Final
An investment A) is acceptable if its calculated payback period is less than some prespecified period of time. B) should be accepted if the payback is positive and rejected if it is negative. C) should be rejected if the payback is positive and accepted if it is negative. D) is acceptable if its calculated payback period is greater than some prespecified period of time. E) should be accepted any time the payback period is less than the discounted payback period, given a positive discount rate.
A
An investment is acceptable if the profitability index (PI) of the investment is A) greater than one. B) less than one. C) greater than the internal rate of return (IRR). D) less than the net present value (NPV). E) greater than a prespecified rate of return
A
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
Standard deviation measures which type of risk? A) Total B) Non-diversifiable C) Unsystematic D) Systematic E) Economic
A
The intercept point of the security market line is the rate of return 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 payback method is a convenient and useful tool because A) it provides a quick estimate of how rapidly an initial investment will be recouped. B) it considers all of a project's relevant cash flows. C) it considers the time value of money. D) the required payback period for all of a firm's projects must be identical. E) it only considers the cash flows within the current period of 12 months
A
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
The two most commonly used methods of capital budgeting analysis are the A) internal rate of return and net present value methods. B) net present value and payback methods. C) profitability index and the internal rate of return methods. D) net present value and discounted payback methods. E) average accounting return and discounted payback methods
A
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
What is the key reason why a positive NPV project should be accepted? A) The project is expected to increase shareholder value. B) The present value of the expected cash flows equals the project's cost. C) The project will produce positive cash flows in the future. D) The project's payback will be positive during its life. E) The project's PI will be less than 1, which indicates acceptance
A
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
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
All else equal, the payback period for a project will decrease whenever the A) duration of a project is lengthened. B) cash inflows are moved earlier in time. C) assigned discount rate decreases. D) required return for a project increases. E) initial cost increases.
B
Assume a project has normal cash flows and a positive (non-zero) net present value. The project's A) profitability index will be less than 1. B) internal rate of return will exceed its required rate of return. C) costs exceed its benefits. D) discounted payback period will exceed the life of the project. E) payback period must equal the life of the project
B
If the discounted payback method is preferable to the payback method, then why is the payback method ever used? A) The discounted payback requires an arbitrary cutoff point while payback does not. B) Payback is easier to compute than discounted payback. C) Payback considers all of a project's cash flows but discounted payback does not. D) Payback requires the initial investment be recovered during a project's life while the required discounted payback period may be shorter. E) Payback can be used with mutually exclusive projects but discounted payback cannot.
B
One advantage of the payback method of project analysis is the method's A) application of a discount rate to each separate cash flow. B) simplicity. C) difficulty of use. D) arbitrary cutoff point. E) consideration of all relevant cash flows
B
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
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
Systematic risk is measured by: A) the mean. B) beta. C) the geometric average. D) the standard deviation. E) the arithmetic average
B
The discount rate that makes the net present value of an investment exactly equal to zero is called the A) profitable rate of return. B) internal rate of return. C) average accounting return. D) profitability index. E) risk-free rate.
B
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
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
Which methods of project analysis are most biased towards short-term projects? A) Net present value and internal rate of return B) Payback and discounted payback C) Accounting rate of return and internal rate of return D) Payback and accounting rate of return E) Internal rate of return and discounted payback
B
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
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
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 firm should accept projects with positive net present values primarily because those projects will A) produce cash inflows that exceed the cash outflows. B) return the firm's initial cash outlay within 1 year. C) create value for the firm's current stockholders. D) produce only positive cash flows after the initial investment period. E) increase the current liquidity of the firm
C
Assume a project has normal cash flows. According to the accept/reject rules, the project should be accepted if the A) PI is less than 1. B) AAR is less than the required AAR. C) IRR exceeds the required return. D) payback period is less than the life of the project. E) discounted payback period is less than the life of the project.
C
Assume a project has normal cash flows. Given this, you should accept the project A) if, and only if, the NPV is exactly equal to zero. B) only if the NPV is equal to the initial cash flow. C) if the NPV is positive and reject it if the NPV is negative. D) if the total cash inflows exceed the initial cash outflow. E) because it has positive cash flows for every time period after the initial investment.
C
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
The discounted payback period of a project will decrease whenever the A) initial cash outlay for the project is increased. B) amount of each projected cash inflow is decreased. C) discount rate applied to the project is decreased. D) time period of the project is increased. E) costs of the fixed assets utilized in the project increase.
C
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
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
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
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
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
Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly? A) Variance B) Standard deviation C) Reward-to-risk ratio D) Beta E) Risk premium
C
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
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
All else constant, the net present value of a typical investment project increases when A) the discount rate increases. B) each cash inflow is delayed by one year. C) the initial cost of a project increases. D) the rate of return decreases. E) all cash inflows are moved to the last year of the project
D
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 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
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
The discounted payback method A) discounts a project's initial cost. B) is simpler and more reliable than the payback period. C) is as reliable as NPV because both methods use discounted cash flo. D) uses an arbitrary cutoff period. E) ignores a project's initial costs.
D
The internal rate of return A) is more reliable as a decision making tool than net present value when considering mutually exclusive projects. B) is the discount rate that makes the net present value of a project equal to one. C) is easier to apply than net present value when cash flows are unconventional. D) will provide the same accept/reject decision as NPV when cash flows are conventional and projects are independent. E) is influenced by daily changes in the market rate of interest
D
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
Uptown Developers is considering two projects. Project A consists of building a wholesale book outlet on the firm's downtown lot. Project B consists of building a sit-down restaurant on that same lot. The lot can only accommodate one of the projects. When trying to decide whether to build the book outlet or the restaurant, management should rely most heavily on the analysis results from which one of these methods? A) Profitability index B) Internal rate of return C) Payback D) Net present value E) Accounting rate of return
D
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
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
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
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
The net present value of a project is projected at $210. How should this amount be interpreted? A) The project's cash inflows exceed its outflows by $210. B) The project will return an accounting profit of $210. C) The project's discounted cash flows are $210 less than its undiscounted cash flows. D) The project will increase the firm's cash account by $210 when the project is started. E) The project is earning $210 in addition to the project's required rate of return.
E
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
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
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
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
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
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
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
You are considering a project with conventional cash flows. The IRR is 12.6 percent, NPV is -$198, and the payback period is 2.87 years. Which one of the following statements is correct given this information? A) The discount rate used in computing the net present value was less than 12.6 percent. B) The discounted payback period will have to be less than 2.87 years. C) The project life must be 2.87 years. D) This project should be accepted based on the internal rate of return. E) The required rate of return must be greater than 12.6 percent
E
