uest|ons re|ated to Chapter S

1rue]Ia|se
1 lor Lhe rlskseeklng manager no change ln reLurn would be requlred for an lncrease ln rlsk
lA
2 lor Lhe rlskaverse manager Lhe requlred reLurn decreases for an lncrease ln rlsk
lA
8 1he real uLlllLy of Lhe coefflclenL of varlaLlon ls ln comparlng asseLs LhaL have equal expecLed reLurns
lA
9 1he rlsk of an asseL may be found by subLracLlng Lhe worsL ouLcome from Lhe besL ouLcome
18
13 1he more cerLaln Lhe reLurn from an asseL Lhe less varlablllLy and Lherefore Lhe less rlsk 18
14 A behavloral approach for assesslng rlsk LhaL uses a number of posslble reLurn esLlmaLes Lo obLaln a sense of Lhe varlablllLy among ouLcomes ls
called senslLlvlLy analysls
18
17 1he flnanclal manager's goal for Lhe flrm ls Lo creaLe a porLfollo LhaL maxlmlzes reLurn ln order Lo maxlmlze Lhe value of Lhe flrm
lA
20 Comblnlng negaLlvely correlaLed asseLs can reduce Lhe overall varlablllLy of reLurns
18
21 Lven lf asseLs are noL negaLlvely correlaLed Lhe lower Lhe poslLlve correlaLlon beLween Lhem Lhe lower Lhe resulLlng rlsk
18
23 A porLfollo of Lwo negaLlvely correlaLed asseLs has less rlsk Lhan elLher of Lhe lndlvldual asseLs
18
33 8eLa coefflclenL ls an lndex of Lhe degree of movemenL of an asseL's reLurn ln response Lo a change ln Lhe rlskfree asseL
lA
36 8ecause any lnvesLor can creaLe a porLfollo of asseLs LhaL wlll ellmlnaLe all or vlrLually all nondlverslflable rlsk Lhe only relevanL rlsk ls
dlverslflable rlsk
lA
38 Any lnvesLor (or flrm) musL be concerned solely wlLh nondlverslflable rlsk because lL can creaLe a porLfollo of asseLs LhaL wlll ellmlnaLe all or
vlrLually all dlverslflable rlsk
18
41 1he unsysLemaLlc rlsk can be ellmlnaLed Lhrough dlverslflcaLlon
18
43 1he dlfference beLween Lhe reLurn Lo Lhe markeL porLfollo of asseLs and Lhe rlskfree raLe of reLurn represenLs Lhe premlum Lhe lnvesLor musL
recelve for Laklng Lhe average amounL of rlsk assoclaLed wlLh holdlng Lhe markeL porLfollo of asseLs
18
60 Cn average durlng Lhe pasL 73 years Lhe reLurn on smallcompany sLocks has exceeded Lhe reLurn on largecompany sLocks
18
61 Cn average durlng Lhe pasL 73 years Lhe reLurn on longLerm governmenL bonds has exceeded Lhe reLurn on longLerm corporaLe bonds
lA
66 Cn average durlng Lhe pasL 73 years Lhe reLurn on largecompany sLocks has exceeded Lhe reLurn on longLerm corporaLe bonds
18
67 A normal probablllLy dlsLrlbuLlon ls a symmeLrlcal dlsLrlbuLlon whose shape resembles a bellshaped curve
18
70 CoefflclenL of varlaLlon ls a measure of relaLlve dlsperslon LhaL ls useful ln comparlng Lhe rlsks of asseLs wlLh dlfferenL expecLed reLurns
18
71 1he hlgher Lhe coefflclenL of varlaLlon Lhe greaLer Lhe rlsk and Lherefore Lhe hlgher Lhe expecLed reLurn
18
86 1oLal securlLy rlsk ls Lhe sum of a securlLy's nondlverslflable and dlverslflable rlsk
18
89 lnvesLors should recognlze LhaL beLas are calculaLed uslng hlsLorlcal daLa and LhaL pasL performance relaLlve Lo Lhe markeL average may noL
accuraLely predlcL fuLure performance
18
3 1he reLurn on an asseL ls Lhe change ln lLs value plus any cash dlsLrlbuLlon over a glven perlod of Llme expressed as a percenLage of lLs endlng
value
lA
11 1he rlsk of an asseL can be measured by lLs varlance whlch ls found by subLracLlng Lhe worsL ouLcome from Lhe besL ouLcome
lA
18 1wo asseLs whose reLurns move ln Lhe same dlrecLlon and have a correlaLlon coefflclenL of r1 are boLh very rlsky asseLs
lA
28 Cver long perlods reLurns from lnLernaLlonally dlverslfled porLfollos Lend Lo be superlor Lo Lhose ylelded by purely domesLlc ones Cver any
slngle shorL or lnLermedlaLe perlod however lnLernaLlonal dlverslflcaLlon can yleld sub par reLurnsparLlcularly durlng perlods when Lhe dollar ls
appreclaLlng ln value relaLlve Lo oLher currencles
18
29 Comblnlng uncorrelaLed asseLs can reduce rlsknoL as effecLlvely as comblnlng negaLlvely correlaLed asseLs buL more effecLlvely Lhan
comblnlng poslLlvely correlaLed asseLs 18
31 A porLfollo comblnlng Lwo asseLs wlLh less Lhan perfecLly poslLlve correlaLlon can lncrease LoLal rlsk Lo a level above LhaL of elLher of Lhe
componenLs
lA
34 1he creaLlon of a porLfollo by comblnlng Lwo asseLs havlng perfecLly poslLlvely correlaLed reLurns cannoL reduce Lhe porLfollo's overall rlsk
