Question 1

Over the past 4 years an investment returned 18%,−9%,−12%,and 15%.What is the standard deviation of returns?

Accepted Answer

A)  9.2% 
B)  10.36% 
C)  11.2% 
D)  13.6% 
A)  9.2% 
B)  10.36% 
C)  11.2% 
D)  13.6% D

Question 2

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 40% 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 40% of U.S. stocks traded, in market value. 
D)  approximately 75% of U.S. stocks traded, in market value. D

Question 3

Which one of the following would you expect to represent the broadest-based index of U.S.stocks?

Accepted Answer

A)  Wilshire 5000 
B)  Dow Jones Industrial Average 
C)  Standard and Poor's Composite 
D)  Financial Times Index 
A)  Wilshire 5000 
B)  Dow Jones Industrial Average 
C)  Standard and Poor's Composite 
D)  Financial Times Index A

Question 4

A market index is used to measure performance of a broad-based portfolio of stocks.

Accepted Answer

A) True 
 B)False

Question 5

Many investors who bought shares of dot.com stocks in March 2000 saw the value of their investment decline over the next two-and-a-half years.

Accepted Answer

A) True 
 B)False

Question 6

The expected return on an investment provides compensation to investors both for waiting and for worrying.

Accepted Answer

A) True 
 B)False

Question 7

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

Question 8

What is the variance of returns of a portfolio that produced returns of 20%,25%,and 30%,respectively?

Accepted Answer

A)  10.00 
B)  16.7 
C)  15.00 
D)  20.00 
A)  10.00 
B)  16.7 
C)  15.00 
D)  20.00

Question 9

A good way to reduce macro risk in a stock portfolio is to invest in stocks that:

Accepted Answer

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

Question 10

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 11

The fact that historical returns on Treasury bonds are less volatile than common stock returns indicates that:

Accepted Answer

A)  the variance of Treasury bond returns is zero. 
B)  the standard deviation of Treasury bond returns is negative. 
C)  the real return on Treasury bonds has been negative. 
D)  common stocks should offer a higher return than Treasury bonds. 
A)  the variance of Treasury bond returns is zero. 
B)  the standard deviation of Treasury bond returns is negative. 
C)  the real return on Treasury bonds has been negative. 
D)  common stocks should offer a higher return than Treasury bonds.

Question 12

What is the standard deviation of a portfolio's returns if the mean return is 15%,and the variance of returns is 184?

Accepted Answer

A)  7.83% 
B)  13.56% 
C)  41.00% 
D)  225.00% 
A)  7.83% 
B)  13.56% 
C)  41.00% 
D)  225.00%

Question 13

If inflation is 6%,what real rate of return is earned by an investor in a bond that was purchased for $1,000,has an annual coupon of 8%,and was sold at the end of the year for $960?

Accepted Answer

A)  −1.89% 
B)  1.92% 
C)  −2.66% 
D)  2.47% 
A)  −1.89% 
B)  1.92% 
C)  −2.66% 
D)  2.47%

Question 14

Which one of the following concerns is likely to be most important to portfolio investors seeking diversification?

Accepted Answer

A)  Total volatility of individual securities 
B)  Standard deviation of individual securities 
C)  Correlation of returns between securities 
D)  Achieving the risk-free rate of return 
A)  Total volatility of individual securities 
B)  Standard deviation of individual securities 
C)  Correlation of returns between securities 
D)  Achieving the risk-free rate of return

Question 15

Which one of the following risks can be progressively eliminated by adding stocks to a portfolio?

Accepted Answer

A)  Systematic risk 
B)  Specific risk 
C)  Market risk 
D)  Inflation rate risk 
A)  Systematic risk 
B)  Specific risk 
C)  Market risk 
D)  Inflation rate risk

Question 16

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 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 relationship.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

The risk that remains in a well-diversified stock portfolio is known as specific risk.

Accepted Answer

A) True 
 B)False

Question 19

Assume market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 6% return over their 15-year life.If the investor sells now,he or she is likely to realize a total return that is:

Accepted Answer

A)  greater than 6%. 
B)  less than 6%. 
C)  equal to 2%. 
D)  equal to 6%. 
A)  greater than 6%. 
B)  less than 6%. 
C)  equal to 2%. 
D)  equal to 6%.

Question 20

Although several stock indexes are available to inform investors of market changes,the Dow Jones Industrial Average:

Accepted Answer

A)  is the broadest-based of the market indexes. 
B)  is the only reliable market index. 
C)  accounts for approximately 90% of U.S. market value. 
D)  is one of the best-known of the U.S. market indexes. 
A)  is the broadest-based of the market indexes. 
B)  is the only reliable market index. 
C)  accounts for approximately 90% of U.S. market value. 
D)  is one of the best-known of the U.S. market indexes.

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

Over the past 4 years an investment returned 18%,−9%,−12%,and 15%.What is the standard deviation of returns?

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

Which one of the following would you expect to represent the broadest-based index of U.S.stocks?

A market index is used to measure performance of a broad-based portfolio of stocks.

Many investors who bought shares of dot.com stocks in March 2000 saw the value of their investment decline over the next two-and-a-half years.

The expected return on an investment provides compensation to investors both for waiting and for worrying.

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

What is the variance of returns of a portfolio that produced returns of 20%,25%,and 30%,respectively?

A good way to reduce macro risk in a stock portfolio is to invest in stocks that:

Investment risk can best be described as the:

The fact that historical returns on Treasury bonds are less volatile than common stock returns indicates that:

What is the standard deviation of a portfolio's returns if the mean return is 15%,and the variance of returns is 184?

If inflation is 6%,what real rate of return is earned by an investor in a bond that was purchased for $1,000,has an annual coupon of 8%,and was sold at the end of the year for $960?

Which one of the following concerns is likely to be most important to portfolio investors seeking diversification?

Which one of the following risks can be progressively eliminated by adding stocks to a portfolio?

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?

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

The risk that remains in a well-diversified stock portfolio is known as specific risk.

Assume market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 6% return over their 15-year life.If the investor sells now,he or she is likely to realize a total return that is:

Although several stock indexes are available to inform investors of market changes,the Dow Jones Industrial Average:

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

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

Filters