Fin 320 Ch.11

Which one of the following is the best example of unsystematic risk? A. decrease in company sales B. increase in market interest rates C. change in corporate tax rates D. increase in inflation E. This risk is related to expected portfolio returns

a

Portfolio diversification eliminates which one of the following?

Unsystematic risk

Standard deviation measures _____ risk while beta measures _____ risk.

total; systematic

Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

Diversification

What is the expected return for an asset with a beta of 1.1 if the risk free rate is 1.5% and the required rate of return on the market is 9.5%? 9.9% 10.1% 10.3% 9.7% 10.4%

EXPECTED RETURN = RISK FREE RATE + BETA (MARKET RETURN - RISK FREE RATE) = 1.5% + 1.1 (9.5% - 1.5%) = 1.5% + 8.8% = 10.30%

What is the beta for an asset with an expected return of 12.5% if the risk free rate is 2.0% and the market risk premium is 7.5%?

Expected Return = 12.5% Risk Free Rate, Rf = 2% Market Risk Premium, Rm-Rf = 7.5% Expected Return = Rf + (Rm - Rm) beta 12.5 = 2 + (7.5 * beta) 7.5 * beta = 10.5 beta = 10.5 / 7.5 beta = 1.4

Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock. Which one of the following best describes the 16.5 percent rate?

Expected return

Which of the following terms can be used to describe unsystematic risk? I. Asset-specific risk II. Diversifiable risk III. Market risk IV. Unique risk

I, II, and IV only

A risky security has less risk than the overall market. What must the beta of this security be?

> 0 but < 1

Which one of the following portfolios will have a beta of zero?

A portfolio comprised solely of U. S. Treasury bills

Which one of the following is the best example of unsystematic risk?

A warehouse fire

_______ states that $1 should have the same purchasing power in each country. This means that an orange costs the same whether you buy it in New York or in Tokyo.

Absolute purchasing power parity

Which one of the following is an example of systematic risk?

Increase in consumption created by a reduction in personal tax rates

_______implies that the percentage difference between the forward exchange rate and the spot exchange rate is equal to the interest rate differential.

Interest rate parity

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?

Portfolio weight

Which one of the following describes systematic risk?

Risk that affects a large number of assets

The risk premium for an individual security is based on which one of the following types of risk?

Systematic

Which one of the following statements applies to unsystematic risk? A. It can be eliminated through portfolio diversification. B. It is also called market risk. C. It is a type of risk that applies to most, if not all, securities. D. Investors receive a risk premium as compensation for accepting this risk. E. This risk is related to expected returns.

a

________________________________means that the expected percentage change in exchange rates between the currencies of two countries is equal to the difference in their inflation rates.

Relative purchasing power parity

An increase in the accounts receivable period will do which one of the following? ** A. Lengthen the accounts payable period B. Shorten the inventory period C. Shorten the operating cycle D. Lengthen the cash cycle E. Shorten the accounts payable period

d

The systematic risk principle states that the expected return on a risky asset depends only on which one of the following?

asset's market-risk

Which one of the following is a use of cash? A. Selling inventory at cost B.Paying a supplier for inventory you purchased last month C. Borrowing money from a local bank D. Collecting payment from a customer E. Selling a fixed asset such as a piece of machinery

b

13. Which one of the following is the best example of systematic risk? A. there is a shortage of nurses B. a fire destroys a warehouse C. gas prices rise sharply D. the cost of sugar increases E. two firms merge their operations

c

Which one of the following is the length of time that a retailer owes its supplier for an inventory purchase? A. Inventory period B. Accounts receivable period C. Accounts payable period D. Operating cycle E. Cash cycle

c

Which one of the following statements related to the inventory period is correct? A. The inventory period increases as the inventory turnover rate increases. B. The length of the inventory period depends on the length of the cash cycle. C. The inventory period is the average number of days a firm holds inventory on its shelves. D. The inventory period is equal to the operating cycle minus the accounts payable period. E. The inventory period has no effect on the cash cycle.

c

Moore & Moore has just finished projecting its expected cash receipts and expenditures for next year. What is this projection called? A. Operating projection B. Receivables schedule C. Balance sheet D. Cash budget E. Compromise policy

d

The accounts receivable period is the time that elapses between the _____ and the ____. A. purchase of inventory; payment to the supplier B. purchase of inventory; collection of the receivable C. sale of inventory; payment to supplier D. sale of inventory; collection of the receivable E. sale of inventory: billing to customer

d

Which one of the following is the best example of an announcement that is most apt to result in an unexpected return? a. A news bulletin that the anticipated layoffs by a firm will occur as expected on December 1 b. Announcement that the CFO of the firm is retiring June 1 as previously announced c. Announcement that a firm will continue its practice of paying a $3 a share annual dividend d. Statement by a firm that it has just discovered a manufacturing defect and is recalling its product e. The verification by senior management that the firm is being acquired as had been rumored

d

Which one of the following will increase the operating cycle? A. Decreasing the accounts payable period B. Increasing the accounts payable turnover rate C. Increasing the cash cycle D.Decreasing the accounts receivable turnover rate

d

Which one of the following will increase the operating cycle? A. Decreasing the days' sales in inventory B. Decreasing the accounts payable period C. Increasing the accounts receivable turnover rate D.Decreasing the inventory turnover rate

d

Which statement is true? a. The expected rate of return on any portfolio must be positive. b. The arithmetic average of the betas for each security held in a portfolio must equal 1.0. c. The beta of any portfolio must be 1.0. d. The weights of the securities held in any portfolio must equal 1.0. e. The standard deviation of any portfolio must equal 1.0

d

Which of the following are sources of cash? I. decreasing accounts receivable II. increasing inventory III. increasing accounts payable IV. increasing common stock A. I and III only B. II and IV only C. II and III only D. I and IV only E.I, III, and IV only

e

which one of the following is a use of cash? a. issuing new shares of stock b. increasing accounts payable c. decreasing inventory d. decreasing fixed assets e. increasing accounts receivable

e