Question 1

An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%.

Accepted Answer

A) True 
 B)False

Question 2

A rational investor will always prefer an investment with a lower standard deviation of returns,because such investments are less risky.

Accepted Answer

A) True 
 B)False

Question 3

Anchor Incorporated has a beta of 1.0.If the expected return on the market is 15%,what is the expected return on Anchor Incorporated's stock?

Accepted Answer

A) 15% 
B) 14% 
C) 18% 
D) cannot be determined without the risk free rate 
A) 15% 
B) 14% 
C) 18% 
D) cannot be determined without the risk free rate

Question 4

What is diversifying among different kinds of assets known as?

Accepted Answer

A) portfolio funding 
B) capital asset classification 
C) asset allocation 
D) multi-diversification 
A) portfolio funding 
B) capital asset classification 
C) asset allocation 
D) multi-diversification

Question 5

The rate on T-bills is currently 2%.Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%.According to CAPM,determine the return on the market portfolio.

Accepted Answer

A) 27.5% 
B) 19.0% 
C) 14.0% 
D) 12.0% 
A) 27.5% 
B) 19.0% 
C) 14.0% 
D) 12.0%

Question 6

Stock A has a beta of 1.2 and a standard deviation of returns of 14%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the risk-free rate of return increases and the market risk premium remains constant,then

Accepted Answer

A) the required return on stock B will increase more than the required return on stock A. 
B) the required returns on stocks A and B will both increase by the same amount. 
C) the required returns on stocks A and B will not change. 
D) the required return on stock A will increase more than the required return on stock B. 
A) the required return on stock B will increase more than the required return on stock A. 
B) the required returns on stocks A and B will both increase by the same amount. 
C) the required returns on stocks A and B will not change. 
D) the required return on stock A will increase more than the required return on stock B.

Question 7

In an efficient market,a stock with a standard deviation of returns of 12% could have a higher expected return than a stock with a standard deviation of 10% because the beta for the higher standard deviation stock could be lower than the beta for the lower standard deviation stock.

Accepted Answer

A) True 
 B)False

Question 8

The Beta of a T-bill is zero.

Accepted Answer

A) True 
 B)False

Question 9

Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

Accepted Answer

A) True 
 B)False

Question 10

You must add one of two investments to an already well- diversified portfolio.   If you are a risk-averse investor,which one is the better choice?

Accepted Answer

A) Security A 
B) Security B 
C) Either security would be acceptable. 
D) cannot be determined with information given 
A) Security A 
B) Security B 
C) Either security would be acceptable. 
D) cannot be determined with information given

Question 11

Beta is a statistical measure of

Accepted Answer

A) unsystematic risk. 
B) total risk. 
C) the standard deviation. 
D) the relationship between an investment's returns and the market return. 
A) unsystematic risk. 
B) total risk. 
C) the standard deviation. 
D) the relationship between an investment's returns and the market return.

Question 12

An investor currently holds the following portfolio:   The beta for the portfolio is

Accepted Answer

A) 1.99. 
B) 1.77. 
C) 1.45. 
D) 1.27. 
A) 1.99. 
B) 1.77. 
C) 1.45. 
D) 1.27.

Question 13

The category of securities with the highest historical risk premium is

Accepted Answer

A) large company stocks. 
B) small company stocks. 
C) government bonds. 
D) small company corporate bonds. 
A) large company stocks. 
B) small company stocks. 
C) government bonds. 
D) small company corporate bonds.

Question 14

The beta of ABC Co.stock is the slope of

Accepted Answer

A) the security market line. 
B) the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills. 
C) the arbitrage pricing line. 
D) the characteristic line for a plot of ABC Co.returns against the returns of the market portfolio for the same period. 
A) the security market line. 
B) the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills. 
C) the arbitrage pricing line. 
D) the characteristic line for a plot of ABC Co.returns against the returns of the market portfolio for the same period.

Question 15

Accounting profits is the most relevant variable the financial manager uses to measure returns.

Accepted Answer

A) True 
 B)False

Question 16

A stock with a beta of 1.4 has 40% more variability in returns than the average stock.

Accepted Answer

A) True 
 B)False

Question 17

Bankers Corp has a very conservative Beta of .7,while Biotech Corp has a Beta of 2.1.Given that the T-bill rate is 5%,and the market is expected to return 15%,what is the expected return of Bankers Corp,Biotech Corp,and a portfolio composed of 60% of Bankers Corp and 40% Biotech Corp? 
a.Solve this problem first by weighting the Betas to calculate a portfolio Beta,and then using CAPM to calculate the portfolio expected return. 
b.Then solve the problem again by calculating the expected return of each asset and weighting those returns to calculate the portfolio expected return. 
c.Why is Biotech Corp's expected return NOT three times that of Bankers Corp?

