Finance Quiz #3

Portfolio diversification eliminates which of the following? A. Total investment risk B. Reward for bearing risk C. Market-widerisk D. Unsystematic risk

D

If any, which of the following does NOT have the potential to increase the net present value of a proposed investment? A. The ability to immediately shut down a project should the project become unprofitable B. The ability to wait until the economy improves before making the investment C. The option to increase production beyond that initially projected D. All of the above have the potential to increase the NPV of a proposed investment

D.

Portfolio diversification eliminates which of the following? A. Total investment risk B. Reward for bearing risk C. Market-widerisk D. Unsystematic risk

D.

Which of the following statements is FALSE? A. Sensitivity analysis helps determine the reasonable range of expectations for a project's outcome. B. The impacts of estimation errors and forecasting risks are small when NPVs are large and negative. C. Under intense competition, positive NPV projects are rare. D. The error of commission, or Type 1 error NPV estimation, is the risk that a project will be accepted when its true NPV is negative.

A

Which of the following statements is FALSE? A. Asset-specific risks can be easily diversified with highly correlated assets in a portfolio B. Asset-specific risks can be easily diversified with numerous assets in a portfolio C. Bearing risk is rewarded with higher expected returns D. Only market-wide risks, not asset-specific risks, should earn rewards

A.

Which of the following statements is FALSE? A. Over the long run, investments in small-company stocks have had the largest return but also the most risk, when compared with large-company stocks, bonds, and T-Bills. B. The average return is always less than the geometric return. C. Investors who hold bonds instead of stocks over long horizons can be rational and relatively averse to risk. D. Unlike the capital gains yield, the dividend yield can never be negative.

B

Which of the following statements is TRUE? A. By investing in varied and numerous assets, an investor is able to virtually eliminate all asset- specific risks in her portfolio, both easily and cheaply. B. It is possible, but not very easy, for an investor to control market-wide risks in his portfolio, and increases in these market-wide risks are costly because they reduce expected returns. C. The most important characteristic in determining the expected return of a well-diversified portfolio is the total variance risks of the individual assets in the portfolio. D. When a portfolio has a positive investment in every one of its assets, its standard deviation cannot be less than that on every asset in the portfolio.

A.

Which of the following statements is TRUE? A. If a portfolio has a positive investment in every asset, the standard deviation on the portfolio can be less than that on every asset in the portfolio. B. Labor strikes and part shortages are examples of market-wide systematic risks. C. Market-wide systematic risks can be significantly reduced by diversification. D. Asset-specific unsystematic risks can be substantially reduced with less numerous and less correlated assets in a portfolio.

A.

Which of the following statements is TRUE? A. It is better to use Geometric Return than Average Return to forecast what the stock market over the next 50 years B. The return earned in an average year over a multiyear period is known as the geometric return C. The compound return earned per year over a multiyear period is known as the arithmetic average return D. The average return is always smaller than the geometric return

A.

Which of the following should not be included in the analysis of a proposed investment? A. The current market value of an existing building to be used in the project. B. The amount paid 4 years ago for an existing building to be used in the project. C. The expected after-tax salvage value at the end of a project of an existing building to be used in the project. D. The net working capital balance remaining at the end of the project.

B

If the financial markets are semi-strong form efficient, then: A. only the most talented analysts can determine the true value of a security. B. only individuals with private information have a marketplace advantage. C. technical analysis provides the best tool to use to gain a marketplace advantage. D. no one individual has an advantage in the marketplace.

B.

Sensitivity analysis: A. looks at the most reasonably optimistic and pessimistic results for a project. B. helps identify the variable within a project that presents the greatest forecasting risk. C. is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable. D. illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project.

B.

Which of the following statements is FALSE?? A. The impacts of estimation errors and forecasting risks are small when NPVs are large and positive. B. Under intense competition, positive NPV projects are as common as negative NPV projects. C. Scenario analysis helps determine the reasonable range of expectations for a project's outcome. D. Sensitivity analysis helps identify the variable within a project that presents the greatest forecasting risk.

B.

Which of the following statements is TRUE? A. The risk-free rate of return has a portfolio risk premium of 1.0. B. The higher the expected rate of return, the wider the distribution of returns for portfolios. C. The reward for bearing risk in portfolios is called the standard deviation. D. Risk premiums are inversely related to the standard deviation of returns for portfolios.

B.

