FINANCIAL MANAGEMENT EXAM 3 PRACTICE QUESTIONS

The majority of the diversifiable risk in a portfolio can be eliminated by owning as few as ________stocks. a. 10 b. 40 c. 75 d. 2 e. 5

a. 10

You own 850 shares of Bennett Trading stock valued at $53.15 per share. What is the dividend yield if your total annual dividend income is $1,256? a. 2.78% b. 2.13% c. 2.54% d. 2.67% e. 1.83%

a. 2.78%

A stock had annual returns of 7 percent, −28 percent, 13 percent, and 23 percent for the past four years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent. a. 3.75; 1.72 b. 3.75; 17.46 c. 3.75; 4.27 d. 17.75; 17.46 e. 17.75; 4.27

a. 3.75; 1.72

Which one of the following statements is correct concerning the foreign exchange market? a. A cross-rate is the exchange rate of a non-U.S. currency expressed in another non-U.S. currency. b. The foreign exchange market is the world's second largest financial market. c. The trading floor of the foreign exchange market is located in London. d. The four primary currencies that are traded in the foreign exchange market are the U.S. dollar, British pound, French franc, and euro. e. The price in U.S. dollars of a foreign currency is referred to as an indirect quote

a. A cross-rate is the exchange rate of a non-U.S. currency expressed in another non-U.S. currency.

You would like to purchase a foreign bond that is issued by the government of the United Kingdom.Which one of the following should you purchase? a. Bulldog bond b. Swap c. Kronor bond d. Samurai bond e. Rembrandt bond

a. Bulldog bond

A U.S. firm has significant profits that were earned overseas. When U.S. taxes are paid on these profits, the profits are considered to be: a. Repatriated. b. Blocked. c. Confiscated. d. taken over. e. abrogated

a. Repatriated.

You want to invest in a riskless project in Sweden. The project has an initial cost of SKr3.86 million and is expected to produce cash inflows of SKr1.76 million per year for three years. The project will be worthless after three years. The expected inflation rate in Sweden is 3.2 percent while it is 2.8 percent in the U.S. A risk-free security is paying 4.1 percent in the U.S. The current spot rate isSKr7.7274. What is the net present value of this project in Swedish krona if the international Fisher Effect applies? a. SKr978,177 b. SKr701,458 c. SKr823,333 d. SKr958,029 e. SKr1,087,561

a. SKr978,177

Which one of the following states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates? a. Uncovered interest parity b. Purchasing power parity c. Interest rate parity d. International Fisher effect e. Unbiased forward rates condition

a. Uncovered interest parity

Interest rate parity: a. eliminates covered interest arbitrage opportunities. b. exists when the spot rate is equal to the forward rate. c. eliminates exchange rate fluctuations. d. means the nominal risk-free rate must be equal across countries. e. exists when spot rates are equal for multiple countries

a. eliminates covered interest arbitrage opportunities.

Given a well-diversified stock portfolio, the variance of the portfolio: a. may be less than the variance of the least risky stock in the portfolio. b. must be equal to or greater than the variance of the least risky stock in the portfolio. c. will be an arithmetic average of the variances of the individual securities in the portfolio. d. will be a weighted average of the variances of the individual securities in the portfolio. e. will equal the variance of the most volatile stock in the portfolio

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

You have a $15,000 portfolio which is invested in Stocks A and B, and a risk-free asset. $6,000 is invested in Stock A. Stock A has a beta of 1.63 and Stock B has a beta of .95. How much needs to be invested in Stock B if you want a portfolio beta of 1.10? a. $9,419.27 b. $7,073.68 c. $7,706.20 d. $8,998.90 e. $8,333.33

b. $7,073.68

Which one of the following time periods is associated with low rates of inflation? a. 1979-1980 b. 2014-2015 c. 1973-1974 d. 1941-1942 e. 1946-1947

b. 2014-2015

The average compound return earned per year over a multiyear period is called the _____ average return. a. Standard b. Geometric c. Arithmetic d. Real e. Variant

b. Geometric

Which of the following items are included when calculating the expected return on a portfolio? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy a. I and III only b. I, II, III, and IV c. I, III, and IV only d. II, III, and IV only e. II and IV only

b. I, II, III, and IV

The price of one Swiss franc expressed in U.S. dollars is referred to as a(n): a. foreign interest rate b. exchange rate c. cross inflation rate d. ADR rate e. depository rate

b. exchange rate

The expected return of a stock, based on the likelihood of various economic outcomes, equals the: a. return for the economic state with the highest probability of occurrence. b. weighted average of the returns for each economic state. c. summation of the individual expected rates of return. d. arithmetic average of the returns for each economic state. e. highest expected return given any economic state

b. weighted average of the returns for each economic state.

