Question 1

The higher the standard deviation of a stock's annual returns, the:

Accepted Answer

A)  lower the level of unique risk. 
B)  lower the expected rate of return. 
C)  higher the accuracy of predictions of the stock's return for any given year. 
D) wider the dispersion of those returns over time. 
A)  lower the level of unique risk. 
B)  lower the expected rate of return. 
C)  higher the accuracy of predictions of the stock's return for any given year. 
D) wider the dispersion of those returns over time.

Question 2

What is the difference between unique risk and market risk to the holder of a diversified portfolio?

Accepted Answer

Even if you hold a well-diversified port

Question 3

In a year in which common stocks offered an average return of 18%, Treasury bonds offered 10%, and Treasury bills offered 7%. The risk premium for common stocks was:

Accepted Answer

A)  1%. 
B)  3%. 
C)  8%. 
D) 11%. 
A)  1%. 
B)  3%. 
C)  8%. 
D) 11%.

Question 4

Investment risk can best be described as the:

Accepted Answer

A)  dispersion of possible returns. 
B)  elimination of macro risk through diversification. 
C)  possibility of changes in the cost of capital. 
D) level of systematic risk for an undiversified investor. 
A)  dispersion of possible returns. 
B)  elimination of macro risk through diversification. 
C)  possibility of changes in the cost of capital. 
D) level of systematic risk for an undiversified investor.

Question 5

One common reason for reporting standard deviations rather than variances is that standard deviations:

Accepted Answer

A)  are lower. 
B)  are stated in understandable units. 
C)  account properly for negative returns. 
D) take probability estimates into consideration. 
A)  are lower. 
B)  are stated in understandable units. 
C)  account properly for negative returns. 
D) take probability estimates into consideration.

Question 6

"Dow up 14. Story at 6:00." This means that:

Accepted Answer

A)  the Dow was up 14% during today's trading. 
B)  14 of the Dow's 30 stocks increased in price today. 
C)  a share of Dow stock went up by $14 today. 
D) the Dow index increased by 14 points in today's trading. 
A)  the Dow was up 14% during today's trading. 
B)  14 of the Dow's 30 stocks increased in price today. 
C)  a share of Dow stock went up by $14 today. 
D) the Dow index increased by 14 points in today's trading.

Question 7

Assume you have a diversified portfolio that has produced a 12% rate of return over the past year. If you were to review the annual returns of the individual securities within that portfolio, what are you most apt to discover?

Accepted Answer

If you think about the concept of divers

Question 8

How can you estimate the opportunity cost of capital for an "average-risk" project?

Accepted Answer

Over the past century the return on the

Question 9

What nominal return was received by an investor when inflation averaged 3.46% and the real rate of return was 2.5%?

Accepted Answer

A)  0.96% 
B)  5.96% 
C)  6.05% 
D) 5.47% 
A)  0.96% 
B)  5.96% 
C)  6.05% 
D) 5.47%

Question 10

A maturity premium is offered on long-term Treasury bonds due to:

Accepted Answer

A)  the risk of changing interest rates. 
B)  the risk of default. 
C)  their unique risk. 
D) the uncertainty of their maturity date. 
A)  the risk of changing interest rates. 
B)  the risk of default. 
C)  their unique risk. 
D) the uncertainty of their maturity date.

Question 11

What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks?

Accepted Answer

A)  The individual stock's standard deviation will be lower. 
B)  The individual stock's standard deviation will be higher. 
C)  The standard deviations should be equal. 
D) There is no way to predict this relationship. 
A)  The individual stock's standard deviation will be lower. 
B)  The individual stock's standard deviation will be higher. 
C)  The standard deviations should be equal. 
D) There is no way to predict this relationship.

Question 12

Discuss the statement, "Only market risk matters to a diversified investor."

Accepted Answer

It is relatively easy for an investor to

Question 13

In general, which stocks should be combined into a portfolio if the goal is the greatest reduction possible in overall portfolio risk?

