Question 1

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 2

Beta is defined as:

Accepted Answer

A)  a measure of volatility of a security's returns relative to the returns of a broad-based market portfolio of securities. 
B)  the ratio of the variance of market returns to the covariance of returns on a security with the market 
C)  the inverse of the slope of the security regression line 
D)  all of the above 
A)  a measure of volatility of a security's returns relative to the returns of a broad-based market portfolio of securities. 
B)  the ratio of the variance of market returns to the covariance of returns on a security with the market 
C)  the inverse of the slope of the security regression line 
D)  all of the above

Question 3

The ____ is the ratio of ____ to the ____.

Accepted Answer

A)  standard deviation, covariance, expected value 
B)  covariance, expected value, standard deviation 
C)  coefficient of variation, standard deviation, expected value 
D)  coefficient of variation, systematic risk, expected value 
A)  standard deviation, covariance, expected value 
B)  covariance, expected value, standard deviation 
C)  coefficient of variation, standard deviation, expected value 
D)  coefficient of variation, systematic risk, expected value

Question 4

The maturity premium reflects a preference by many lenders for

Accepted Answer

A)  shorter maturities 
B)  reducing yields 
C)  high yield securities 
D)  longer maturities 
A)  shorter maturities 
B)  reducing yields 
C)  high yield securities 
D)  longer maturities

Question 5

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 coefficient of variation for the rate of return on Phoenix stock.

Accepted Answer

A)  0.0 
B)  2.68 
C)  2.61 
D)  0.275 
A)  0.0 
B)  2.68 
C)  2.61 
D)  0.275

Question 6

The yield to maturity on ACL bonds maturing in 2005 is 8.75 percent. The yield to maturity on a similar maturity U.S. Government Treasury bond in 7.06 percent and the yield on Treasury bills is 6.51 percent. What is the default risk premium on the ACL bond?

Accepted Answer

A)  2.24% 
B)  1.69% 
C)  0.55% 
D)  8.75% 
A)  2.24% 
B)  1.69% 
C)  0.55% 
D)  8.75%

Question 7

The term structure of interest rates is related to the ____.

Accepted Answer

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

Question 8

The ____ theory of the yield curve holds that required returns on long-term securities tend to be greater the longer the time to maturity.

Accepted Answer

A)  expectations 
B)  market segmentation 
C)  preferred habitat 
D)  liquidity premium 
A)  expectations 
B)  market segmentation 
C)  preferred habitat 
D)  liquidity premium

Question 9

Find beta and determine the required rate of return. The market risk premium is 12% and the risk-free rate is 5%.

Accepted Answer

A)  12.61% 
B)  8.27% 
C)  10.11% 
D)  14.84% 
A)  12.61% 
B)  8.27% 
C)  10.11% 
D)  14.84%

Question 10

HDTV has planned on diversifying into the dual-VCR field. As a result, HDTV's beta would rise to 1.6 from 1.2 and the expected future long-term growth rate in the firm's earnings would increase from 12% to 16%. The expected market return, km, is 14%; the risk free rate, rf, is 7%; and the current dividend, Do, is $0.50. Should HDTV go into the dual-VCR field?

Accepted Answer

A)  No-stock price decrease $7.82 
B)  Yes-stock price increase $9.89 
C)  Yes-stock price increase $3.81 
D)  No-stock price decrease $3.78 
A)  No-stock price decrease $7.82 
B)  Yes-stock price increase $9.89 
C)  Yes-stock price increase $3.81 
D)  No-stock price decrease $3.78

Question 11

Values of the ____ can range from +1.0 to -1.0.

Accepted Answer

A)  coefficient of variation 
B)  correlation coefficient 
C)  standard deviation 
D)  covariance 
A)  coefficient of variation 
B)  correlation coefficient 
C)  standard deviation 
D)  covariance

Question 12

Which of the following statements regarding risk is/are correct?
I. A portfolio of two negatively correlated assets has less risk than either of the individual assets and risk could be further reduced to 0 or below.
II. There is no case where creating a portfolio of assets will result in greater risk than that of the riskiest asset included in the portfolio.