below Lhe rlsk of Lhe leasL rlsky asseL whereas a porLfollo comblnlng Lwo asseLs wlLh less Lhan perfecLly poslLlve correlaLlon can reduce LoLal rlsk Lo
a level below LhaL of elLher of Lhe componenLs
18
43 1he requlred reLurn on an asseL ls an lncreaslng funcLlon of lLs nondlverslflable rlsk
18
47 1he caplLal asseL prlclng model (CAM) llnks LogeLher unsysLemaLlc rlsk and reLurn for all asseLs
lA
30 1he sLeeper Lhe slope of Lhe securlLy markeL llne Lhe greaLer Lhe degree of rlsk averslon
18
32 A change ln lnflaLlonary expecLaLlons resulLlng from evenLs such as lnLernaLlonal Lrade embargoes or ma[or changes ln lederal 8eserve pollcy
wlll resulL ln a shlfL ln Lhe SML
18
34 A glven change ln lnflaLlonary expecLaLlons wlll be fully reflecLed ln a correspondlng change ln Lhe reLurns of all asseLs and wlll be reflecLed
graphlcally ln a parallel shlfL of Lhe SML
18
37 Changes ln rlsk averslon and Lherefore shlfLs ln Lhe SML resulL from changlng LasLes and preferences of lnvesLors whlch generally resulL from
varlous economlc pollLlcal and soclal evenLs
18
38 ln general wldely accepLed expecLaLlons of hard Llmes ahead Lend Lo cause lnvesLors Lo become less rlskaverse
lA
68 An abnormal probablllLy dlsLrlbuLlon ls a symmeLrlcal dlsLrlbuLlon whose shape resembles a bellshaped curve
lA
72 1he lower Lhe coefflclenL of varlaLlon Lhe greaLer Lhe rlsk and Lherefore Lhe hlgher Lhe expecLed reLurn
lA
73 8uslness rlsk ls Lhe chance LhaL Lhe flrm wlll be unable Lo cover lLs operaLlng cosLs and ls affecLed by a flrm's revenue sLablllLy and Lhe sLrucLure
of lLs operaLlng cosLs (flxed vs varlable)
18
74 llnanclal rlsk ls Lhe chance LhaL Lhe flrm wlll be unable Lo cover lLs operaLlng cosLs and ls affecLed by a flrm's revenue sLablllLy and Lhe sLrucLure
of lLs operaLlng cosLs (flxed vs varlable)
lA
73 lnLeresL raLe rlsk ls Lhe chance LhaL changes ln lnLeresL raLes wlll adversely affecL Lhe value of an lnvesLmenL mosL lnvesLmenLs decllne ln value
when Lhe lnLeresL raLes rlse and lncrease ln value when lnLeresL raLes fall
18
76 LlquldlLy rlsk ls Lhe chance LhaL changes ln lnLeresL raLes wlll adversely affecL Lhe value of an lnvesLmenL mosL lnvesLmenLs decllne ln value
when Lhe lnLeresL raLes rlse and lncrease ln value when lnLeresL raLes fall
lA
77 MarkeL rlsk ls Lhe chance LhaL Lhe value of an lnvesLmenL wlll decllne because of markeL facLors (such as economlc pollLlcal and soclal evenLs)
LhaL are lndependenL of Lhe lnvesLmenL
18
78 lnLeresL raLe rlsk ls Lhe chance LhaL Lhe value of an lnvesLmenL wlll decllne because of markeL facLors (such as economlc pollLlcal and soclal
evenLs) LhaL are lndependenL of Lhe lnvesLmenL
lA
79 LvenL rlsk ls Lhe chance LhaL a LoLally unexpecLed evenL wlll have a slgnlflcanL effecL on Lhe value of Lhe flrm or a speclflc lnvesLmenL
18
80 MarkeL rlsk ls Lhe chance LhaL a LoLally unexpecLed evenL wlll have a slgnlflcanL effecL on Lhe value of Lhe flrm or a speclflc lnvesLmenL
lA
81 urchaslngpower rlsk ls Lhe chance LhaL changes ln lnLeresL raLes wlll adversely affecL Lhe value of an lnvesLmenL mosL lnvesLmenLs decllne ln
value when Lhe lnLeresL raLes rlse and lncrease ln value when lnLeresL raLes fall
lA
90 1he beLa of a porLfollo ls a funcLlon of Lhe sLandard devlaLlons of Lhe lndlvldual securlLles ln Lhe porLfollo Lhe proporLlon of Lhe porLfollo
lnvesLed ln Lhose securlLles and Lhe correlaLlon beLween Lhe reLurns of Lhose securlLles
lA
,u|t|p|e Cho|ce uest|ons
1 lf a person's requlred reLurn does noL change when rlsk lncreases LhaL person ls sald Lo be
(a) rlskseeklng
(b) rlsklndlfferenL
(c) rlskaverse
(d) rlskaware
b
3 8lsk averslon ls Lhe behavlor exhlblLed by managers who requlre a greaLer Lhan proporLlonal _________
(a) lncrease ln reLurn for a glven decrease ln rlsk
(b) lncrease ln reLurn for a glven lncrease ln rlsk
(c) decrease ln reLurn for a glven lncrease ln rlsk
(d) decrease ln reLurn for a glven decrease ln rlsk
b
7 LasL year Mlke boughL 100 shares of uallas CorporaLlon common sLock for $33 per share uurlng Lhe year he recelved dlvldends of $143 per
share 1he sLock ls currenLly selllng for $60 per share WhaL raLe of reLurn dld Mlke earn over Lhe year?
