finance final

What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 3.1 percent, the inflation rate is 2.6 percent, and the market rate of return is 7.4 percent?

0 percent

11. Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid. A) I and III only B) II and IV only C) I and II only D) III and IV only E) I, II, and III only

A) I and III only

18. Standard deviation measures which type of risk? A) Total B) Non-diversifiable C) Unsystematic D) Systematic E) Economic

A) Total

14. Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst? A) Weak B) Semiweak C) Semistrong D) Strong E) Perfect

A) Weak

5. Unsystematic risk: A) can be effectively eliminated by portfolio diversification. B) is compensated for by the risk premium. C) is measured by beta. D) is measured by standard deviation. E) is related to the overall economy.

A) can be effectively eliminated by portfolio diversification.

19. Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock: A) is underpriced. B) is correctly priced. C) will plot below the security market line. D) will plot on the security market line. E) will plot to the right of the overall market on a security market line graph.

A) is underpriced.

A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12 percent. What type of risk does this news flash best represent? A. Market B. Unsystematic C. Portfolio D. Non-diversifiable

B unsystematic

13. Which one of the following statements is correct concerning a portfolio beta? A) Portfolio betas range between −1.0 and +1.0. B) A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. C) A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification. D) A portfolio of U.S. Treasury bills will have a beta of +1.0. E) The beta of a market portfolio is equal to zero.

B) A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.

2. Suzie owns five different bonds and twelve different stocks. Which one of the following terms most applies to her investments? A) Index B) Portfolio C) Collection D) Grouping E) Risk-free

B) Portfolio

23. Which one of the following should earn the highest risk premium based on CAPM? A) Diversified portfolio with returns similar to the overall market B) Stock with a beta of 1.38 C) Stock with a beta of .74 D) U.S. Treasury bill E) Portfolio with a beta of 1.01

B) Stock with a beta of 1.38

10. Which one of the following risks is irrelevant to a well-diversified investor? A) Systematic risk B) Unsystematic risk C) Market risk D) Non-diversifiable risk E) Systematic portion of a surprise

B) Unsystematic risk

8. Standard deviation is a measure of which one of the following? A) Average rate of return B) Volatility C) Probability D) Risk premium E) Real returns

B) Volatility

5. To convince investors to accept greater volatility, you must: A) decrease the risk premium. B) increase the risk premium. C) decrease the real return. D) decrease the risk-free rate. E) increase the risk-free rate.

B) increase the risk premium.

22. The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the: A) market risk premium. B) risk premium. C) systematic return. D) total return. E) real rate of return.

B) risk premium.

Which of the following statements are true based on the historical record for 1926-2016?

Bonds are generally a safer, or less risky, investment than are stocks.

1. You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent? A) Arithmetic return B) Historical return C) Expected return D) Geometric return E) Required return

C) Expected return

9. Which one of the following is defined by its mean and its standard deviation? A) Arithmetic nominal return B) Geometric real return C) Normal distribution D) Variance E) Risk premium

C) Normal distribution

20. Which one of the following will be constant for all securities if the market is efficient ad securities are priced fairly? A) Variance B) Standard deviation C) Reward-to-risk ratio D) Beta E) Risk premium

C) Reward-to-risk ratio

4. Which one of the following earned the highest risk premium over the period 1926-2016? A) Long-term corporate bonds B) U.S. Treasury bills C) Small-company stocks D) Large-company stocks E) Long-term government bonds

C) Small-company stocks

7. Which one of the following is a risk that applies to most securities? A) Unsystematic B) Diversifiable C) Systematic D) Asset-specific E) Industry

C) Systematic

9. Which one of the following statements related to risk is correct? A) The beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio. B) Every portfolio that contains 25 or more securities is free of unsystematic risk. C) The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio. D) Adding five additional stocks to a diversified portfolio will lower the portfolio's beta. E) Stocks that move in tandem with the overall market have zero betas.

C) The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.

3. The expected rate of return on a stock portfolio is a weighted average where the weights are based on the: A) number of shares owned of each stock. B) market price per share of each stock. C) market value of the investment in each stock. D) original amount invested in each stock. E) cost per share of each stock held.

C) market value of the investment in each stock.

15. You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best ________ form efficient. A) weak B) semiweak C) semistrong D) strong E) perfect

C) semistrong

13. Which one of the following statements is correct concerning market efficiency? A) Real asset markets are more efficient than financial markets. B) If a market is efficient, arbitrage opportunities should be common. C) In an efficient market, some market participants will have an advantage over others. D) A firm will generally receive a fair price when it issues new shares of stock if the market is efficient. E) New information will gradually be reflected in a stock's price to avoid any sudden price changes in an efficient market.

D) A firm will generally receive a fair price when it issues new shares of stock if the market is efficient.

15. Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas? A) Reward-to-risk matrix B) Portfolio weight graph C) Normal distribution D) Security market line E) Market real returns

D) Security market line

1. Stacy purchased a stock last year and sold it today for $4 a share more than her purchase price. She received a total of $1.15 per share in dividends. Which one of the following statements is correct in relation to this investment? A) The dividend yield is expressed as a percentage of the par value. B) The capital gain would have been less had Stacy not received the dividends. C) The total dollar return per share is $2.85. D) The capital gains yield is positive. E) The dividend yield is greater than the capital gains yield.

D) The capital gains yield is positive.

