Question 1

Standard deviation measures _____ risk.

Accepted Answer

A) total 
B) nondiversifiable 
C) unsystematic 
D) systematic 
E) economic 
A) total 
B) nondiversifiable 
C) unsystematic 
D) systematic 
E) economic

Question 2

You would like to combine a risky share with a beta of 1.5 with Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in Treasury bills?

Accepted Answer

A) 25% 
B) 33% 
C) 50% 
D) 67% 
E) 75% 
A) 25% 
B) 33% 
C) 50% 
D) 67% 
E) 75%

Question 3

Which one of the following shares is correctly priced if the risk-free rate of return is 2.5% and the market risk premium is 8%?
$\begin{array}{l}
\begin{array}{|l|l|l|}
\hline
Share &Beta &\text { Expected Retum }\
\hline \mathrm{A} & .68 & 8.2 \% \
\hline \mathrm{B} & 1.42 & 13.9 \% \
\hline \mathrm{C} & 1.23 & 11.8 \% \
\hline \mathrm{D} & 1.31 & 12.6 \% \
\hline \mathrm{E} & .94 & 9.7 \% \
\hline
\end{array}
\end{array}$

Accepted Answer

A) A 
B) B 
C) C 
D) D 
E) E 
A) A 
B) B 
C) C 
D) D 
E) E

Question 4

Risk that affects at most a small number of assets is called _____ risk.

Accepted Answer

A) portfolio 
B) undiversifiable 
C) market 
D) unsystematic 
E) total 
A) portfolio 
B) undiversifiable 
C) market 
D) unsystematic 
E) total

Question 5

The separation principle states that an investor will:

Accepted Answer

A) choose any efficient portfolio and invest some amount in the riskless asset to generate the expected return. 
B) choose an efficient portfolio based on individual risk tolerance or utility. 
C) never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time. 
D) invest only in the riskless asset and tangency portfolio choosing the weights based on individual risk tolerance. 
E) All of the above. 
A) choose any efficient portfolio and invest some amount in the riskless asset to generate the expected return. 
B) choose an efficient portfolio based on individual risk tolerance or utility. 
C) never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time. 
D) invest only in the riskless asset and tangency portfolio choosing the weights based on individual risk tolerance. 
E) All of the above.

Question 6

The percentage of a portfolio's total value invested in a particular asset is called that asset's:

Accepted Answer

A) portfolio return. 
B) portfolio weight. 
C) portfolio risk. 
D) rate of return. 
E) investment value. 
A) portfolio return. 
B) portfolio weight. 
C) portfolio risk. 
D) rate of return. 
E) investment value.

Question 7

The intercept point of the security market line is the rate of return which corresponds to:

Accepted Answer

A) the risk-free rate of return. 
B) the market rate of return. 
C) a value of zero. 
D) a value of 1.0. 
E) the beta of the market. 
A) the risk-free rate of return. 
B) the market rate of return. 
C) a value of zero. 
D) a value of 1.0. 
E) the beta of the market.

Question 8

Diversification can effectively reduce risk.Once a portfolio is diversified the type of risk remaining is:

Accepted Answer

A) individual security risk. 
B) riskless security risk. 
C) risk related to the market portfolio. 
D) total standard deviations. 
E) None of the above. 
A) individual security risk. 
B) riskless security risk. 
C) risk related to the market portfolio. 
D) total standard deviations. 
E) None of the above.

Question 9

Which one of the following is an example of systematic risk?

Accepted Answer

A) the price of lumber declines sharply 
B) airline pilots go on strike 
C) the European Central Bank increases interest rates 
D) a hurricane hits a tourist destination 
E) people become diet conscious and avoid fast food restaurants 
A) the price of lumber declines sharply 
B) airline pilots go on strike 
C) the European Central Bank increases interest rates 
D) a hurricane hits a tourist destination 
E) people become diet conscious and avoid fast food restaurants

Question 10

The elements along the diagonal of the variance/covariance matrix are:

Accepted Answer

A) covariances. 
B) security weights. 
C) security selections. 
D) variances. 
E) None of the above. 
A) covariances. 
B) security weights. 
C) security selections. 
D) variances. 
E) None of the above.

Question 11

The variance of Share A is .004,the variance of the market is .007 and the covariance between the two is .0026.What is the correlation coefficient?

Accepted Answer

A) .9285 
B) .8542 
C) .5010 
D) .4913 
E) .3510 
A) .9285 
B) .8542 
C) .5010 
D) .4913 
E) .3510

Question 12

Which one of the following measures is relevant to the systematic risk principle?

Accepted Answer

A) variance 
B) alpha 
C) standard deviation 
D) theta 
E) beta 
A) variance 
B) alpha 
C) standard deviation 
D) theta 
E) beta

Question 13

Systematic risk is measured by:

Accepted Answer

A) the mean. 
B) beta. 
C) the geometric average. 
D) the standard deviation. 
E) the arithmetic average. 
A) the mean. 
B) beta. 
C) the geometric average. 
D) the standard deviation. 
E) the arithmetic average.

Question 14

Inferior Goods SpA equity is expected to earn 14% in a recession,6% in a normal economy,and lose 4% in a booming economy.The probability of a boom is 20% while the probability of a normal economy is 55% and the chance of a recession is 25%.What is the expected rate of return on this share?

Accepted Answer

A) 6.00% 
B) 6.72% 
C) 6.80% 
D) 7.60% 
E) 11.33% 
A) 6.00% 
B) 6.72% 
C) 6.80% 
D) 7.60% 
E) 11.33%

Question 15

Which one of the following is an example of a nondiversifiable risk?