(a) 117 percenL
(b) 132 percenL
(c) 141 percenL
(d) 139 percenL
d
9 A common approach of esLlmaLlng Lhe varlablllLy of reLurns lnvolvlng forecasLlng Lhe pesslmlsLlc mosL llkely and opLlmlsLlc reLurns assoclaLed
wlLh Lhe asseL ls called
(a) marglnal analysls
(b) senslLlvlLy analysls
(c) breakeven analysls
(d) flnanclal sLaLemenL analysls
b
10 1he _________ ls Lhe exLenL of an asseL's rlsk lL ls found by subLracLlng Lhe pesslmlsLlc ouLcome from Lhe opLlmlsLlc ouLcome
(a) reLurn
(b) sLandard devlaLlon
(c) probablllLy dlsLrlbuLlon
(d) range
d
12 _________ probablllLy dlsLrlbuLlon shows all posslble ouLcomes and assoclaLed probablllLles for a glven evenL
(a) A dlscreLe
(b) An expecLed value
(c) A bar charL
(d) A conLlnuous
d
13 1he _________ measures Lhe dlsperslon around Lhe expecLed value
(a) coefflclenL of varlaLlon
(b) chl square
(c) mean
(d) sLandard devlaLlon
d
14 1he _________ ls a measure of relaLlve dlsperslon used ln comparlng Lhe rlsk of asseLs wlLh dlfferlng expecLed reLurns
(a) coefflclenL of varlaLlon
(b) chl square
(c) mean
(d) sLandard devlaLlon
a
18 1he _________ Lhe coefflclenL of varlaLlon Lhe _________ Lhe rlsk
(a) lower lower
(b) hlgher lower
(c) lower hlgher
(d) more sLable hlgher
a
21 A(n) _________ porLfollo maxlmlzes reLurn for a glven level of rlsk or mlnlmlzes rlsk for a glven level of reLurn
(a) efflclenL
(b) coefflclenL
(c) conLlnuous
(d) rlsklndlfferenL
a
33 ln general Lhe lower (less poslLlve and more negaLlve) Lhe correlaLlon beLween asseL reLurns
(a) Lhe less Lhe poLenLlal dlverslflcaLlon of rlsk
(b) Lhe greaLer Lhe poLenLlal dlverslflcaLlon of rlsk
(c) Lhe lower Lhe poLenLlal proflL
(d) Lhe less Lhe asseLs have Lo be monlLored
b
37 SysLemaLlc rlsk ls also referred Lo as
(a) dlverslflable rlsk
(b) economlc rlsk
(c) nondlverslflable rlsk
(d) noL relevanL
c
38 1he purpose of addlng an asseL wlLh a negaLlve or low poslLlve beLa ls Lo
(a) reduce proflL
(b) reduce rlsk
(c) lncrease proflL
(d) lncrease rlsk
b
39 1he beLa of Lhe markeL
(a) ls greaLer Lhan 1
(b) ls less Lhan 1
(c) ls 1
(d) cannoL be deLermlned
c
40 8lsk LhaL affecLs all flrms ls called
(a) LoLal rlsk
(b) managemenL rlsk
(c) nondlverslflable rlsk
(d) dlverslflable rlsk
c
42 1he relevanL porLlon of an asseL's rlsk aLLrlbuLable Lo markeL facLors
LhaL affecL all flrms ls called
(a) unsysLemaLlc rlsk
(b) dlverslflable rlsk
(c) sysLemaLlc rlsk
(d) none of Lhe above
c
43 ______ rlsk represenLs Lhe porLlon of an asseL's rlsk LhaL can be ellmlnaLed by comblnlng asseLs wlLh less Lhan perfecL poslLlve correlaLlon
(a) ulverslflable
(b) nondlverslflable
(c) SysLemaLlc
(d) 1oLal
a
47 A beLa coefflclenL of r1 represenLs an asseL LhaL
(a) ls more responslve Lhan Lhe markeL porLfollo
(b) has Lhe same response as Lhe markeL porLfollo
(c) ls less responslve Lhan Lhe markeL porLfollo
(d) ls unaffecLed by markeL movemenL
b
77 WhaL ls nlco's porLfollo beLa lf he lnvesLs an equal amounL ln asseL x wlLh a beLa of 060 asseL ? wlLh a beLa of 160 Lhe rlskfree asseL and Lhe
markeL porLfollo?
(a) 120
(b) 100
(c) 080
(d) 060
c
16 Whlch asseL would Lhe rlskaverse flnanclal manager prefer? (See below)
Asset A 8 C D
lnlLlal lnvesLmenL $13000 $13000 $13000 $13000
Annual raLe of
reLurn
esslmlsLlc 8 3 3 11
MosL llkely 12 12 12 12
CpLlmlsLlc 14 13 13 14
(a) AsseL A
(b) AsseL 8
(c) AsseL C
(d) AsseL u
d
17 1he expecLed value and Lhe sLandard devlaLlon of reLurns for asseL A ls (See below)
Asset A oss|b|eCutcomes robab|||ty keturns
()
esslmlsLlc 023 10
MosL llkely 043 12
CpLlmlsLlc 030 16
(a) 12 percenL and 4 percenL
(b) 127 percenL and 23 percenL
(c) 127 percenL and 4 percenL
(d) 12 percenL and 23 percenL
b
19 Clven Lhe followlng expecLed reLurns and sLandard devlaLlons of asseLs 8 M C and u whlch asseL should Lhe prudenL flnanclal manager
selecL?
Asset Lxpectedketurn StandardDev|at|on
8 10 3
M 16 10
C 14 9
u 12 8
(a) AsseL 8
(b) AsseL M
(c) AsseL C
(d) AsseL u
a
20 1he expecLed value sLandard devlaLlon of reLurns and coefflclenL of varlaLlon for asseL A are (See below)
Asset A oss|b|eCutcomes robab|||ty keturns
()
esslmlsLlc 023 3
MosL llkely 033 10
CpLlmlsLlc 020 13
(a) 10 percenL 8 percenL and 123 respecLlvely
(b) 933 percenL 8 percenL and 213 respecLlvely
(c) 933 percenL 468 percenL and 2 respecLlvely
(d) 933 percenL 276 percenL and 03 respecLlvely
d
23 An efflclenL porLfollo ls one LhaL
(a) maxlmlzes rlsk for a glven level of reLurn
(b) maxlmlzes reLurn for a glven level of rlsk
(c) mlnlmlzes reLurn for a glven level of rlsk
(d) maxlmlzes reLurn aL all rlsk levels
b
24 1he _________ ls a sLaLlsLlcal measure of Lhe relaLlonshlp beLween serles of numbers
(a) coefflclenL of varlaLlon
(b) sLandard devlaLlon
(c) correlaLlon
(d) probablllLy
c
26 erfecLly _________ correlaLed serles move exacLly LogeLher and have a correlaLlon coefflclenL of _________ whlle perfecLly _________
correlaLed serles move exacLly ln opposlLe dlrecLlons and have a correlaLlon coefflclenL of _________
(a) negaLlvely 1 poslLlvely r1
(b) negaLlvely r1 poslLlvely 1
(c) poslLlvely 1 negaLlvely r1
(d) poslLlvely r1 negaLlvely 1
d
28 An lnvesLmenL advlsor has recommended a $30000 porLfollo conLalnlng asseLs 8 ! and k $23000 wlll be lnvesLed ln asseL 8
wlLh an expecLed annual reLurn of 12 percenL $10000 wlll be lnvesLed ln asseL ! wlLh an expecLed annual reLurn of 18 percenL and $13000 wlll
be lnvesLed ln asseL k wlLh an expecLed annual reLurn of 8 percenL 1he expecLed annual reLurn of Lhls porLfollo ls
