Question 1

What is the name given to the equation that financial managers use to measure an investor's required rate of return?

Accepted Answer

A)  The standard deviation 
B)  The capital asset pricing model 
C)  The coefficient of variation 
D)  The MIRR 
A)  The standard deviation 
B)  The capital asset pricing model 
C)  The coefficient of variation 
D)  The MIRR

Question 2

An investor currently holds the following portfolio:
Amount
Invested
8,000 shares of Stock A $16,000 Beta = 1.3
15,000 shares of Stock B $48,000 Beta = 1.8
25,000 shares of Stock C $96,000 Beta = 2.2
The investor is worried that the beta of his portfolio is too high,so he wants to sell some stock C and add stock D,which has a beta of 1.0,to his portfolio.If the investor wants his portfolio to have a beta of 1.72,how much stock C must he replace with stock D?

Accepted Answer

A)  $18,000 
B)  $24,000 
C)  $31,000 
D)  $36,000 
A)  $18,000 
B)  $24,000 
C)  $31,000 
D)  $36,000

Question 3

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 4

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

Accepted Answer

A) True 
 B)False

Question 5

An investor currently holds the following portfolio:
  If the risk-free rate of return is 4% and the market risk premium is 9%,then the required return on the portfolio is

Accepted Answer

A)  14.00%. 
B)  17.91%. 
C)  21.91%. 
D)  23.85%. 
A)  14.00%. 
B)  17.91%. 
C)  21.91%. 
D)  23.85%.

Question 6

You are going to invest all of your funds in one of three projects with the following distribution of possible returns:
  If you are a risk averse investor,which one should you choose?

Accepted Answer

A)  Project 1 
B)  Project 2 
C)  Project 3 
D)  Either Project 1 or Project 2 because they have the same expected return. 
A)  Project 1 
B)  Project 2 
C)  Project 3 
D)  Either Project 1 or Project 2 because they have the same expected return.

Question 7

The risk-free rate of interest is 4% and the market risk premium is 9%.Howard Corporation has a beta of 2.0,and last year generated a return of 16% with a standard deviation of returns of 27%.The required return on Howard Corporation stock is

Accepted Answer

A)  36%. 
B)  34%. 
C)  26%. 
D)  22%. 
A)  36%. 
B)  34%. 
C)  26%. 
D)  22%.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Investment A has an expected return of 14% with a standard deviation of 4%,while investment B has an expected return of 20% with a standard deviation of 9%.Therefore,

Accepted Answer

A)  a risk averse investor will definitely select investment A because the standard deviation is lower. 
B)  a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A ($14% - 4%). 
C)  it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A's, but the return is not twice as big. 
D)  rational investors could pick either A or B, depending on their level of risk aversion. 
A)  a risk averse investor will definitely select investment A because the standard deviation is lower. 
B)  a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A ($14% - 4%). 
C)  it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment A's, but the return is not twice as big. 
D)  rational investors could pick either A or B, depending on their level of risk aversion.

Question 10

Bay Land,Inc.has the following distribution of returns:
   Assuming that these returns are normally distributed,what is the probability that Bay Land,Inc.will return less than 7.25%?
 Show all work,and clearly explain and state your answer.

Accepted Answer

Exp.Return = (.3 × .25)+ (.4 × .15)+ (.3

Question 11

White Company stock has a beta of 2 and a required return of 23%,while Black Company stock has a beta of 1.0 and a required return of 14%.The standard deviation of returns for White Company is 10% more than the standard deviation for Black Company.The risk free rate of return according to the CAPM is

Accepted Answer

A)  4%. 
B)  5%. 
C)  6%. 
D)  Impossible to determine with the information given. 
A)  4%. 
B)  5%. 
C)  6%. 
D)  Impossible to determine with the information given.