Accepted Answer

a. B_p = .6 × .7 + .4 × 2.1)= 1.26 K_p = .05

Question 18

You purchased 500 shares of A.M.J.Inc.common stock one year ago for $50 per share.You received a dividend of $2 per share today and decide to take your profits by selling at $54.50 per share.What is your holding period return?

Accepted Answer

A) 13.0% 
B) 9.0% 
C) 6.5% 
D) 4.0% 
A) 13.0% 
B) 9.0% 
C) 6.5% 
D) 4.0%

Question 19

Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio?

Accepted Answer

A) Investment A   
B) Investment B 
C) Investment C 
D) Cannot be determined without information regarding the risk-free rate of return. 
A) Investment A   
B) Investment B 
C) Investment C 
D) Cannot be determined without information regarding the risk-free rate of return.

Question 20

Because risk is measured by variability of returns,how long we hold our investments does not matter very much when it comes to reducing risk.

Accepted Answer

A) True 
 B)False

An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%.

A rational investor will always prefer an investment with a lower standard deviation of returns,because such investments are less risky.

Anchor Incorporated has a beta of 1.0.If the expected return on the market is 15%,what is the expected return on Anchor Incorporated's stock?

What is diversifying among different kinds of assets known as?

The rate on T-bills is currently 2%.Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%.According to CAPM,determine the return on the market portfolio.

Stock A has a beta of 1.2 and a standard deviation of returns of 14%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the risk-free rate of return increases and the market risk premium remains constant,then

In an efficient market,a stock with a standard deviation of returns of 12% could have a higher expected return than a stock with a standard deviation of 10% because the beta for the higher standard deviation stock could be lower than the beta for the lower standard deviation stock.

The Beta of a T-bill is zero.

Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

You must add one of two investments to an already well- diversified portfolio. If you are a risk-averse investor,which one is the better choice?

Beta is a statistical measure of

An investor currently holds the following portfolio: The beta for the portfolio is

The category of securities with the highest historical risk premium is

The beta of ABC Co.stock is the slope of

Accounting profits is the most relevant variable the financial manager uses to measure returns.

A stock with a beta of 1.4 has 40% more variability in returns than the average stock.

You purchased 500 shares of A.M.J.Inc.common stock one year ago for $50 per share.You received a dividend of $2 per share today and decide to take your profits by selling at $54.50 per share.What is your holding period return?

Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio?

Because risk is measured by variability of returns,how long we hold our investments does not matter very much when it comes to reducing risk.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters

Exam 6: The Meaning and Measurement of Risk and Return

An investor with a required return of 8% for stock A will purchase stock A if the expected return for stock A is less than or equal to 8%.

A rational investor will always prefer an investment with a lower standard deviation of returns,because such investments are less risky.

Anchor Incorporated has a beta of 1.0.If the expected return on the market is 15%,what is the expected return on Anchor Incorporated's stock?

What is diversifying among different kinds of assets known as?

The rate on T-bills is currently 2%.Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%.According to CAPM,determine the return on the market portfolio.

Stock A has a beta of 1.2 and a standard deviation of returns of 14%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the risk-free rate of return increases and the market risk premium remains constant,then

In an efficient market,a stock with a standard deviation of returns of 12% could have a higher expected return than a stock with a standard deviation of 10% because the beta for the higher standard deviation stock could be lower than the beta for the lower standard deviation stock.

The Beta of a T-bill is zero.

Actual returns are always less than expected returns because actual returns are determined at the end of the period and must be discounted back to present value.

You must add one of two investments to an already well- diversified portfolio. If you are a risk-averse investor,which one is the better choice?

Beta is a statistical measure of

An investor currently holds the following portfolio: The beta for the portfolio is

The category of securities with the highest historical risk premium is

The beta of ABC Co.stock is the slope of

Accounting profits is the most relevant variable the financial manager uses to measure returns.

A stock with a beta of 1.4 has 40% more variability in returns than the average stock.

You purchased 500 shares of A.M.J.Inc.common stock one year ago for $50 per share.You received a dividend of $2 per share today and decide to take your profits by selling at $54.50 per share.What is your holding period return?

Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio?

Because risk is measured by variability of returns,how long we hold our investments does not matter very much when it comes to reducing risk.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

International Business Finance

Cash,receivables,and Inventory Management

Filters