(a) 1267
(b) 1200
(c) 1000
(d) unable Lo be deLermlned from Lhe lnformaLlon provlded
b
1ab|e S1
Lxpected keturn ()
ear AssetA Asset8 AssetC
1 6 8 6
2 7 7 7
3 8 6 8
29 1he correlaLlon of reLurns beLween AsseL A and AsseL 8 can be characLerlzed as (See 1able 31)
(a) perfecLly poslLlvely correlaLed
(b) perfecLly negaLlvely correlaLed
(c) uncorrelaLed
(d) cannoL be deLermlned
b
30 lf you were Lo creaLe a porLfollo deslgned Lo reduce rlsk by lnvesLlng equal proporLlons ln each of Lwo dlfferenL asseLs whlch porLfollo would
you recommend? (See 1able 31)
(a) AsseLs A and 8
(b) AsseLs A and C
(c) none of Lhe avallable comblnaLlons
(d) cannoL be deLermlned
a
31 1he porLfollo wlLh a sLandard devlaLlon of zero (See 1able 31)
(a) ls comprlsed of AsseLs A and 8
(b) ls comprlsed of AsseLs A and C
(c) ls noL posslble
(d) cannoL be deLermlned
a
33 Comblnlng Lwo asseLs havlng perfecLly negaLlvely correlaLed reLurns wlll resulL ln Lhe creaLlon of a porLfollo wlLh an overall rlsk LhaL
(a) remalns unchanged
(b) decreases Lo a level below LhaL of elLher asseL
(c) lncreases Lo a level above LhaL of elLher asseL
(d) sLablllzes Lo a level beLween Lhe asseL wlLh Lhe hlgher rlsk and Lhe asseL wlLh Lhe lower rlsk
b
36 Comblnlng Lwo asseLs havlng perfecLly poslLlvely correlaLed reLurns wlll resulL ln Lhe creaLlon of a porLfollo wlLh an overall rlsk LhaL
(a) remalns unchanged
(b) decreases Lo a level below LhaL of elLher asseL
(c) lncreases Lo a level above LhaL of elLher asseL
(d) sLablllzes Lo a level beLween Lhe asseL wlLh Lhe hlgher rlsk and Lhe asseL wlLh Lhe lower rlsk
d
47 A beLa coefflclenL of r1 represenLs an asseL LhaL
(a) ls more responslve Lhan Lhe markeL porLfollo
(b) has Lhe same response as Lhe markeL porLfollo
(c) ls less responslve Lhan Lhe markeL porLfollo
(d) ls unaffecLed by markeL movemenL
b
48 A beLa coefflclenL of 1 represenLs an asseL LhaL
(a) ls more responslve Lhan Lhe markeL porLfollo
(b) has Lhe same response as Lhe markeL porLfollo buL ln opposlLe dlrecLlon
(c) ls less responslve Lhan Lhe markeL porLfollo
(d) ls unaffecLed by markeL movemenL b
49 A beLa coefflclenL of 0 represenLs an asseL LhaL
(a) ls more responslve Lhan Lhe markeL porLfollo
(b) has Lhe same response as Lhe markeL porLfollo
(c) ls less responslve Lhan Lhe markeL porLfollo
(d) ls unaffecLed by markeL movemenL
d
31 1he hlgher an asseL's beLa
(a) Lhe more responslve lL ls Lo changlng markeL reLurns
(b) Lhe less responslve lL ls Lo changlng markeL reLurns
(c) Lhe hlgher Lhe expecLed reLurn wlll be ln a down markeL
(d) Lhe lower Lhe expecLed reLurn wlll be ln an up markeL
a
32 An lncrease ln nondlverslflable rlsk
(a) would cause an lncrease ln Lhe beLa and would lower Lhe requlred reLurn
(b) would have no effecL on Lhe beLa and would Lherefore cause no change ln Lhe requlred reLurn
(c) would cause an lncrease ln Lhe beLa and would lncrease Lhe requlred reLurn
(d) would cause a decrease ln Lhe beLa and would Lherefore lower Lhe requlred raLe of reLurn
c
33 1he beLa of a porLfollo ls
(a) Lhe sum of Lhe beLas of all asseLs ln Lhe porLfollo
(b) lrrelevanL only Lhe beLas of Lhe lndlvldual asseLs are lmporLanL
(c) does noL change over Llme
(d) ls Lhe welghLed average of Lhe beLas of Lhe lndlvldual asseLs ln Lhe porLfollo
d
39 As randomly selecLed securlLles are comblned Lo creaLe a porLfollo Lhe _________ rlsk of Lhe porLfollo decreases unLll 10 Lo 20 securlLles are
lncluded 1he porLlon of Lhe rlsk ellmlnaLed ls _________ rlsk whlle LhaL remalnlng ls _________ rlsk
(a) dlverslflable nondlverslflable LoLal
(b) relevanL lrrelevanL LoLal
(c) LoLal dlverslflable nondlverslflable
(d) LoLal nondlverslflable dlverslflable
c
61 Lxamples of evenLs LhaL lncrease rlsk averslon lnclude
(a) a sLock markeL crash
(b) assasslnaLlon of a key pollLlcal leader
(c) Lhe ouLbreak of war
(d) all of Lhe above
d
63 AsseL ? has a beLa of 12 1he rlskfree raLe of reLurn ls 6 percenL whlle Lhe reLurn on Lhe markeL porLfollo of asseLs ls 12 percenL 1he asseL's
markeL rlsk premlum ls
(a) 72 percenL
(b) 60 percenL
(c) 132 percenL
(d) 10 percenL
b
63 AsseL has a beLa of 09 1he rlskfree raLe of reLurn ls 8 percenL whlle Lhe reLurn on Lhe markeL porLfollo of asseLs ls 14 percenL 1he asseL's
requlred raLe of reLurn ls
(a) 134 percenL
(b) 60 percenL
(c) 34 percenL
(d) 10 percenL
a
66 As rlsk averslon lncreases
(a) a flrm's beLa wlll lncrease
(b) lnvesLors' requlred raLe of reLurn wlll lncrease
(c) a flrm's beLa wlll decrease
(d) lnvesLors' requlred raLe of reLurn wlll decrease
b
68 ln Lhe caplLal asseL prlclng model Lhe general rlsk preferences of lnvesLors ln Lhe markeLplace are reflecLed by
(a) Lhe rlskfree raLe
(b) Lhe level of Lhe securlLy markeL llne
(c) Lhe slope of Lhe securlLy markeL llne
(d) Lhe dlfference beLween Lhe securlLy markeL llne and Lhe rlskfree raLe c
71 nlcole holds Lhree sLocks ln her porLfollo A 8 and C 1he porLfollo beLa ls 140 SLock A comprlses 13 percenL of Lhe dollar value of her holdlngs
and has a beLa of 10 lf nlcole sells all of her lnvesLmenL ln A and lnvesLs Lhe proceeds ln Lhe rlskfree asseL her new porLfollo beLa wlll be
(a) 060
(b) 088
(c) 100
(d) 123
d
73 nlco wanLs Lo lnvesL all of hls money ln [usL Lwo asseLs Lhe rlsk free asseL and Lhe markeL porLfollo WhaL ls nlco's porLfollo beLa lf he
lnvesLs a quarLer of hls money ln Lhe markeL porLfollo and Lhe resL ln Lhe rlsk free asseL?