Question 12

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 13

The prices for the Electric Circuit Corporation for the first quarter of 2009 are given below.The price of the stock on January 1,2009 was $130.Find the holding period return for an investor who purchased the stock on January 1,2009 and sold it the last day of March 2009. Month End Price
January $125.00
February 138.50
March 132.75

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 14

Emery Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the market risk premium is 7.5%,the risk-free rate of return is

Accepted Answer

A)  4.1%. 
B)  3.4%. 
C)  2.0%. 
D)  1.5%. 
A)  4.1%. 
B)  3.4%. 
C)  2.0%. 
D)  1.5%.

Question 15

The realized rate of return,or holding period return,is equal to the holding period dollar gain divided by the price at the beginning of the period.

Accepted Answer

A) True 
 B)False

Question 16

Due to strict stock market controls,the most a stock's value can drop in one trading day is 5%.

Accepted Answer

A) True 
 B)False

Question 17

The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.

Accepted Answer

A) True 
 B)False

Question 18

A well-diversified portfolio typically has systematic risk equal to about 40% of the portfolio's total risk.

Accepted Answer

A) True 
 B)False

Question 19

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 20

A typical measure for the risk-free rate of return is the

Accepted Answer

A)  U.S. Treasury Bill rate. 
B)  prime lending rate. 
C)  money market rate. 
D)  short-term AAA-rated bond rate. 
A)  U.S. Treasury Bill rate. 
B)  prime lending rate. 
C)  money market rate. 
D)  short-term AAA-rated bond rate.

What is the name given to the equation that financial managers use to measure an investor's required rate of return?

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

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

An investor currently holds the following portfolio: If the risk-free rate of return is 4% and the market risk premium is 9%,then the required return on the portfolio is

You are going to invest all of your funds in one of three projects with the following distribution of possible returns: If you are a risk averse investor,which one should you choose?

The risk-free rate of interest is 4% and the market risk premium is 9%.Howard Corporation has a beta of 2.0,and last year generated a return of 16% with a standard deviation of returns of 27%.The required return on Howard Corporation stock is

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

Investment A has an expected return of 14% with a standard deviation of 4%,while investment B has an expected return of 20% with a standard deviation of 9%.Therefore,

Bay Land,Inc.has the following distribution of returns: Assuming that these returns are normally distributed,what is the probability that Bay Land,Inc.will return less than 7.25%? Show all work,and clearly explain and state your answer.

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%.

Emery Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the market risk premium is 7.5%,the risk-free rate of return is

The realized rate of return,or holding period return,is equal to the holding period dollar gain divided by the price at the beginning of the period.

Due to strict stock market controls,the most a stock's value can drop in one trading day is 5%.

The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.

A well-diversified portfolio typically has systematic risk equal to about 40% of the portfolio's total risk.

The category of securities with the highest historical risk premium is

A typical measure for the risk-free rate of return is the

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

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Exam 6: The Meaning and Measurement of Risk and Return

What is the name given to the equation that financial managers use to measure an investor's required rate of return?

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

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

An investor currently holds the following portfolio: If the risk-free rate of return is 4% and the market risk premium is 9%,then the required return on the portfolio is

You are going to invest all of your funds in one of three projects with the following distribution of possible returns: If you are a risk averse investor,which one should you choose?

The risk-free rate of interest is 4% and the market risk premium is 9%.Howard Corporation has a beta of 2.0,and last year generated a return of 16% with a standard deviation of returns of 27%.The required return on Howard Corporation stock is

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

Investment A has an expected return of 14% with a standard deviation of 4%,while investment B has an expected return of 20% with a standard deviation of 9%.Therefore,

Bay Land,Inc.has the following distribution of returns: Assuming that these returns are normally distributed,what is the probability that Bay Land,Inc.will return less than 7.25%? Show all work,and clearly explain and state your answer.

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%.

Emery Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the market risk premium is 7.5%,the risk-free rate of return is

The realized rate of return,or holding period return,is equal to the holding period dollar gain divided by the price at the beginning of the period.

Due to strict stock market controls,the most a stock's value can drop in one trading day is 5%.

The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.

A well-diversified portfolio typically has systematic risk equal to about 40% of the portfolio's total risk.

The category of securities with the highest historical risk premium is

A typical measure for the risk-free rate of return is the

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