Question 1

The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the

Accepted Answer

A) stock's beta. 
B) investor's risk premium. 
C) investor's required rate of return. 
D) risk-free rate. 
A) stock's beta. 
B) investor's risk premium. 
C) investor's required rate of return. 
D) risk-free rate.

Question 2

Rogue Recreation,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 5%,while Lake Tours,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 15%.Which of the following is true?

Accepted Answer

A) Lake Tours' investors are not being adequately compensated for relevant risk. 
B) Rogue Rec is likely to experience returns larger than those of Lake Tours. 
C) Lake Tours is more likely to have negative returns than Rogue Rec. 
D) Rational investors will prefer Lake Tours,Inc.over Rogue Recreation,Inc. 
A) Lake Tours' investors are not being adequately compensated for relevant risk. 
B) Rogue Rec is likely to experience returns larger than those of Lake Tours. 
C) Lake Tours is more likely to have negative returns than Rogue Rec. 
D) Rational investors will prefer Lake Tours,Inc.over Rogue Recreation,Inc.

Question 3

Portfolio performance is determined mainly by stock selection and market timing,with less emphasis on asset allocation.

Accepted Answer

A) True 
 B)False

Question 4

Use the following data: Market risk premium = 10% Risk free rate = 2% Beta of XYZ stock = 1.6 Beta of PDQ stock = 2.4 Investment in XYZ stock = $15,000 Investment in PDQ stock = $60,000 You have no assets other than your investments in XYZ and PDQ stock. What is the expected return of your portfolio? Show all work.

Accepted Answer

Portfolio Beta method: B_p = (15/75 × 1.6)

Question 5

The prices for the National Gasworks Corporation for the second quarter of 2012 are given below.The price of the stock on April 1,2012 was $130.Find the holding period return for an investor who purchased the stock on April 1,2012 and sold it the last day of June 2012.

Accepted Answer

A) -4.2%   
B) -3.7% 
C) 2.1% 
D) 3.7% 
A) -4.2%   
B) -3.7% 
C) 2.1% 
D) 3.7%

Question 6

You are considering investing in a project with the following possible outcomes:   Calculate the expected rate of return and standard deviation of returns for this investment,respectively.

Accepted Answer

A) 8.72%,12.99% 
B) 7.35%,12.99% 
C) 3.50%,1.69% 
D) 2.18%,1.69% 
A) 8.72%,12.99% 
B) 7.35%,12.99% 
C) 3.50%,1.69% 
D) 2.18%,1.69%

Question 7

The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.

Accepted Answer

A) True 
 B)False

Question 8

The characteristic line for any well-diversified portfolio is horizontal.

Accepted Answer

A) True 
 B)False

Question 9

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

Accepted Answer

A) True 
 B)False

Question 10

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is the slope of the security market line?

Accepted Answer

A) beta 
B) one 
C) It varies,and is steeper for riskier securities. 
D) the market risk premium 
A) beta 
B) one 
C) It varies,and is steeper for riskier securities. 
D) the market risk premium

Question 12

Beginning with an investment in one company's securities,as we add securities of other companies to our portfolio,which type of risk declines?

Accepted Answer

A) systematic risk 
B) market risk 
C) non-diversifiable risk 
D) unsystematic risk 
A) systematic risk 
B) market risk 
C) non-diversifiable risk 
D) unsystematic risk

Question 13

Redesign Corp is considering a new strategy that would increase its expected return from 12% to 13.9%,but would also increase its beta from 1.2 to 1.8.If the risk free rate is 5% and the return on the market is expected to be 10%,should Redesign change its strategy?

Accepted Answer

No.Currently the company's required retu

Question 14

Small company stocks have historically had higher average annual returns than large company stocks,and also a higher risk premium.

Accepted Answer

A) True 
 B)False

Question 15

Assume that you expect to hold a $40,000 investment for one year.It is forecasted to have a year end value of $42,000 with a 30% probability; a year end value of $48,000 with a 45% probability; and a year end value of $60,000 with a 25% probability.What is the expected holding period return for this investment?