(a) 000
(b) 023
(c) 073
(d) 100
b
77 WhaL ls nlco's porLfollo beLa lf he lnvesLs an equal amounL ln asseL x wlLh a beLa of 060 asseL ? wlLh a beLa of 160 Lhe rlskfree asseL and Lhe
markeL porLfollo?
(a) 120
(b) 100
(c) 080
(d) 060
c
82 WhaL ls Lhe markeL rlsk premlum lf Lhe rlsk free raLe ls 3 percenL and Lhe expecLed markeL reLurn ls glven as follows?
State of Nature robab|||ty keturn
8oom 20 30
Average 70 13
8ecesslon 10 r3
(a) 103
(b) 110
(c) 160
(d) 163
b
84 nlco boughL 100 shares of Clsco SysLems sLock for $2400 per share on !anuary 1 2002 Pe recelved a dlvldend of $200 per share aL Lhe end of
2002 and $300 per share aL Lhe end of 2003 AL Lhe end of 2004 nlco collecLed a dlvldend of $400 per share and sold hls sLock for $1800 per
share WhaL was nlco's reallzed reLurn durlng Lhe Lhree year holdlng perlod? WhaL was nlco's compound annual raLe of reLurn?
(a) 123 44
(b) r123 r44
(c) 167 44
(d) r167 r44
b
Lssay uest|ons
3 Assumlng Lhe followlng reLurns and correspondlng probablllLles for asseL A compuLe lLs sLandard devlaLlon and coefflclenL of varlaLlon Asset A
kate of keturn robab|||ty
10 30
13 40
20 30
133 1323
6 Champlon 8rewerles musL choose beLween Lwo asseL purchases 1he annual raLe of reLurn and relaLed probablllLles glven below summarlze Lhe
flrm's analysls
Asset A Asset 8
kate ofketurn robab|||ty kate ofketurn robab|||ty
10 30 3 40
13 40 13 20
20 30 23 40
lor each asseL compuLe
(a) Lhe expecLed raLe of reLurn
(b) Lhe sLandard devlaLlon of Lhe expecLed reLurn
(c) Lhe coefflclenL of varlaLlon of Lhe reLurn
(d) Whlch asseL should Champlon selecL?
(a) A 13 8 13 (b) A387 8 894 (c) A 026 8 06
(d) A for 13 raLe of reLurn and less rlsk
10 8usso's Cas ulsLrlbuLor lnc wanLs Lo deLermlne Lhe requlred reLurn on a sLock porLfollo wlLh a beLa coefflclenL of 03 Assumlng Lhe rlskfree
raLe of 6 percenL and Lhe markeL reLurn of 12 percenL compuLe Lhe requlred raLe of reLurn 9
11 Assumlng a rlskfree raLe of 8 percenL and a markeL reLurn of 12 percenL would a wlse lnvesLor acqulre a securlLy wlLh a 8eLa of 13 and a raLe
of reLurn of 14 percenL glven Lhe facLs above? ?es a securlLy's beLa of 13 shall yleld 14
13 nlco boughL 100 shares of Clsco SysLems sLock for $2400 per share on !anuary 1 2002 Pe recelved a dlvldend of $200 per share aL Lhe end of
2002 and $300 per share aL Lhe end of 2003 AL Lhe end of 2004 nlco collecLed a dlvldend of $400 per share and sold hls sLock for $1800 per
share WhaL was nlco's reallzed reLurn durlng Lhe Lhree year holdlng perlod? WhaL was nlco's compound annual raLe of reLurn? Lxplaln Lhe
dlfference?
8eallzed reLurn 123
Compound reLurn (solved elLher wlLh a calculaLor or vla Lrlal and error) ls approxlmaLely 43
1he reason Lhe reallzed holdlng perlod ls so much larger Lhan Lhe compound raLe of reLurn ls LhaL Lhe reallzed reLurn does noL accounL for Lhe Llme
value of money
1 !eremy lrons purchased 100 shares of lerro lnc common sLock for $23 per share one year ago uurlng Lhe year lerro lnc pald cash dlvldends
of $2 per share 1he sLock ls currenLly selllng for $30 per share lf !eremy sells all of hls shares of lerro lnc Loday whaL raLe of reLurn would he
reallze?
28
2 8alph's 8aLcheLs CorporaLlon purchased raLcheLs roLaLor one year ago for $6300 uurlng Lhe year lL generaLed $4000 ln cash flow lf 8alph sells
lL he could recelve $6100 for lL WhaL ls raLcheLs roLaLor's raLe of reLurn? 33
3 AsseL A was purchased slx monLhs ago for $23000 and has generaLed $1300 cash flow durlng LhaL perlod WhaL ls Lhe asseL's raLe of reLurn lf lL
can be sold for $26730 Loday?
13
9 8usso has a porLfollo of Lhree asseLs llnd Lhe expecLed raLe of reLurn for Lhe porLfollo assumlng he lnvesLs 30 percenL of lLs money ln asseL A
wlLh 10 percenL raLe of reLurn 30 percenL ln asseL 8 wlLh a raLe of reLurn of 20 percenL and Lhe resL ln asseL C wlLh 30 percenL raLe of reLurn
17












uest|ons re|ated to Chapter 6
1rue]Ia|se uest|ons
7 LlquldlLy preference Lheory suggesLs LhaL for any glven lssuer longLerm lnLeresL raLes Lend Lo be hlgher Lhan shorLLerm raLes due Lo Lhe lower
llquldlLy and hlgher responslveness Lo general lnLeresL raLe movemenLs of longerLerm securlLles causes Lhe yleld curve Lo be upwardsloplng
18
9 An lnverLed yleld curve ls a downwardsloplng yleld curve LhaL lndlcaLes generally cheaper longLerm borrowlng cosLs Lhan shorLLerm borrowlng
cosLs
18
19 1o carry ouL Lhe slnklng fund requlremenL Lhe corporaLlon makes semlannual or annual paymenLs Lo a LrusLee who uses Lhese funds Lo reLlre
bonds by purchaslng Lhem ln Lhe markeLplace
18
32 ln a bond lndenLure subordlnaLlon ls Lhe sLlpulaLlon LhaL subsequenL credlLors agree Lo walL unLll all clalms of Lhe senlor debL are saLlsfled
18
43 1he level of rlsk assoclaLed wlLh a glven cash flow poslLlvely affecLs lLs value
lA
48 8egardless of Lhe exacL cause Lhe lmporLanL polnL ls LhaL when Lhe requlred reLurn ls greaLer Lhan Lhe coupon lnLeresL raLe Lhe bond value wlll
be less Lhan lLs par value
18
33 When Lhe requlred reLurn ls dlfferenL from Lhe coupon lnLeresL raLe and ls assumed Lo be consLanL unLll maLurlLy Lhe value of Lhe bond wlll
approach lLs par value as Lhe passage of Llme moves Lhe bond's value closer Lo maLurlLy
18
37 8ecause a rlse ln lnLeresL raLes and Lherefore Lhe requlred reLurn
resulLs ln an lncrease ln bond value bondholders are Lyplcally more
concerned wlLh dropplng lnLeresL raLes
lA
39 1he shorLer Lhe amounL of Llme unLll a bond's maLurlLy Lhe more responslve ls lLs markeL value Lo a glven change ln Lhe requlred reLurn
lA
66 A normal yleld curve ls upwardsloplng and lndlcaLes generally cheaper shorLLerm borrowlng cosLs Lhan longLerm borrowlng cosLs
18
70 1he markeL segmenLaLlon Lheory suggesLs LhaL Lhe shape of Lhe yleld curve ls deLermlned by Lhe supply and demand for loans wlLhln each
maLurlLy segmenL
18
72 1he llquldlLy preference Lheory suggesLs LhaL shorLLerm raLes should be lower Lhan longLerm raLes
18
73 1he expecLaLlons Lheory suggesLs LhaL Lhe shape of Lhe yleld curve reflecLs lnvesLors expecLaLlons abouL fuLure lnflaLlon raLes
18
73 Accordlng Lo Moodys a bond raLed A should provlde lnvesLors wlLh a hlgher yleld Lhan an oLherwlse ldenLlcal bond raLed Aa
lA
91 Any bond raLed accordlng Lo Moody's 8a or lower would be consldered speculaLlve or [unk"
18
92 As an ouLsLandlng bond approaches maLurlLy Lhe prlce of Lhe bond wlll always Lrend Loward par value unLll aL maLurlLy Lhe bond ls worLh lLs
face value
18
1 8eal raLe of lnLeresL ls Lhe acLual raLe of lnLeresL charged by Lhe suppllers of funds and pald by Lhe demanders
lA
3 A downwardsloplng yleld curve lndlcaLes generally cheaper shorLLerm borrowlng cosLs Lhan longLerm borrowlng cosLs
lA
3 An lnverLed yleld curve ls an upwardsloplng yleld curve LhaL lndlcaLes generally cheaper shorLLerm borrowlng cosLs Lhan longLerm borrowlng
cosLs
lA
11 upwardsloplng yleld curves resulL from hlgher fuLure lnflaLlon expecLaLlons lender preferences for shorLer maLurlLy loans and greaLer supply
of shorLLerm as opposed Lo longLerm loans relaLlve Lo Lhelr respecLlve demand
18
12 8esLrlcLlve covenanLs are conLracLual clauses ln longLerm debL agreemenLs LhaL place cerLaln operaLlng and flnanclal consLralnLs on Lhe
borrower
18
14 1rusLee ls a pald parLy represenLlng Lhe bond lssuer ln Lhe bond lndenLure
lA
30 1here ls an lnverse relaLlonshlp beLween Lhe quallLy or raLlng of a bond and Lhe raLe of reLurn lL musL provlde bondholders
18
41 1he value of an asseL depends on Lhe hlsLorlcal cash flow(s) up Lo Lhe presenL Llme
lA
42 valuaLlon ls Lhe process LhaL llnks rlsk and reLurn Lo deLermlne Lhe worLh of an asseL
18
32 ?leld Lo maLurlLy (?1M) ls Lhe raLe lnvesLors earn lf Lhey buy Lhe bond aL a speclflc prlce and hold lL unLll maLurlLy
18
33 1he yleld Lo maLurlLy on a bond wlLh a currenL prlce equal Lo lLs par or face value wlll always be equal Lo Lhe coupon lnLeresL raLe 18
63 1he rlsk free raLe of lnLeresL ls equal Lo Lhe sum of Lhe real raLe of lnLeresL plus an lnflaLlon rlsk premlum
18
77 1he posslblllLy LhaL Lhe lssuer of a bond wlll noL pay Lhe conLracLual lnLeresL or prlnclpal paymenLs as scheduled ls called defaulL rlsk
18
90 Any bond raLed accordlng Lo Moody's Caa Lhrough Aaa would be consldered lnvesLmenL grade debL
lA

,u|t|p|e Cho|ce uest|ons

11 A downwardsloplng yleld curve LhaL lndlcaLes generally cheaper longLerm borrowlng cosLs Lhan shorLLerm borrowlng cosLs ls called
(a) normal yleld curve
(b) lnverLed yleld curve
(c) flaL yleld curve
(d) none of Lhe above
b
13 A yleld curve LhaL reflecLs relaLlvely slmllar borrowlng cosLs for boLh shorLLerm and longLerm loans ls called
(a) normal yleld curve
