Business Finance: Final Exam

The return earned in an average year over a multi-year period is called the ________ average return. a. arithmetic b. standard c. variant d. geometric e. real

A

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

A

Which one of the following statements is correct? a. The greater the volatility of returns, the greater the risk premium. b. The lower the volatility of returns, the greater the risk premium. c. The lower the average return, the greater the risk premium. d. The risk premium is unrelated to the average rate of return. e. This risk premium, is not affected by the volatility of returns.

A

Efficient financial markets fluctuate continuously because: a. the markets are continually reacting to old information as that information is absorbed. b. the markets are continually reacting to new information. c. arbitrage trading is limited d. current trading systems require human intervention. e. investments produce varying levels of net present values.

B

Individuals who continually monitor the financial markets seeking mispriced securities: a. earn excess profits over the long-term. b. make the markets increasingly more efficient. c. are never able to find a security that is temporarily mispriced. d. are overwhelmingly successful in earning abnormal profits. e. are always quite successful using only historical price information as their bases of evaluation.

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

The expected risk premium on a stock is equal to the expected return on the stock minus the: a. expected market rate of return. b. risk-free rate. c. inflation rate. d. standard deviation. e. variance.

B

Which one of the following statements is correct concerning unsystematic risk? a. An investor is rewarded for assuming unsystematic risk. b. Eliminating unsystematic risk is the responsibility of the individual investor. c. Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. d. Beta measures the level of unsystematic risk inherent in an individual security. e. Standard deviation is a measure of unsystematic risk.

B

According to theory, studying historical stock price movements to identify mispriced stocks: a. is effective as long as the market is only semistrong form efficient. b. is effective provided the market is only weak form efficient. c. is ineffective even when the market is only weak form efficient. d. becomes ineffective as soon as the market gains semistrong form efficiency, e. is ineffective only in strong form efficient markets.

C

The primary purpose of portfolio diversification is to: a. increase returns and risks. b. eliminate all risks. c. eliminate asset-specific risk d. eliminate systematic risk e. lower both returns and risk

C

Which one of the following is a risk that applies to most securities? a. unsystematic b. diversifiable c. systematic d. asset-specific e. total

C

Which one of the following statements is correct in relation to a stock investment? I. The capital gains yield can be positive, negative, or zero. II. The dividend yields can be positive, negative, or zero. III. The total return can be positive, negative, or zero. IV. Neither the dividend yield nor the total return can be negative. a. I only b. I and II only c. I and III only d. I and IV only e. IV only

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

Inside information has the least value when financial markets are: a. weak form efficient. b. semiweak form efficient. c. semistrong form efficient. d. strong form efficient. e. inefficient.

D

The ______ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly. a. real return b. actual return c. nominal return d. risk premium e. expected return

D

The average compound return earned per year over a multi-year period is called the _____ average return. a. arithmetic b. standard c. variant d. geometric e. real

D

Total risk is measured by _____ and systematic risk is measured by _____. a. beta; alpha b. beta; standard deviation c. alpha; beta d. standard deviation; beta e. standard deviation; variance

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

Assume that the market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines that market? a. riskless market b. evenly distributed market c. zero volatility market d. Blume's market e. efficient capital market

E

The principal 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