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 13

Determine the beta of a portfolio consisting of equal investments in the following common stocks:

Accepted Answer

A)  1.05 
B)  1.00 
C)  1.10 
D)  0.95 
A)  1.05 
B)  1.00 
C)  1.10 
D)  0.95

Question 14

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

Accepted Answer

The risk elements include:
1.

Question 15

Elephant Company common stock has a beta of 1.2. The risk-free rate is 6 percent and the expected market rate of return is 12 percent. Determine the required rate of return on the security.

Accepted Answer

A)  7.2% 
B)  14.4% 
C)  19.2% 
D)  13.2% 
A)  7.2% 
B)  14.4% 
C)  19.2% 
D)  13.2%

Question 16

What is an efficient portfolio?

Accepted Answer

A portfolio is efficient if, for a given

Question 17

The risk-free rate of return is composed of which of the following elements:

Accepted Answer

A)  risk premium and inflation 
B)  cost of capital and risk premium 
C)  real rate of return and risk premium 
D)  real rate of return and inflation 
A)  risk premium and inflation 
B)  cost of capital and risk premium 
C)  real rate of return and risk premium 
D)  real rate of return and inflation

Question 18

Security A's expected return is 10 percent while the expected return of B is 14 percent. The standard deviation of A's returns is 5 percent, and it is 9 percent for B. An investor plans to invest equal amounts in A and B. Which of the following statements is true about this portfolio consisting of stock A and stock B.

Accepted Answer

A)  The risk of the portfolio is equal to 7 percent. 
B)  The lower the correlation of returns between the two stocks, the higher the portfolio's risk. 
C)  The risk of the portfolio is primarily dependent on the utility function of the investor. 
D)  The higher the correlation of returns between the two stocks, the higher the portfolio's risk. 
A)  The risk of the portfolio is equal to 7 percent. 
B)  The lower the correlation of returns between the two stocks, the higher the portfolio's risk. 
C)  The risk of the portfolio is primarily dependent on the utility function of the investor. 
D)  The higher the correlation of returns between the two stocks, the higher the portfolio's risk.

Question 19

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 20

Kermit Industries current common stock dividend is $1.35 per share and the dividend is expected to grow at 6% per year into the foreseeable future. Currently the risk-free rate is 4.5% and the estimated market risk premium is 8.5%. Merrill Lynch has estimated KI's beta to be 1.10. Compute the expected price for KI's common stock.

Accepted Answer

A)  $17.20 
B)  $10.33 
C)  $18.23 
D)  $49.35 
A)  $17.20 
B)  $10.33 
C)  $18.23 
D)  $49.35

Exam 8: Analysis of Risk and Return

A portfolio is efficient if ____.

Beta is defined as:

The ____ is the ratio of ____ to the ____.

The maturity premium reflects a preference by many lenders for

The yield to maturity on ACL bonds maturing in 2005 is 8.75 percent. The yield to maturity on a similar maturity U.S. Government Treasury bond in 7.06 percent and the yield on Treasury bills is 6.51 percent. What is the default risk premium on the ACL bond?

The term structure of interest rates is related to the ____.

The ____ theory of the yield curve holds that required returns on long-term securities tend to be greater the longer the time to maturity.

Find beta and determine the required rate of return. The market risk premium is 12% and the risk-free rate is 5%.

Values of the ____ can range from +1.0 to -1.0.

Determine the beta of a portfolio consisting of equal investments in the following common stocks:

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

Elephant Company common stock has a beta of 1.2. The risk-free rate is 6 percent and the expected market rate of return is 12 percent. Determine the required rate of return on the security.

What is an efficient portfolio?

The risk-free rate of return is composed of which of the following elements:

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.

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 is the ratio of to the .