You want your portfolio beta to be .95. Currently, your portfolio consists of $4,000 invested in Stock A with a beta of 1.26 and $7,000 in Stock B with a beta of .94. You have another $8,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in the risk-free asset? a. $4,425 b. $4,902 c. $4,305 d. $3,966 e. $5,083

c. $4,305

One year ago, you purchased a stock at a price of $38.22 per share. Today, you sold the stock and realized a total loss of 11.09 percent on your investment. Your capital loss was −$4.68 per share.What was your dividend yield? a. .38% b. .67% c. 1.15% d. .88% e. 1.02%

c. 1.15%

Your portfolio has a beta of 1.24. The portfolio consists of 6 percent U.S. Treasury bills, 40 percent Stock A, and 54 percent Stock B. Stock A has a risk level equivalent to that of the overall market.What is the beta of Stock B? a. 1.44 b. 1.96 c. 1.56 d. 1.84 e. 1.52

c. 1.56

A trader has just agreed to exchange Mexican pesos for Singapore dollars three months from today. This exchange is an example of a: a. floating swap. b. triangle arbitrage. c. forward trade. d. short sale. e. spot trade

c. forward trade.

Of the options listed below, which is most directly impacted by the level of systematic risk? a. Market risk premium b. Variance of the returns c. Standard deviation of the returns d. Expected rate of return e. Risk-free rate

d. Expected rate of return

Which one of the following statements is correct based on the historical record for the period 1926-2019? a. Long-term government bonds were less volatile than intermediate-term government bonds. b. U.S. Treasury bills had a zero standard deviation of returns because they are considered to be risk-free. c. Inflation was less volatile than the returns on U.S. Treasury bills. d. Long-term government bonds had a lower return but a higher standard deviation, on average, than did long-term corporate bonds. e. The standard deviation of returns for small-company stocks was double that of large-company stocks

d. Long-term government bonds had a lower return but a higher standard deviation, on average, than did long-term corporate bonds.

The historical record for the period 1926-2019 supports which one of the following statements? a. The inflation rate was positive each year throughout the period. b. There was only one year during the period when double-digit inflation occurred. c. The return on U.S. Treasury bills exceeds the inflation rate by at least .5 percent each year. d. Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year. e. When large-company stocks have a negative return, they will have a negative return for at least two consecutive years

d. Small-company stocks have lost as much as 50 percent and gained as much as 100 percent in a single year.

To convince investors to accept greater volatility, you must: a. decrease the risk-free rate. b. increase the risk-free rate. c. decrease the risk premium. d. increase the risk premium. e. decrease the real return

d. increase the risk premium.

According to the ________, real interest rates are equal across countries. a. purchasing power parity theory b. uncovered interest rate parity theory c. interest rate parity theory d. international Fisher effect e. unbiased forward rates condition

d. international Fisher effect

You are analyzing a project with an initial cost of £50,000. The project is expected to return £12,000 the first year, £36,000 the second year, and £40,000 the third and final year. There is no salvage value. Assume the current spot rate is £.6346. The nominal return relevant to the project is 12 percent in the U.S. The nominal risk-free rate in the U.S. is 3.4 percent while it is 4.1 percent in the U.K. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars? a. $26,930 b. $29,639 c. $30,796 d. $23,611 e. $26,509

e. $26,509

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. Semi-weak c. Perfect d. Semi-strong e. Strong

e. Strong

Assume you are an analyst monitoring Okello stock. Which one of the following would be reflected in Okello's expected return? a. The price of Okello stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. b. The board of directors made an unprecedented decision to give sizable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending. c. The labor union representing Okello's employees unexpectedly called a strike. d. The chief financial officer of Okello unexpectedly resigned. e. This morning Okello confirmed that, as expected, the CFO is retiring at the end of the year

e. This morning Okello confirmed that, as expected, the CFO is retiring at the end of the year

The rate of return on which type of security is normally used as the risk-free rate of return? a. Long-term Treasury bonds b. Intermediate-term corporate bonds c. Intermediate-term treasury bonds d. Long-term corporate bonds e. Treasury bills

e. Treasury bills

The ________ explains the relationship between the expected return on a security and the level of that security's systematic risk. a. time value of money equation b. unsystematic risk equation c. expected risk formula d. market performance equation e. capital asset pricing model

e. capital asset pricing model