Question 1

Which of the following risks is most important to a well-diversified investor in common stocks?

Accepted Answer

A)  Market risk 
B)  Unique risk 
C)  Idiosyncratic risk 
D)  Diversifiable risk 
A)  Market risk 
B)  Unique risk 
C)  Idiosyncratic risk 
D)  Diversifiable risk

Question 2

Which of the following statements is true for a stock that sells now for $60,pays an annual dividend of $4.00,and experienced a 20% return on investment over the past year? Its price one year ago was:

Accepted Answer

A)  $42.00. 
B)  $46.15. 
C)  $48.46. 
D)  $53.33. 
A)  $42.00. 
B)  $46.15. 
C)  $48.46. 
D)  $53.33.

Question 3

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)  their systematic risk. 
A)  the risk of changing interest rates. 
B)  the risk of default. 
C)  their unique risk. 
D)  their systematic risk.

Question 4

Market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 7% return.If the investor sells now he or she is likely to receive:

Accepted Answer

A)  greater than a 7% total return. 
B)  less than a 7% total return. 
C)  a 7% total rate of return. 
D)  a 7% nominal return but less than a 7% real return. 
A)  greater than a 7% total return. 
B)  less than a 7% total return. 
C)  a 7% total rate of return. 
D)  a 7% nominal return but less than a 7% real return.

Question 5

When high growth is expected in the economy,an investor should receive higher returns from:

Accepted Answer

A)  cyclical investments. 
B)  countercyclical investments. 
C)  stocks with negative correlations. 
D)  stocks with low standard deviations. 
A)  cyclical investments. 
B)  countercyclical investments. 
C)  stocks with negative correlations. 
D)  stocks with low standard deviations.

Question 6

Calculate the nominal return,real return,and risk premium for the following common stock investment:

Accepted Answer

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Question 7

Which of the following firms is likely to exhibit the least macro risk exposure?

Accepted Answer

A)  Furniture manufacturer 
B)  Airline company 
C)  Dog food processor 
D)  Auto manufacturer 
A)  Furniture manufacturer 
B)  Airline company 
C)  Dog food processor 
D)  Auto manufacturer

Question 8

What is the variance of return of a three-stock portfolio (each stock being equally weighted)that produced returns of 20%,25%,and 30%?

Accepted Answer

A)  16.67 
B)  33.33 
C)  50.00 
D)  100.00 
A)  16.67 
B)  33.33 
C)  50.00 
D)  100.00

Question 9

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 10

The addition of a negative risk asset to a portfolio of assets will:

Accepted Answer

A)  increase the portfolio's expected return. 
B)  decrease the portfolio's expected return. 
C)  increase the portfolio's expected volatility. 
D)  decrease the portfolio's expected volatility. 
A)  increase the portfolio's expected return. 
B)  decrease the portfolio's expected return. 
C)  increase the portfolio's expected volatility. 
D)  decrease the portfolio's expected volatility.

Question 11

Stock A has 10 million shares issued and stock B has 5 million shares issued.What is their relative weighting if both stocks are represented in the S&P 500?

Accepted Answer

A)  They have equal weighting, like all S&P 500 stocks. 
B)  B has twice the weighting, to account for having fewer shares. 
C)  A has twice the weighting, to account for having more shares. 
D)  They are weighted according to their expected performance. 
A)  They have equal weighting, like all S&P 500 stocks. 
B)  B has twice the weighting, to account for having fewer shares. 
C)  A has twice the weighting, to account for having more shares. 
D)  They are weighted according to their expected performance.

Question 12

A firm is said to be countercyclical if its returns:

Accepted Answer

A)  continue to decrease, year after year. 
B)  continue to increase, year after year. 
C)  are better when most firms do poorly. 
D)  are negative in real terms. 
A)  continue to decrease, year after year. 
B)  continue to increase, year after year. 
C)  are better when most firms do poorly. 
D)  are negative in real terms.

Question 13

The major benefit of diversification is to:

Accepted Answer

A)  increase the expected return. 
B)  remove negative risk assets from the portfolio. 
C)  reduce the portfolio's systematic risk. 
D)  reduce the expected risk. 
A)  increase the expected return. 
B)  remove negative risk assets from the portfolio. 
C)  reduce the portfolio's systematic risk. 
D)  reduce the expected risk.

