Question 1

Which of the following is not an example of a source of systematic risk?

Accepted Answer

A)  interest rate changes 
B)  foreign competition with an industry's products 
C)  changes in the overall economic outlook 
D)  changes in the inflation rate 
A)  interest rate changes 
B)  foreign competition with an industry's products 
C)  changes in the overall economic outlook 
D)  changes in the inflation rate

Question 2

Find beta and determine the risk premium. The market risk premium is 8% and the risk-free rate is 2%.

Accepted Answer

A)  16.82% 
B)  20.76% 
C)  10.15% 
D)  18.11% 
A)  16.82% 
B)  20.76% 
C)  10.15% 
D)  18.11%

Question 3

The coefficient of variation is a(n) ____ measure of risk.

Accepted Answer

A)  relative 
B)  absolute 
C)  systematic 
D)  unsystematic 
A)  relative 
B)  absolute 
C)  systematic 
D)  unsystematic

Question 4

Determine the beta of a portfolio consisting of the following common stocks:

Accepted Answer

A)  0.93 
B)  0.85 
C)  1.00 
D)  1.14 
A)  0.93 
B)  0.85 
C)  1.00 
D)  1.14

Question 5

The risk remaining after extensive diversification is primarily:

Accepted Answer

A)  unsystematic risk 
B)  systematic risk 
C)  coefficient of variation risk 
D)  standard deviation risk 
A)  unsystematic risk 
B)  systematic risk 
C)  coefficient of variation risk 
D)  standard deviation risk

Question 6

An investor plans to invest 75 percent of her funds in the common stock of Gamma Industries and 25 percent in Epsilon Company. The expected return on Gamma is 12 percent and the expected return on Epsilon is 16 percent. The standard deviation of returns for Gamma is 8 percent and for Epsilon is 12 percent. The correlation between the returns for Gamma and Epsilon is +0.8.
-An investor plans to invest 75 percent of her funds in the common stock of Gamma Industries and 25 percent in Epsilon Company. The expected return on Gamma is 12 percent and the expected return on Epsilon is 16 percent. The standard deviation of returns for Gamma is 8 percent and for Epsilon is 12 percent. The correlation between the returns for Gamma and Epsilon is +0.8.Determine the expected return on the investor's portfolio.

Accepted Answer

A)  14% 
B)  12% 
C)  13% 
D)  9% 
A)  14% 
B)  12% 
C)  13% 
D)  9%

Question 7

Business risk is influenced by all the following factors except:

Accepted Answer

A)  variability in interest expenses 
B)  variability in sales 
C)  diversity of its product line 
D)  choice of production technology 
A)  variability in interest expenses 
B)  variability in sales 
C)  diversity of its product line 
D)  choice of production technology

Question 8

The risk premium for an individual security is equal to the

Accepted Answer

A)  beta times the market return 
B)  difference between the required return and the risk free rate 
C)  weighted average of the individual security betas in a portfolio 
D)  the security's covariance divided by the variance of the market 
A)  beta times the market return 
B)  difference between the required return and the risk free rate 
C)  weighted average of the individual security betas in a portfolio 
D)  the security's covariance divided by the variance of the market

Question 9

AKA's stock is currently selling for $11.44. This year the firm had earnings per share of $2.80 and the current dividend is $0.68. Earnings are expected to grow 7% a year in the foreseeable future. The risk-free rate is 10 percent and the expected market return is 14.2 percent. What will be the effect on the price of AKAs' stock if systematic risk increases by 40 percent, all other factors remaining constant?

Accepted Answer

A)  an increase of $1.14 
B)  a decrease of $0.40 
C)  a decrease of $1.99 
D)  cannot determine from the given data 
A)  an increase of $1.14 
B)  a decrease of $0.40 
C)  a decrease of $1.99 
D)  cannot determine from the given data

Question 10

That portion of the risk premium that is based on the ability of the borrower to repay principal and interest is the:

Accepted Answer

A)  Maturity risk 
B)  Default risk 
C)  Seniority risk 
D)  Business risk 
A)  Maturity risk 
B)  Default risk 
C)  Seniority risk 
D)  Business risk

Question 11

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 standard deviation of possible rates of return on Phoenix stock (to the nearest tenth of a percent).