Accepted Answer

A) a well respected chief executive of a firm suddenly resigns 
B) a well respected chairman of the European Central Bank suddenly resigns 
C) a key employee suddenly resigns and accepts employment with a key competitor 
D) a well managed firm reduces its work force and automates several jobs 
E) a poorly managed firm suddenly goes out of business due to lack of sales 
A) a well respected chief executive of a firm suddenly resigns 
B) a well respected chairman of the European Central Bank suddenly resigns 
C) a key employee suddenly resigns and accepts employment with a key competitor 
D) a well managed firm reduces its work force and automates several jobs 
E) a poorly managed firm suddenly goes out of business due to lack of sales

Question 16

The linear relation between an asset's expected return and its beta coefficient is the:

Accepted Answer

A) reward-to-risk ratio. 
B) portfolio weight. 
C) portfolio risk. 
D) security market line. 
E) market risk premium. 
A) reward-to-risk ratio. 
B) portfolio weight. 
C) portfolio risk. 
D) security market line. 
E) market risk premium.

Question 17

The equity of Martin Industries has a beta of 1.43.The risk-free rate of return is 3.6% and the market risk premium is 9%.What is the expected rate of return on Martin Industries share?

Accepted Answer

A) 11.3% 
B) 14.1% 
C) 16.5% 
D) 17.4% 
E) 18.0% 
A) 11.3% 
B) 14.1% 
C) 16.5% 
D) 17.4% 
E) 18.0%

Question 18

Which one of the following statements is correct concerning the expected rate of return on an individual share given various states of the economy?

Accepted Answer

A) The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers. 
B) The expected return is an arithmetic average of the individual returns for each state of the economy. 
C) The expected return is a weighted average where the probabilities of the economic states are used as the weights. 
D) The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state. 
E) As long as the total probabilities of the economic states equal 100%,then the expected return on the share is a geometric average of the expected returns for each economic state. 
A) The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers. 
B) The expected return is an arithmetic average of the individual returns for each state of the economy. 
C) The expected return is a weighted average where the probabilities of the economic states are used as the weights. 
D) The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state. 
E) As long as the total probabilities of the economic states equal 100%,then the expected return on the share is a geometric average of the expected returns for each economic state.

Question 19

If the covariance of share 1 with share 2 is -.0065,then what is the covariance of share 2 with share 1?

Accepted Answer

A) -.0065 
B) +.0065 
C) greater than +.0065 
D) less than -.0065 
E) Need additional information. 
A) -.0065 
B) +.0065 
C) greater than +.0065 
D) less than -.0065 
E) Need additional information.

Question 20

What is the expected return on a portfolio comprised of €3,000 in share K and €5,000 in share L if the economy is normal?
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$Returns if
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$State Occurs
$\begin{array}{|l|l|l|l|}
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { ShareK } & \text { Share L } \
\hline \text { Boom } & 20 \% & 14 \% & 10 \% \
\hline \text { Normal } & 30 \% & 5 \% & 6 \% \
\hline
\end{array}$

Accepted Answer

A) 3.75% 
B) 5.25% 
C) 5.63% 
D) 5.88% 
E) 6.80% 
A) 3.75% 
B) 5.25% 
C) 5.63% 
D) 5.88% 
E) 6.80%

Exam 10: Return and Risk: The Capital Asset Pricing Model Capm

Standard deviation measures _____ risk.

You would like to combine a risky share with a beta of 1.5 with Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in Treasury bills?

Which one of the following shares is correctly priced if the risk-free rate of return is 2.5% and the market risk premium is 8%? Share Beta Expected Retum .68 8.2\% 1.42 13.9\% 1.23 11.8\% 1.31 12.6\% .94 9.7\%

Risk that affects at most a small number of assets is called _____ risk.

The separation principle states that an investor will:

The percentage of a portfolio's total value invested in a particular asset is called that asset's:

The intercept point of the security market line is the rate of return which corresponds to:

Diversification can effectively reduce risk.Once a portfolio is diversified the type of risk remaining is:

Which one of the following is an example of systematic risk?

The elements along the diagonal of the variance/covariance matrix are:

The variance of Share A is .004,the variance of the market is .007 and the covariance between the two is .0026.What is the correlation coefficient?

Which one of the following measures is relevant to the systematic risk principle?

Systematic risk is measured by:

Inferior Goods SpA equity is expected to earn 14% in a recession,6% in a normal economy,and lose 4% in a booming economy.The probability of a boom is 20% while the probability of a normal economy is 55% and the chance of a recession is 25%.What is the expected rate of return on this share?

Which one of the following is an example of a nondiversifiable risk?

The linear relation between an asset's expected return and its beta coefficient is the:

The equity of Martin Industries has a beta of 1.43.The risk-free rate of return is 3.6% and the market risk premium is 9%.What is the expected rate of return on Martin Industries share?

Which one of the following statements is correct concerning the expected rate of return on an individual share given various states of the economy?

If the covariance of share 1 with share 2 is -.0065,then what is the covariance of share 2 with share 1?

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis and Long-Term Planning

Discounted Cash Flow Valuation

How to Value Bonds and Shares

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Factor Models and the Arbitrage Pricing Theory

Risk, cost of Capital, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: An Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividend and Other Payouts

Equity Financing

Debt Financing

Leasing and Off-Balance-Sheet Financing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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