(b) lnverLed yleld curve
(c) flaL yleld curve
(d) none of Lhe above
c
16 1he yleld curve ln an economlc perlod of low Lo moderaLe lnflaLlon would mosL llkely be
(a) upwardsloplng
(b) flaL
(c) downwardsloplng
(d) llnear
c
18 1he Lheory LhaL explalns only Lhe Lendency for Lhe yleld curve Lo be upward sloplng ls
(a) expecLaLlons hypoLhesls
(b) llquldlLy preference Lheory
(c) markeL segmenLaLlon Lheory
(d) lnvesLor percepLlon Lheory
b
19 1he rlsk premlum conslsLs of a number of componenLs lncludlng all of Lhe followlng LxCL1
(a) defaulL rlsk
(b) lnflaLlonary rlsk
(c) Lax LreaLmenL rlsk
(d) llquldlLy rlsk
b
24 A _________ ls a resLrlcLlve provlslon on a bond whlch provldes for Lhe sysLemaLlc reLlremenL of Lhe bonds prlor Lo Lhelr maLurlLy
(a) redempLlon clause
(b) slnklngfund requlremenL
(c) converslon feaLure
(d) subordlnaLlon clause
b
31 An example of a sLandard debL provlslon ls Lhe
(a) llmlLlng of Lhe corporaLlon's annual cash dlvldend paymenLs
(b) requlremenL Lo pay Laxes and oLher llablllLles when due
(c) resLrlcLlng Lhe corporaLlon from dlsposlng of flxed asseLs
(d) consLralnLs on subsequenL borrowlng
b
40 vlolaLlon of any sLandard or resLrlcLlve provlslon by Lhe borrower glves Lhe lender Lhe rlghL Lo do all of Lhe followlng LxCL1
(a) alLer Lhe Lerms of Lhe lnlLlal agreemenL for example acceleraLe Lhe maLurlLy daLe
(b) demand lmmedlaLe repaymenL
(c) lncrease Lhe lnLeresL raLe
(d) selze Lhe loan collaLeral
d
41 1o compensaLe for Lhe uncerLalnLy of fuLure lnLeresL raLes and Lhe facL LhaL Lhe longer Lhe Lerm of a loan Lhe hlgher Lhe probablllLy LhaL Lhe
borrower wlll defaulL Lhe lender Lyplcally
(a) charges a hlgher lnLeresL raLe on longLerm loans
(b) reserves Lhe rlghL Lo change Lhe Lerms of Lhe loan aL any Llme
(c) lncludes excesslvely resLrlcLlve debL provlslons
(d) reserves Lhe rlghL Lo demand lmmedlaLe paymenL aL any Llme
a
66 1he slgnlflcanL porLlon of Lhe reLurn on a zero coupon bond ls ln Lhe form of
(a) lnLeresL and galn ln value
(b) lnLeresL
(c) galn ln value
(d) Lax reducLlon c
80 1he _________ value of a bond ls also called lLs face value 8onds whlch sell aL less Lhan face value are prlced aL a _________ whlle bonds
whlch sell aL greaLer Lhan face value sell aL a _________
(a) dlscounL par premlum
(b) premlum dlscounL par
(c) par dlscounL premlum
(d) coupon premlum dlscounL
c
82 1he value of a bond ls Lhe presenL value of Lhe
(a) dlvldends and maLurlLy value
(b) lnLeresL and dlvldend paymenLs
(c) maLurlLy value
(d) lnLeresL paymenLs and maLurlLy value
d
89 1he A8C company has Lwo bonds ouLsLandlng LhaL are Lhe same excepL for Lhe maLurlLy daLe 8ond u maLures ln 4 years whlle 8ond L maLures
ln 7 years lf Lhe requlred reLurn changes by 13 percenL
(a) 8ond u wlll have a greaLer change ln prlce
(b) 8ond L wlll have a greaLer change ln prlce
(c) Lhe prlce of Lhe bonds wlll be consLanL
(d) Lhe prlce change for Lhe bonds wlll be equal
b
93 PewlLL acklng Company has an lssue of $1000 par value bonds wlLh a 14 percenL annual coupon lnLeresL raLe 1he lssue has Len years
remalnlng Lo Lhe maLurlLy daLe 8onds of slmllar rlsk are currenLly selllng Lo yleld a 12 percenL raLe of reLurn 1he currenL value of each PewlLL bond
ls _________
(a) $79100
(b) $1000
(c) $103224
(d) $111300
d
94 A bond wlll sell _________ when Lhe sLaLed raLe of lnLeresL exceeds Lhe requlred raLe of reLurn _________ when Lhe sLaLed raLe of lnLeresL ls
less Lhan Lhe requlred reLurn and _________ when Lhe sLaLed raLe of lnLeresL ls equal Lo Lhe requlred reLurn
(a) aL a premlum aL a dlscounL equal Lo Lhe par value
(b) aL a premlum equal Lo Lhe par value aL a dlscounL
(c) aL a dlscounL aL a premlum equal Lo Lhe par value
(d) equal Lo Lhe par value aL a premlum aL a dlscounL
a
101 Mugwump lndusLrles has lssued a bond whlch has a $1000 par value and a 13 percenL annual coupon lnLeresL raLe 1he bond wlllmaLure ln
Len years and currenLly sells for $1230 uslng Lhls lnformaLlon Lhe yleld Lo maLurlLy on Mugwump's bond ls _________
(a) 1079 percenL
(b) 1139 percenL
(c) 1219 percenL
(d) 1329 percenL
a
103 Al ls Lrylng Lo declde whlch of Lwo bonds Lo buy 8ond P ls a 10 percenL coupon 10year maLurlLy $1000 par !anuary 1 2000 lssue paylng
annual lnLeresL 8ond l ls a 10 percenL coupon 10year maLurlLy $1000 par !anuary 1 2000 lssue paylng semlannual lnLeresL 1he markeL
requlred reLurn for each bond ls 10 percenL When uslng presenL value Lo deLermlne Lhe prlces of Lhe bonds Al wlll flnd LhaL
(a) Lhere ls no dlfference ln prlce
(b) Lhe prlce of l ls greaLer Lhan P
(c) Lhe prlce of P ls greaLer Lhan l
(d) he needs more lnformaLlon before deLermlnlng Lhe prlces
a
106 Conslder Lhe followlng reLurns and ylelds uS 1blll 8 3year uS 1noLe 7 l8M common sLock 13 l8M AAA CorporaLe 8ond 12
and 10year uS 1bond 6 8ased on Lhls lnformaLlon Lhe shape of Lhe yleld curve ls
(a) upward sloplng
(b) downward sloplng
(c) flaL
(d) normal
b
111 nlco Corp lssued bonds bearlng a coupon raLe of 12 percenL pay coupons semlannually have 3 years remalnlng Lo maLurlLy and are currenLly
prlced aL $940 per bond WhaL ls Lhe yleld Lo maLurlLy?