10. The average compound return earned per year over a multiyear period is called the ________ average return. A) arithmetic B) standard C) variant D) geometric E) real

D) geometric

16. The U.S. Securities and Exchange Commission periodically charges individuals with insider trading and claims those individuals have made unfair profits. Given this, you would be most apt to argue that the markets are less than ________ form efficient. A) weak B) semiweak C) semistrong D) strong E) perfect

D) strong

21. The market risk premium is computed by: A) adding the risk-free rate of return to the inflation rate. B) adding the risk-free rate of return to the market rate of return. C) subtracting the risk-free rate of return from the inflation rate. D) subtracting the risk-free rate of return from the market rate of return. E) multiplying the risk-free rate of return by a beta of 1.0.

D) subtracting the risk-free rate of return from the market rate of return.

16. Which one of the following is represented by the slope of the security market line? A) Reward-to-risk ratio B) Market standard deviation C) Beta coefficient D) Risk-free interest rate E) Market risk premium

E) Market risk premium

6. Which one of the following is an example of unsystematic risk? A) An across the board increase in income taxes B) Adoption of a national sales tax C) Decrease in the national level of inflation D) An increased feeling of global prosperity E) National decrease in consumer spending on entertainment

E) National decrease in consumer spending on entertainment

6. Which one of the following best defines the variance of an investment's annual returns over a number of years? A) The average squared difference between the arithmetic and the geometric average annual returns B) The squared summation of the differences between the actual returns and the average geometric return C) The average difference between the annual returns and the average return for the period D) The difference between the arithmetic average and the geometric average return for the period E) The average squared difference between the actual returns and the arithmetic average return

E) The average squared difference between the actual returns and the arithmetic average return

12. Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? Assume the market is semistrong form efficient. A) Company insiders were aware of the information prior to the announcement. B) Investors do not pay attention to daily news. C) Investors tend to overreact. D) The news was positive. E) The information was expected.

E) The information was expected.

4. The standard deviation of a portfolio: A) is a weighted average of the standard deviations of the individual securities held in the portfolio. B) can never be less than the standard deviation of the most risky security in the portfolio. C) must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. D) is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. E) can be less than the standard deviation of the least risky security in the portfolio.

E) can be less than the standard deviation of the least risky security in the portfolio.

8. The principle of diversification tells us that: A) concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. B) concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. C) spreading an investment across five diverse companies will not lower the total risk. D) spreading an investment across many diverse assets will eliminate all of the systematic risk. E) spreading an investment across many diverse assets will eliminate some of the total risk.

E) spreading an investment across many diverse assets will eliminate some of the total risk.

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

Investors panic causing security prices around the globe to fall precipitously

The common stock of Alpha Manufacturers has a beta of 1.18 and an actual expected return of 13.33 percent. The risk-free rate of return is 3.3 percent and the market rate of return is 12.20 percent. Which one of the following statements is true given this information?

The actual expected stock return indicates the stock is currently overpriced.

The rate of return on which type of security is normally used as the risk-free rate of return?

Treasury bills

Which form of market efficiency would most likely offer the greatest profit potential to an outstanding professional stock analyst?

Weak

A stock with an actual return that lies above the security market line has:

a higher return than expected for the level of risk assumed.

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

portfolio weight

Assume that last year T-bills returned 2.8 percent while your investment in large-company stocks earned an average of 7.6 percent. Which one of the following terms refers to the difference between these two rates of return?

risk premium

Inside information has the least value when financial markets are:

strong form efficient.

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information.

14. The systematic risk of the market is measured by a: A) beta of 1. B) beta of 0. C) standard deviation of 1. D) standard deviation of 0. E) variance of 1.

A) beta of 1.

17. The intercept point of the security market line is the rate of rturn which corresponds to: A) the risk-free rate. B) the market rate. C) a return of zero. D) a return of 1.0 percent. E) the market risk premium.

A) the risk-free rate.

Which one of the following statements best defines the efficient market hypothesis?

All securities in an efficient market are zero net present value investments.

12. Systematic risk is measured by: A) the mean. B) beta. C) the geometric average. D) the standard deviation. E) the arithmetic average.

B) beta.

3. For the period 1926-2016, the average risk premium on large-company stocks was about: A) 12.7 percent. B) 10.4 percent. C) 8.6 percent. D) 6.9 percent. E) 7.3 percent.

C) 8.6 percent.

7. What is the probability that small-company stocks will produce an annual return that is more than one standard deviation below the average? A) 1.0 percent B) 2.5 percent C) 5.0 percent D) 16 percent E) 32 percent

D) 16 percent

11. Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions? A) Riskless market B) Evenly distributed market C) Zero volatility market D) Blume's market E) Efficient capital market

E) Efficient capital market

2. Which one of the following categories of securities had the lowest average risk premium for the period 1926-2016? A) Long-term government bonds B) Small-company stocks C) Large-company stocks D) Long-term corporate bonds E) U.S. Treasury bills

E) U.S. Treasury bills

Which of the following are examples of diversifiable risk? I. An earthquake damages an entire town II. The federal government imposes a $100 fee on all business entities III. Employment taxes increase nationally IV. All toymakers are required to improve their safety standards

I and IV only

Which of the following statements are correct concerning diversifiable risks? I. Diversifiable risks can be essentially eliminated by investing in 30 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk.

I, II and III only

Which one of the following correctly describes the dividend yield?

Next year's annual dividend divided by today's stock price

If a stock portfolio is well diversified, then the portfolio variance:

may be less than the variance of the least risky stock in the portfolio.

Total risk is measured by ________ and systematic risk is measured by ________.

standard deviation; beta