Question 14

The variance of a stock's returns can be calculated as the:

Accepted Answer

A)  average value of deviations from the mean. 
B)  average value of squared deviations from the mean. 
C)  square root of average value of deviations from the mean. 
D)  sum of the deviations from the mean. 
A)  average value of deviations from the mean. 
B)  average value of squared deviations from the mean. 
C)  square root of average value of deviations from the mean. 
D)  sum of the deviations from the mean.

Question 15

Averaging the deviations from the mean for a portfolio of securities will:

Accepted Answer

A)  compute the standard deviation. 
B)  compute the variance. 
C)  equal zero. 
D)  equal the number of securities in the portfolio. 
A)  compute the standard deviation. 
B)  compute the variance. 
C)  equal zero. 
D)  equal the number of securities in the portfolio.

Question 16

If when a coin is tossed the observance of a head rewards you with a dollar and the observance of a tail costs you fifty cents,how much would you expect to gain after 20 tosses?

Accepted Answer

A)  $5.00 
B)  $7.50 
C)  $10.00 
D)  $15.00 
A)  $5.00 
B)  $7.50 
C)  $10.00 
D)  $15.00

Question 17

What percentage return is achieved by an investor who purchases a stock for $30,receives a $1.50 dividend,and sells the share one year later for $28.50?

Accepted Answer

A)  -5% 
B)  0% 
C)  5% 
D)  10% 
A)  -5% 
B)  0% 
C)  5% 
D)  10%

Question 18

If the stock market return in 2005 turns out to be 30%,what will happen to our estimate of the "normal" risk premium? Does this make sense?

Accepted Answer

If we use historical averages to compute

Question 19

Perhaps the best way to reduce macro risk in a stock portfolio is to invest in stocks that:

Accepted Answer

A)  have only unique risks. 
B)  have diversified away the macro risk. 
C)  have low exposure to business cycles. 
D)  pay guaranteed dividends. 
A)  have only unique risks. 
B)  have diversified away the macro risk. 
C)  have low exposure to business cycles. 
D)  pay guaranteed dividends.

Question 20

If a stock's returns are volatile,then the stock:

Accepted Answer

A)  cannot be considered a negative risk asset. 
B)  can still be considered a negative risk asset. 
C)  has macro risk, but no unique risk. 
D)  does not offer diversification potential. 
A)  cannot be considered a negative risk asset. 
B)  can still be considered a negative risk asset. 
C)  has macro risk, but no unique risk. 
D)  does not offer diversification potential.

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

Which of the following risks is most important to a well-diversified investor in common stocks?

Which of the following statements is true for a stock that sells now for $60,pays an annual dividend of $4.00,and experienced a 20% return on investment over the past year? Its price one year ago was:

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

Market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 7% return.If the investor sells now he or she is likely to receive:

When high growth is expected in the economy,an investor should receive higher returns from:

Calculate the nominal return,real return,and risk premium for the following common stock investment:

Which of the following firms is likely to exhibit the least macro risk exposure?

What is the variance of return of a three-stock portfolio (each stock being equally weighted)that produced returns of 20%,25%,and 30%?

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

The addition of a negative risk asset to a portfolio of assets will:

Stock A has 10 million shares issued and stock B has 5 million shares issued.What is their relative weighting if both stocks are represented in the S&P 500?

A firm is said to be countercyclical if its returns:

The major benefit of diversification is to:

The variance of a stock's returns can be calculated as the:

Averaging the deviations from the mean for a portfolio of securities will:

If when a coin is tossed the observance of a head rewards you with a dollar and the observance of a tail costs you fifty cents,how much would you expect to gain after 20 tosses?

What percentage return is achieved by an investor who purchases a stock for $30,receives a $1.50 dividend,and sells the share one year later for $28.50?

If the stock market return in 2005 turns out to be 30%,what will happen to our estimate of the "normal" risk premium? Does this make sense?

Perhaps the best way to reduce macro risk in a stock portfolio is to invest in stocks that:

If a stock's returns are volatile,then the stock:

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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters