Question 1

Which of the following measures the average relationship between a stock's returns and the market's returns?

Accepted Answer

A)  Coefficient of validation 
B)  Standard deviation 
C)  Geometric regression 
D)  Beta coefficient 
A)  Coefficient of validation 
B)  Standard deviation 
C)  Geometric regression 
D)  Beta coefficient

Question 2

Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/09.Bill sold the shares on 12/31/09 for $3.45.Robotics stock has a beta of 1.9,the risk-free rate of return is 4%,and the market risk premium is 9%.The required return on Robotics Stock is

Accepted Answer

A)  15.0%. 
B)  16.5%. 
C)  17.6%. 
D)  21.1%. 
A)  15.0%. 
B)  16.5%. 
C)  17.6%. 
D)  21.1%.

Question 3

You are considering an investment in First Allegiance Corp.The firm has a beta of 1.6.Currently,U.S.Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%.What rate of return should you expect for your investment in First Allegiance?

Accepted Answer

A)  11.15% 
B)  15.39% 
C)  16.75% 
D)  20.75% 
A)  11.15% 
B)  15.39% 
C)  16.75% 
D)  20.75%

Question 4

Total risk equals systematic risk plus unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following investments is clearly preferred to the others for a risk-averse investor:

Accepted Answer

A)  Investment A 
B)  Investment B 
C)  Investment C 
D)  Cannot be determined without additional information 
A)  Investment A 
B)  Investment B 
C)  Investment C 
D)  Cannot be determined without additional information

Question 6

Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return.What is the standard deviation of return for this investment?

Accepted Answer

A)  5.89% 
B)  16.1% 
C)  2.43% 
D)  15.7% 
A)  5.89% 
B)  16.1% 
C)  2.43% 
D)  15.7%

Question 7

SeeBreeze Incorporated has a beta of 1.0.If the expected return on the market is 15%,what is the expected return on SeeBreeze 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 8

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the highest risk investment?

Accepted Answer

A)  Common stock of large firms 
B)  U.S. Treasury bills 
C)  Common stock of small firms 
D)  Long-term government bonds 
A)  Common stock of large firms 
B)  U.S. Treasury bills 
C)  Common stock of small firms 
D)  Long-term government bonds

Question 9

A security with a beta of one has a required rate of return equal to the overall market rate of return.

Accepted Answer

A) True 
 B)False

Question 10

Security A has an expected rate of return of 29.8 percent and a beta of 3.1.Security B has a beta of 1.70.If the Treasury bill rate is 5 percent,what is the expected rate of return for Security B?

Accepted Answer

Use A to determine the market

Question 11

Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/09.Bill sold the shares on 12/31/09 for $3.45.Robotics stock has a beta of 1.9,the risk-free rate of return is 4%,and the market risk premium is 9%.Joe's holding period return is:

Accepted Answer

A)  15.0%. 
B)  16.5%. 
C)  17.6%. 
D)  21.1%. 
A)  15.0%. 
B)  16.5%. 
C)  17.6%. 
D)  21.1%.

Question 12

Assume that you expect to hold a $20,000 investment for one year.It is forecasted to have a yearend value of $21,000 with a 30% probability; a yearend value of $24,000 with a 45% probability; and a yearend value of $30,000 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 13

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

Question 14

You are going to add one of the following three projects to your already well-diversified portfolio.   Assume the risk-free rate of return is 2% and the market risk premium is 8%.If you are a risk averse investor,which project should you choose?

Accepted Answer

A)  Project 1 
B)  Project 2 
C)  Project 3 
D)  Either Project 2 or Project 3 because the higher expected return on project 3 offsets its higher risk. 
A)  Project 1 
B)  Project 2 
C)  Project 3 
D)  Either Project 2 or Project 3 because the higher expected return on project 3 offsets its higher risk.

Question 15

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 16

You are considering a security with the following possible rates of return:
   a.Calculate the expected rate of return.
b.Calculate the standard deviation of the returns.

Accepted Answer

a.Expected Return = (0.15)(9.5

Question 17

Which of the following statements is most correct regarding beta?

Accepted Answer

A)  Beta must be calculated using at least 5 years of monthly returns data to be accurate. 
B)  Beta can only be measured properly using daily returns. 
C)  Beta for a particular company remains constant over time. 
D)  Even professionals may not agree on the measurement of beta. 
A)  Beta must be calculated using at least 5 years of monthly returns data to be accurate. 
B)  Beta can only be measured properly using daily returns. 
C)  Beta for a particular company remains constant over time. 
D)  Even professionals may not agree on the measurement of beta.

Question 18

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 19

The appropriate measure for risk according to the capital asset pricing model is

Accepted Answer

A)  the standard deviation of a firm's cash flows. 
B)  alpha. 
C)  the standard deviation of a firm's stock returns. 
D)  beta. 
A)  the standard deviation of a firm's cash flows. 
B)  alpha. 
C)  the standard deviation of a firm's stock returns. 
D)  beta.

Question 20

Which of the following is/are true?

Accepted Answer

A)  Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks. 
B)  Two points on the Characteristic Line are the T-bill and the market portfolio. 
C)  The greater the total risk of an asset, the greater the expected return. 
D)  All securities have a beta between 0 and 1. 
A)  Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks. 
B)  Two points on the Characteristic Line are the T-bill and the market portfolio. 
C)  The greater the total risk of an asset, the greater the expected return. 
D)  All securities have a beta between 0 and 1.

Which of the following measures the average relationship between a stock's returns and the market's returns?

Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/09.Bill sold the shares on 12/31/09 for $3.45.Robotics stock has a beta of 1.9,the risk-free rate of return is 4%,and the market risk premium is 9%.The required return on Robotics Stock is

You are considering an investment in First Allegiance Corp.The firm has a beta of 1.6.Currently,U.S.Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%.What rate of return should you expect for your investment in First Allegiance?

Total risk equals systematic risk plus unsystematic risk.

Which of the following investments is clearly preferred to the others for a risk-averse investor:

Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return.What is the standard deviation of return for this investment?

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

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the highest risk investment?

A security with a beta of one has a required rate of return equal to the overall market rate of return.

Security A has an expected rate of return of 29.8 percent and a beta of 3.1.Security B has a beta of 1.70.If the Treasury bill rate is 5 percent,what is the expected rate of return for Security B?

Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/09.Bill sold the shares on 12/31/09 for $3.45.Robotics stock has a beta of 1.9,the risk-free rate of return is 4%,and the market risk premium is 9%.Joe's holding period return is:

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.

You are going to add one of the following three projects to your already well-diversified portfolio. Assume the risk-free rate of return is 2% and the market risk premium is 8%.If you are a risk averse investor,which project should you choose?

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 are considering a security with the following possible rates of return: a.Calculate the expected rate of return. b.Calculate the standard deviation of the returns.

Which of the following statements is most correct regarding beta?

The beta of ABC Co.stock is the slope of

The appropriate measure for risk according to the capital asset pricing model is

Which of the following is/are true?

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

Current Asset Management

International Business Finance

Filters

Exam 6: The Meaning and Measurement of Risk and Return

Which of the following measures the average relationship between a stock's returns and the market's returns?

Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/09.Bill sold the shares on 12/31/09 for $3.45.Robotics stock has a beta of 1.9,the risk-free rate of return is 4%,and the market risk premium is 9%.The required return on Robotics Stock is

You are considering an investment in First Allegiance Corp.The firm has a beta of 1.6.Currently,U.S.Treasury bills are yielding 2.75% and the expected return for the S & P 500 is 14%.What rate of return should you expect for your investment in First Allegiance?

Total risk equals systematic risk plus unsystematic risk.

Which of the following investments is clearly preferred to the others for a risk-averse investor:

Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return.What is the standard deviation of return for this investment?

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

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the highest risk investment?

A security with a beta of one has a required rate of return equal to the overall market rate of return.

Security A has an expected rate of return of 29.8 percent and a beta of 3.1.Security B has a beta of 1.70.If the Treasury bill rate is 5 percent,what is the expected rate of return for Security B?

Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/09.Bill sold the shares on 12/31/09 for $3.45.Robotics stock has a beta of 1.9,the risk-free rate of return is 4%,and the market risk premium is 9%.Joe's holding period return is:

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.

You are going to add one of the following three projects to your already well-diversified portfolio. Assume the risk-free rate of return is 2% and the market risk premium is 8%.If you are a risk averse investor,which project should you choose?

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 are considering a security with the following possible rates of return: a.Calculate the expected rate of return. b.Calculate the standard deviation of the returns.

Which of the following statements is most correct regarding beta?

The beta of ABC Co.stock is the slope of

The appropriate measure for risk according to the capital asset pricing model is

Which of the following is/are true?

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

Current Asset Management

International Business Finance

Filters