FIN 330 Test 2 Study Guide

An annuity with an infinite life is called A. a perpetuity. B. a premium. C. an indefinite. D. a deep discount.

A

Asset P has a beta of .9. The risk-free rate of return is 8 percent, while the return on the market portfolio of assets is 14 percent. The asset's required rate of return is A. 13.4 percent. B. 6.0 percent. C.5.4 percent. D.10 percent.

A

If a person's required return decreases for an increase in risk, that person is said to be A. risk-seeking. B. risk-indifferent. C. risk-averse. D. risk-aware.

A

In future value or present value problems, unless stated otherwise, cash flows are assumed to be A. at the end of a time period. B. at the beginning of a time period. C. in the middle of a time period. D. spread out evenly over a time period.

A

The ______ is a measure of relative dispersion used in comparing the risk of assets with differing expected returns. A. coefficient of variation B. chi square C. mean D. standard deviation

A

The ______ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return. A.efficient B.coefficient C continuous D.risk-indifferent

A

The future value interest factor is A. always greater than 1.0. B. sometimes negative. C. always less than 0. D. never greater than 25.

A

The future value of $100 received today and deposited at 6 percent for four years is A. $126. B. $ 79. C. $124. D. $116.

A

The rate of interest actually paid or earned, also called the annual percentage rate (APR), is the ______ interest rate. A. effective B. nominal C. discounted D. continuous

A

An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K; $25,000 will be invested in asset R, with an expected annual return of 12%; $10,000 will be invested in asset J, with an expected annual return of 18%; and $15,000 will be invested in asset K, with an expected annual return of 8%. The expected annual return of this portfolio is A. 12.67% B. 12.00% C. 10.00% D. unable to be determined from the information provided.

B

If a person's required return does not change when risk increases, that person is said to be A. risk-seeking. B. risk-indifferent. C. risk-averse. D. risk-aware.

B

The amount of money that would have to be invested today at a given interest rate over a specified period in order to equal a future amount is called A. future value. B. present value. C. future value interest factor. D. present value interest factor.

B

The correlation of returns between Asset A and Asset B can be characterized as (See Figure 501.) A. perfectly positively correlated. B.perfectly negatively correlated. C.uncorrelated. D.cannot be determined.

B

The present value of $1,000 received at the end of year 1, $1,200 received at the end of year 2, and $1,300 received at the end of year 3, assuming an opportunity cost of 7 percent, is A. $2,500. B. $3,043. C. $6,516. D. $2,856.

B

The present value of a $20,000 perpetuity at a 7 percent discount rate is A. $186,915. B. $285,714. C. $140,000. D. $325,000.

B

The purpose of adding an asset with a negative or low positive beta is to A. reduce profit. B.reduce risk. C.increase profit. D.increase risk.

B

You have been offered a project paying $300 at the beginning of each year for the next 20 years. What is the maximum amount of money you would invest in this project if you expect 9 percent rate of return to your investment? A. $ 2,738.70 B. $ 2,985.18 C. $15,347.70 D. $ 6,000.00

B

Combining negatively correlated assets having the same expected return results in a portfolio with ______ level of expected return and ______ level of risk. A. a higher; a lower B.the same; a higher C.the same; a lower D.a lower; a higher

C

Dan plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 10 years. If Dan can earn 10 percent on his contributions, how much will he have at the end of the tenth year? A. $12,290 B. $20,000 C. $31,874 D. $51,880

C

If the interest rate is zero, the future value interest factor equals_____. A. -1.0 B. 0.0 C. 1.0 D. 2.0

C

Systematic risk is also referred to as A. diversifiable risk. B. economic risk. C. nondiversifiable risk. D. not relevant.

C

The beta of the market A.is greater than 1. B.is less than 1. C.is 1. D.cannot be determined.

C

The future value of a dollar ______ as the interest rate increases and ______ the farther in the future an initial deposit is to be received. A. decreases; decreases B. decreases; increases C. increases; increases D. increases; decreases

C

The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, is A. $236. B. $699. C. $ 42. D. $ 75.

C

______ is the chance of loss or the variability of returns associated with a given asset. A. Return B. Value C. Risk D. Probability

C

Betty borrows $50,000 at 10 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year loan payment is A. $10,774. B. $12,500. C.$14,340. D. $15,773.

D

Last year Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling for $60 per share. What rate of return did Mike earn over the year? A. 11.7 percent. B. 13.2 percent. C. 14.1 percent. D. 15.9 percent.

D

Perfectly ______ correlated series move exactly together and have a correlation coefficient of ______, while perfectly ______ correlated series move exactly in opposite directions and have a correlation coefficient of ______. A. negatively; -1; positively; +1 B. negatively; +1; positively; -1 C. positively; -1; negatively; +1 D. positively; +1; negatively; -1

D

Since for a given increase in risk, most managers require an increase in return, they are A. risk-seeking B.risk-indifferent C.risk-free D.risk-averse

D

The ______ measures the dispersion around the expected value. A. coefficient of variation B. chi square C. mean D. standard deviation

D

The annual rate of return is variously referred to as the A. discount rate. B. opportunity cost. C. cost of capital. D. all of the above.

D

The expected value, standard deviation of returns, and coefficient of variation for asset A are (See below.) _______________________________________________________ Possible outcomes Probability Returns (%) _______________________________________________________ Pessimistic .25 5 Most likely .55 10 Optimistic .20 13 A. 10 percent, 8 percent, and 1.25, respectively. B. 9.33 percent, 8 percent, and 2.15, respectively. C. 9.35 percent, 4.68 percent, and 2, respectively. D. 9.35 percent, 2.76 percent, and 0.3, respectively

D

The present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent, is A. $ 50. B. $200. C. $518. D. $ 77

D