Accepted Answer

A)  456% 
B)  20.9% 
C)  2.2% 
D)  21.4% 
A)  456% 
B)  20.9% 
C)  2.2% 
D)  21.4%

Question 12

Don has $3,000 invested in AT&T with an expected return of 11.6 percent; $10,000 in IBM with an expected return of 12.8 percent; and $6,000 in GM with an expected return of 12.2 percent. What is Don's expected return on his portfolio?

Accepted Answer

A)  12.42% 
B)  12.20% 
C)  11.81% 
D)  Cannot be determined 
A)  12.42% 
B)  12.20% 
C)  11.81% 
D)  Cannot be determined

Question 13

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%

Question 14

The two elements that make up the risk-free rate of return are

Accepted Answer

A)  the supply of funds and the demand for funds 
B)  the yield on 90-day Treasury bills plus an inflation premium 
C)  the real rate of return plus an inflation premium 
D)  the required return plus a risk premium 
A)  the supply of funds and the demand for funds 
B)  the yield on 90-day Treasury bills plus an inflation premium 
C)  the real rate of return plus an inflation premium 
D)  the required return plus a risk premium

Question 15

The return expected from a risky investment is 24 percent, and the standard deviation of this return is 17 percent. If returns from this investment are normally distributed, what is the probability that the investment may earn a negative rate of return? (Note: Table V is required to work this problem.)

Accepted Answer

A)  8.33% 
B)  7.93% 
C)  6.88% 
D)  5.44% 
A)  8.33% 
B)  7.93% 
C)  6.88% 
D)  5.44%

Question 16

The security returns from multinational companies tend to have ____ systematic risk than domestic companies.

Accepted Answer

A)  more 
B)  less options with 
C)  less 
D)  more hedging of 
A)  more 
B)  less options with 
C)  less 
D)  more hedging of

Question 17

The ____ correlated the returns from two securities are, the ____ will be the portfolio effects of risk reduction.

Accepted Answer

A)  more positively, greater 
B)  greater, greater 
C)  less positively, greater 
D)  lower, lower 
A)  more positively, greater 
B)  greater, greater 
C)  less positively, greater 
D)  lower, lower

Question 18

How can standard deviation, a statistical measure of dispersion, be used in investment analysis?

Accepted Answer

The standard deviation can be used to me

Question 19

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 20

Which of the following is not an approach for managing risk:

Accepted Answer

A)  hedging 
B)  gaining control over the operating environment 
C)  limited use of firm-specific assets 
D)  ignoring systematic risk 
A)  hedging 
B)  gaining control over the operating environment 
C)  limited use of firm-specific assets 
D)  ignoring systematic risk

Exam 8: Analysis of Risk and Return

Which of the following is not an example of a source of systematic risk?

Find beta and determine the risk premium. The market risk premium is 8% and the risk-free rate is 2%.

The coefficient of variation is a(n) ____ measure of risk.

Determine the beta of a portfolio consisting of the following common stocks:

The risk remaining after extensive diversification is primarily:

Business risk is influenced by all the following factors except:

The risk premium for an individual security is equal to the

That portion of the risk premium that is based on the ability of the borrower to repay principal and interest is the:

Don has $3,000 invested in AT&T with an expected return of 11.6 percent; $10,000 in IBM with an expected return of 12.8 percent; and $6,000 in GM with an expected return of 12.2 percent. What is Don's expected return on his portfolio?

The two elements that make up the risk-free rate of return are

The security returns from multinational companies tend to have ____ systematic risk than domestic companies.

The ____ correlated the returns from two securities are, the ____ will be the portfolio effects of risk reduction.

How can standard deviation, a statistical measure of dispersion, be used in investment analysis?

Which of the following is not an approach for managing risk:

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 correlated the returns from two securities are, the will be the portfolio effects of risk reduction.