Accepted Answer

A) 50% 
B) 25% 
C) 23% 
D) 18% 
A) 50% 
B) 25% 
C) 23% 
D) 18%

Question 16

Asset allocation is not recommended by financial planners because mixing different types of assets,such as stocks with bonds,makes it more difficult to track performance and adjust portfolios to changing market conditions.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following types of risk is diversifiable?

Accepted Answer

A) unsystematic,or company-unique risk 
B) betagenic,or ecocentric risk 
C) systematic risk 
D) market risk 
A) unsystematic,or company-unique risk 
B) betagenic,or ecocentric risk 
C) systematic risk 
D) market risk

Question 18

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 19

You are considering buying some stock in Continental Grain.Which of the following are examples of non-diversifiable risks? 
I.Risk resulting from a general decline in the stock market. 
II.Risk resulting from a possible increase in income taxes. 
III.Risk resulting from an explosion in a grain elevator owned by Continental. 
IV.Risk resulting from a pending lawsuit against Continental.

Accepted Answer

A) I and II 
B) III and IV 
C) I only 
D) II,III,and IV 
A) I and II 
B) III and IV 
C) I only 
D) II,III,and IV

Question 20

Of the following different types of securities,which is typically considered most risky?

Accepted Answer

A) long-term corporate bonds 
B) long-term government bonds 
C) common stocks of large companies 
D) common stocks of small companies 
A) long-term corporate bonds 
B) long-term government bonds 
C) common stocks of large companies 
D) common stocks of small companies

The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the

Rogue Recreation,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 5%,while Lake Tours,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 15%.Which of the following is true?

Portfolio performance is determined mainly by stock selection and market timing,with less emphasis on asset allocation.

The prices for the National Gasworks Corporation for the second quarter of 2012 are given below.The price of the stock on April 1,2012 was $130.Find the holding period return for an investor who purchased the stock on April 1,2012 and sold it the last day of June 2012.

You are considering investing in a project with the following possible outcomes: Calculate the expected rate of return and standard deviation of returns for this investment,respectively.

The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.

The characteristic line for any well-diversified portfolio is horizontal.

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

Which of the following is the slope of the security market line?

Beginning with an investment in one company's securities,as we add securities of other companies to our portfolio,which type of risk declines?

Redesign Corp is considering a new strategy that would increase its expected return from 12% to 13.9%,but would also increase its beta from 1.2 to 1.8.If the risk free rate is 5% and the return on the market is expected to be 10%,should Redesign change its strategy?

Small company stocks have historically had higher average annual returns than large company stocks,and also a higher risk premium.

Asset allocation is not recommended by financial planners because mixing different types of assets,such as stocks with bonds,makes it more difficult to track performance and adjust portfolios to changing market conditions.

Which of the following types of risk is diversifiable?

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?

Of the following different types of securities,which is typically considered most risky?

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

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Exam 6: The Meaning and Measurement of Risk and Return

The minimum rate of return necessary to attract an investor to purchase or hold a security is referred to as the

Rogue Recreation,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 5%,while Lake Tours,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 15%.Which of the following is true?

Portfolio performance is determined mainly by stock selection and market timing,with less emphasis on asset allocation.

The prices for the National Gasworks Corporation for the second quarter of 2012 are given below.The price of the stock on April 1,2012 was $130.Find the holding period return for an investor who purchased the stock on April 1,2012 and sold it the last day of June 2012.

You are considering investing in a project with the following possible outcomes: Calculate the expected rate of return and standard deviation of returns for this investment,respectively.

The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.

The characteristic line for any well-diversified portfolio is horizontal.

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

Which of the following is the slope of the security market line?

Beginning with an investment in one company's securities,as we add securities of other companies to our portfolio,which type of risk declines?

Redesign Corp is considering a new strategy that would increase its expected return from 12% to 13.9%,but would also increase its beta from 1.2 to 1.8.If the risk free rate is 5% and the return on the market is expected to be 10%,should Redesign change its strategy?

Small company stocks have historically had higher average annual returns than large company stocks,and also a higher risk premium.

Asset allocation is not recommended by financial planners because mixing different types of assets,such as stocks with bonds,makes it more difficult to track performance and adjust portfolios to changing market conditions.

Which of the following types of risk is diversifiable?

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?

Of the following different types of securities,which is typically considered most risky?

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