
B)  beta 
C)  total risk 
D)  portfolio diversification

Question 20

Sally's broker told her that the expected return from her portfolio was 14.2%. If 40% of her securities have an expected return of 10.3 percent and 20% have an expected return of 12.8 percent, what is the expected return of the remaining portion of her portfolio?

Accepted Answer

A)  20.9% 
B)  18.8% 
C)  12.5% 
D)  cannot be determined 
A)  20.9% 
B)  18.8% 
C)  12.5% 
D)  cannot be determined

Exam 8: Analysis of Risk and Return

According to the ____, long-term interest rates are a function of expected short-term interest rates.

The ____ the standard deviation, the ____ the investment.

The following yields on 20 year bonds prevailed in January for the three securities shown: The difference in yields is due primarily to

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

An increase in uncertainty regarding the future economic outlook has the effect of ____.

Security A offers an expected return of 14% with a standard deviation of 8%. Security B offers an expected return of 11% with a standard deviation of 6%. If you wish to construct a portfolio with a 12.8% expected return, what percentage of the portfolio will consist of security A?

Why is risk an increasing function of time?

Users of the CAPM should be aware of some of the problems in its practical application. These problems include which of the following?

Texas Computers (TC) stock has a beta of 1.5 and American Water (AW) stock has a beta of 0.5. Which of the following statements will be true about these securities?

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 ____.

An increase in the expected future inflation rate has the effect of ____.

Recalling the meaning and calculation of beta, a security that is completely uncorrelated (pi,m = 0) with the market portfolio would have a beta of

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

The default risk premium reflects the fact that

____ refers to the ability of an investor to buy and sell a company's securities quickly and without a significant loss of value.

The expected rate of return for the coming year on FTC common stock is normally distributed with a mean of 14% and a standard deviation of 7%. Determine the probability of earning a negative rate of return (i.e. less than 0%) on FTC common stock.

The security market line can be thought of as expressing relationships between required rates of return and

Sally's broker told her that the expected return from her portfolio was 14.2%. If 40% of her securities have an expected return of 10.3 percent and 20% have an expected return of 12.8 percent, what is the expected return of the remaining portion of her portfolio?

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

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

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-term Financing

The Management of Cash and Marketable Securities

Management of Accounts Receivable and Inventories

Lease and Intermediate-term Financing

Financing With Derivatives

Risk Management

International Financial Management

Corporate Restructuring

Continuous Compounding and Discounting

Mutually Exclusive Investments Having Unequal Lives

Breakeven Analysis

Bond Refunding Analysis

Taxes

Filters

The the standard deviation, the the investment.

Recalling the meaning and calculation of beta, a security that is completely uncorrelated (p_i,m = 0) with the market portfolio would have a beta of

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