Accepted Answer

A)  Stocks with returns that are positively correlated 
B)  Stocks with returns that are negatively correlated 
C)  Stocks with returns that are not correlated 
D) Stocks that have the highest expected returns 
A)  Stocks with returns that are positively correlated 
B)  Stocks with returns that are negatively correlated 
C)  Stocks with returns that are not correlated 
D) Stocks that have the highest expected returns

Question 14

Although Standard and Poor's Composite Index contains a limited number of U.S. publicly traded stocks, the Index represents:

Accepted Answer

A)  all stocks in the industrial sector. 
B)  all stocks priced at $50 a share or more. 
C)  approximately 50% of U.S. stocks traded, in market value. 
D) approximately 75% of U.S. stocks traded, in market value. 
A)  all stocks in the industrial sector. 
B)  all stocks priced at $50 a share or more. 
C)  approximately 50% of U.S. stocks traded, in market value. 
D) approximately 75% of U.S. stocks traded, in market value.

Question 15

Sue purchased a stock for $25 a share, held it for one year, received a $1.34 dividend, and sold the stock for $26.45. What nominal rate of return did she earn?

Accepted Answer

A)  11.16% 
B)  14.23% 
C)  12.09% 
D) 10.55% 
A)  11.16% 
B)  14.23% 
C)  12.09% 
D) 10.55%

Question 16

A common stock was held for 2 years during which time total dividends of $20 were paid. The stock was sold for $100. What was the purchase price of the stock if the total rate of return for the period was 32%?

Accepted Answer

A)  $61.60 
B)  $64.80 
C)  $88.00 
D) $90.91 
A)  $61.60 
B)  $64.80 
C)  $88.00 
D) $90.91

Question 17

Market risk can be eliminated in a stock portfolio through diversification.

Accepted Answer

A) True 
 B)False

Question 18

By reviewing the historical performance of the stock market, we can:

Accepted Answer

A)  accurately project future performance. 
B)  be assured of a positive return over any 3-year period. 
C)  ascertain that losses will occur but cannot predict when or how large. 
D) be assured we will not lose more than one-third of our investment in any given year. 
A)  accurately project future performance. 
B)  be assured of a positive return over any 3-year period. 
C)  ascertain that losses will occur but cannot predict when or how large. 
D) be assured we will not lose more than one-third of our investment in any given year.

Question 19

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the rate of return on:

Accepted Answer

A)  Treasury bills. 
B)  the market portfolio. 
C)  the market portfolio minus the rate of return on Treasury bills. 
D) Treasury bonds plus a maturity premium. 
A)  Treasury bills. 
B)  the market portfolio. 
C)  the market portfolio minus the rate of return on Treasury bills. 
D) Treasury bonds plus a maturity premium.

Question 20

Long-term corporate bonds are the only portfolio of securities found to be riskier than common stocks.

Accepted Answer

A) True 
 B)False

Exam 11: Introduction to Risk, Return, and the Opportunity Cost of Capital

The higher the standard deviation of a stock's annual returns, the:

What is the difference between unique risk and market risk to the holder of a diversified portfolio?

In a year in which common stocks offered an average return of 18%, Treasury bonds offered 10%, and Treasury bills offered 7%. The risk premium for common stocks was:

Investment risk can best be described as the:

One common reason for reporting standard deviations rather than variances is that standard deviations:

"Dow up 14. Story at 6:00." This means that:

Assume you have a diversified portfolio that has produced a 12% rate of return over the past year. If you were to review the annual returns of the individual securities within that portfolio, what are you most apt to discover?

How can you estimate the opportunity cost of capital for an "average-risk" project?

What nominal return was received by an investor when inflation averaged 3.46% and the real rate of return was 2.5%?

A maturity premium is offered on long-term Treasury bonds due to:

What is the typical relationship between the standard deviation of an individual common stock and the standard deviation of a diversified portfolio of common stocks?

Discuss the statement, "Only market risk matters to a diversified investor."

In general, which stocks should be combined into a portfolio if the goal is the greatest reduction possible in overall portfolio risk?

Although Standard and Poor's Composite Index contains a limited number of U.S. publicly traded stocks, the Index represents:

Sue purchased a stock for $25 a share, held it for one year, received a $1.34 dividend, and sold the stock for $26.45. What nominal rate of return did she earn?

A common stock was held for 2 years during which time total dividends of $20 were paid. The stock was sold for $100. What was the purchase price of the stock if the total rate of return for the period was 32%?

Market risk can be eliminated in a stock portfolio through diversification.

By reviewing the historical performance of the stock market, we can:

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the rate of return on:

Long-term corporate bonds are the only portfolio of securities found to be riskier than common stocks.

Goals and Governance of the Corporation

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

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