(a) 1200
(b) 1399
(c) 1434
(d) 1323
c
113 !la Pua LnLerprlses wanLs Lo lssue slxLy 20year $1000 par value zerocoupon bonds lf each bond ls prlced Lo yleld 7 percenL how much wlll
!la Pua recelve (lgnorlng lssuance cosLs) when Lhe bonds are flrsL sold?
(a) $11212
(b) $12393
(c) $13303
(d) $18880
(e) $20000
C
1 1he _________ raLe of lnLeresL creaLes equlllbrlum beLween Lhe supply of savlngs and Lhe demand for lnvesLmenL funds
(a) nomlnal
(b) real
(c) rlskfree
(d) lnflaLlonary
b
3 _________ yleld curve reflecLs hlgher expecLed fuLure raLes of lnLeresL
(a) An upwardsloplng
(b) A flaL
(c) A downwardsloplng
(d) A llnear
a
7 Cenerally an lncrease ln rlsk wlll resulL ln _________ requlred reLurn or lnLeresL raLe
(a) a lower
(b) a hlgher
(c) an unchanged
(d) an undeLermlned
b
10 Cenerally longLerm loans have hlgher lnLeresL raLes Lhan shorLLerm loans because of
(a) Lhe general expecLaLlon of hlgher fuLure raLes of lnflaLlon
(b) lender preferences for shorLerLerm more llquld loans
(c) greaLer demand for longLerm raLher Lhan shorLLerm loans
relaLlve Lo Lhe supply of such loans
(d) all of Lhe above
d
21 All of Lhe followlng are examples of longLerm debL LxCL1
(a) bonds
(b) llnes of credlL
(c) Lerm loans
(d) debenLures
b
23 A _________ ls a complex and lengLhy legal documenL sLaLlng Lhe condlLlons under whlch a bond has been lssued
(a) bond debenLure
(b) warranL
(c) slnklng fund
(d) bond lndenLure
d
27 lf a bond pays $1000 plus lnLeresL aL maLurlLy $1000 ls called Lhe
(a) sLaLed value
(b) markeL value
(c) par value
(d) longLerm value
c
33 1he ma[or facLor(s) affecLlng Lhe cosL or lnLeresL raLe on a bond ls (are) lLs
(a) maLurlLy
(b) slze of Lhe offerlng
(c) lssuer rlsk
(d) baslc cosL of money
(e) All of Lhe above e
72 1he process LhaL llnks rlsk and reLurn ln order Lo deLermlne Lhe worLh of an asseL ls Lermed
(a) evaluaLlon
(b) valuaLlon
(c) dlscounLlng
(d) varlable growLh
b
73 A Lype of longLerm flnanclng used by boLh corporaLlons and governmenL enLlLles ls
(a) common sLock
(b) bonds
(c) preferred sLock
(d) reLalned earnlngs
b
77 1he reLurn expecLed from an asseL ls fully deflned by lLs
(a) rlsk and cash flow
(b) cash flow and Llmlng
(c) dlscounL raLe
(d) beLa
b
86 lf Lhe requlred reLurn ls less Lhan Lhe coupon raLe a bond wlll sell aL
(a) par
(b) a dlscounL
(c) a premlum
(d) book value c
87 When Lhe requlred reLurn ls consLanL buL dlfferenL from Lhe coupon raLe Lhe prlce of a bond as lL approaches lLs maLurlLy daLe wlll
(a) remaln consLanL
(b) lncrease
(c) decrease
(d) approach par
d
97 lnLeresL raLe rlsk and Lhe Llme Lo maLurlLy have a relaLlonshlp LhaL ls besL characLerlzed as
(a) consLanL
(b) varylng
(c) dlrecL
(d) lnverse
C

Lssay uest|ons
3 WhaL ls Lhe value of an asseL whlch pays $200 a year for Lhe nexL 3 years and can be sold for $1300 aL Lhe end of flve years from now? Assume
LhaL Lhe opporLunlLy cosL ls 10 percenL
Answer 200(vllA) + 1300(vll)
200(3791) + 1300(0621) $168970
8 PewlLL acklng Company has an lssue of $1000 par value bonds wlLh a 14 percenL coupon lnLeresL raLe ouLsLandlng 1he lssue pays lnLeresL
semlannually and has 10 years remalnlng Lo lLs maLurlLy daLe 8onds of slmllar rlsk are currenLly selllng Lo yleld a 12 percenL raLe of reLurn WhaL ls
Lhe value of Lhese PewlLL acklng Company bonds?
Answer 8 $70(11470) + $1000(312) $111490
10 1o flnance a new llne of producL Lhe WesLchesLer Company has lssued $1000000 bond wlLh a par value of $1000 coupon raLe of 8 percenL
and maLurlLy of 30 years CompuLe Lhe prlce of Lhe bond lf Lhe opporLunlLy cosL ls 11 percenL
Answer Coupon paymenL 1000 008 $80
8 80(vllA1130) + 1000(vll1130)
80(8694) + 1000(0044) $73932