Corporate Finance Exam -

2) Investment A has an expected return of 15% per year, while investment B has an expected return of 12% per year. A rational investor will choose A) investment A because of the higher expected return. B) investment B because a lower return means lower risk. C) investment A if A and B are of equal risk. D) investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B.

C

1) Stock A has an expected return of 12% with a standard deviation of 8%. If returns are normally distributed, then approximately two-thirds of the time the return on stock A will be: A) between 12% and 20%. B) between 8% and 12%. C) between -4% and 28%. D) between 4% and 20%.

D

13) Stock A has a beta of 1.2 and a standard deviation of returns of 18%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the market risk premium increases, then A) the required return on stock B will increase more than the required return on stock A. B) the required returns on stocks A and B will both increase by the same amount. C) the required returns on stocks A and B will remain the same. D) the required return on stock A will increase more than the required return on stock B.

a

6) Which of the following statements is most correct concerning diversification and risk? A) Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry. B) Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk. C) Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification. D) Proper diversification generally results in the elimination of risk.

a

8) You are considering buying some stock in Continental Grain. Which of the following are examples of non-diversifiable risks? I. Risk resulting from a general decline in the stock market. II. Risk resulting from a possible increase in income taxes. III. Risk resulting from an explosion in a grain elevator owned by Continental. IV. Risk resulting from a pending lawsuit against Continental. A) I and II B) III and IV C) I only D) II, III, and IV

a

10) You must add one of two investments to an already well- diversified portfolio. Security A Security B Expected Return = 14% Expected Return = 14% Standard Deviation of Standard Deviation of Returns = 15.8% Returns = 19.7% Beta = 1.8 Beta = 1.5 If you are a risk-averse investor, which one is the better choice? A) Security A B) Security B C) Either security would be acceptable. D) Cannot be determined with information given.

b

12) Which of the following investments is clearly preferred to the others for an investor who is not holding a well-diversified portfolio? Investment σ A 18% 20% B 20% 20% C 20% 22% A) Investment A B) Investment B C) Investment C D) Cannot be determined without information regarding the risk-free rate of return.

b

14) Stock A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the risk-free rate of return increases and the market risk premium remains constant, then A) the required return on stock B will increase more than the required return on stock A. B) the required returns on stocks A and B will both increase by the same amount. C) the required returns on stocks A and B will not change. D) the required return on stock A will increase more than the required return on stock B.

b

4) If you were to use the standard deviation as a measure of investment risk, which of the following has historically been the least risky investment? A) Common stock of large firms B) U.S. Treasury bills C) Common stock of small firms D) Long-term government bonds

b

5) Changes in the general economy, like changes in interest rates or tax laws represent what type of risk? A) Company-unique risk B) Market risk C) Unsystematic risk D) Diversifiable risk

b

11) Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________. A) standard deviation; beta B) security market line; standard deviation C) beta; standard deviation D) beta; slope of the characteristic line

c

15) Which of the following is the slope of the security market line? A) beta B) one C) it varies, and is steeper for riskier securities D) the market risk premium

d

3) Of the following different types of securities, which is typically considered most risky? A) Long term corporate bonds B) Long term government bonds C) Common stocks of large companies D) Common stocks of small companies

d

7) You are considering investing in Ford Motor Company. Which of the following are examples of diversifiable risk? I. Risk resulting from possibility of a stock market crash. II. Risk resulting from uncertainty regarding a possible strike against Ford. III. Risk resulting from an expensive recall of a Ford product. IV. Risk resulting from interest rates decreasing. A) I only B) I and IV C) I, II, III, IV D) II, III

d

9) Beta is a statistical measure of A) unsystematic risk. B) total risk. C) the standard deviation. D) the relationship between an investment's returns and the market return.

d