Which of the following statements is TRUE? A. Opportunity costs are those values that have already been incurred, cannot be recouped, and should not be considered in an investment decision. B. Under hard capital rationing, a business enforces limits on investment budgets because it prefers not to raise financing from the capital markets. C. Managerial real options can be very valuable but difficult to measure, and ignoring them will underestimate a project's true Net Present Value. D. Forecasting risk is more troublesome when NPV estimates are particularly large.

C

Fill in the blanks: Standard deviation measures ______ risk, while beta measures ______ risk. A. Asset-specific; market-wide B. Market-wide; total C. Total;market-wide D. Total; asset-specific

C.

Under Munich, a footwear manufacturer, recently announced that they have just designed a new footwear product which includes the latest technology. This news is totally unexpected and viewed as a major advancement in the footwear industry. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient? A. The price of Under Munich doesn't change, but then it increases one week after the announcement. B. The price of all stocks quickly increase in value and then all but Under Munich stock fall back to their original values. C. The price of Under Munich's stock suddenly increases, and then remains at that price. D. The price of Under Munich's stock increases rapidly, and then settles back to its pre-announcement level.

C.

Which of the following statements is FALSE? A. If a portfolio has a positive investment in every asset, the standard deviation on the portfolio can be less than that on every asset in the portfolio. B. Labor strikes and part shortages are examples of firm-specific unsystematic risks. C. Market-wide systematic risks can be significantly reduced by diversification. D. Asset-specific unsystematic risks can be substantially reduced with more numerous and less correlated assets in a portfolio.

C.

Which of the following statements is FALSE? A. Since errors of commission are often readily apparent, managers have a tendency to be cautious when evaluating new projects B. Errors of omission can result in lost potential value as much as errors of commission can destroy value. C. Type 1 errors occur when managers reject projects whose true NPVs are positive D. Errors in projected cash flows create large forecasting risks when their net present values are particularly small in magnitude.

C.

Which of the following statements is TRUE? A. Efficient markets will protect investors from wrong choices if they do not diversify. B. Consistent with efficient markets, stock prices reach equilibrium several times per week. C. Efficient markets react to new information by instantly adjusting the price of a stock to its new fair market value without any delay or overreaction. D. Weak form efficiency implies that all information is reflected in stock prices.

C.

Which of the following statements is FALSE? A. Asset-specific risks can be diversified in a portfolio of imperfectly correlated assets B. Asset-specific risks can be diversified with numerous assets in a portfolio C. Bearing risk is rewarded with higher expected returns D. Only asset-specific risks, not market-wide risks, should earn rewards

D.

Which of the following statements is FALSE? A. Over the long run, investments in small-company stocks have had the largest return but also the most risk, when compared with large-company stocks, bonds, and T-Bills. B. The average return is always greater than the geometric return. C. Investors who hold bonds instead of stocks over long horizons can be rational and relatively averse to risk. D. Like the dividend yield, the capital gains yield can never be negative.

D.

Which of the following statements is FALSE? A. Scenario analysis helps determine the reasonable range of expectations for a project's outcome. B. The impacts of estimation errors and forecasting risks are small when NPVs are large and negative. C. Under intense competition, positive NPV projects are rare. D. The error of omission, or Type 1 error NPV estimation, is the risk that a project will be accepted when its true NPV is negative.

D.

Which of the following statements is TRUE? A. Efficient markets protect investors from wrong choices even if they do not diversify. B. Consistent with efficient markets, stock prices reach equilibrium several times per hour. C. Efficient markets react to new information by partially and slowly adjusting the price of a stock to its new fair market value with a delay since it takes a while for everyone to agree. D. If markets are semi-strong form efficient, then all publicly available information is reflected in stock prices and fundamental analysis is useless.

D.

Which of the following statements is TRUE? A. Opportunity costs are those values that have already been incurred, cannot be recouped, and should not be considered in an investment decision. B. The stand-alone principle requires analysts to evaluate a project based on its stand-alone cash flows without reference to how it might impact the firm's incremental cash flows. C. Under hard capital rationing, a business enforces limits on investment budgets because it prefers not to raise financing from the capital markets. D. Managerial real options can be very valuable but difficult to measure, and ignoring them will underestimate a project's true Net Present Value.

D.

Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic firm-specific risk associated with an individual security? A. Security beta multiplied by the market rate of return B. Market risk premium C. Risk-free rate of return D. Zero

D.

Which one of the following statements is TRUE? A. The risk-free rate of return has a risk premium of 1.0. B. The reward for bearing risk is called the standard deviation. C. Risks and expected return are inversely related. D. The higher the expected rate of return, the wider the distribution of returns.

D.