Principles of Finance Test 2

Two assets whose returns move in the opposite directions and have a correlation coefficient of -1 are both either risk-free assets or low-risk assets.

false

Unsystematic risk is the relevant portion of an asset's risk attributable to market factors that affect all firms.

false

Beta coefficient is an index of the degree of movement of an asset's return in response to a change in the risk-free asset.

false

Coefficient of variation is a measure of relative dispersion used in comparing the expected returns of assets with differing risks.

false

Everything else being equal, the higher the discount rate, the higher the present value.

false

For any interest rate and for any period of time, the more frequently interest is compounded, the greater the amount of money that has to be invested today in order to accumulate a given future amount.

false

For the risk-averse manager, required return would decrease for an increase in risk.

false

Market risk is the chance that a totally unexpected event will have a significant effect on the value of the firm or a specific investment.

false

Systematic risk is that portion of an asset's risk that is attributable to firm-specific, random causes.

false

The greater the interest rate and the longer the period of time, the higher the present value.

false

If you expect to retire in 30 years, are currently comfortable living on $50,000 per year and expect inflation to average 3% over the next 30 years, what amount of annual income will you need to live at the same comfort level in 30 years? a. $121,363 b. $95,000 c. $20,599 d. $51,500

a. $121,363

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. $126

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. coefficient of variation

The ________ the coefficient of variation, the ________ the risk. a. lower; lower b. higher; lower c. lower; higher d. more stable; higher

a. lower; lower

The ________ of an asset is the change in value plus any cash distributions expressed as a percentage of the initial price or amount invested. a. return b. value c. risk d. probability

a. return

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. risk-seeking.

The higher an asset's beta, a. the more responsive it is to changing market returns. b. the less responsive it is to changing market returns. c. the higher the expected return will be in a down market. d. the lower the expected return will be in an up market.

a. the more responsive it is to changing market returns.

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. $ 2,985.18

Mary will receive $12,000 per year for the next 10 years as royalty for her work on a finance book. What is the present value of her royalty income if the opportunity cost is 12 percent? a. $120,000 b. $ 67,800 c. $ 38,640 d. none of these.

b. $ 67,800

The future value of an ordinary annuity of $1,000 each year for 10 years, deposited at 3 percent, is a. $11,808. b. $11,464. c. $ 8,530. d. $10,000.

b. $11,464

Nico makes annual end-of-year payments of $5,043.71 on a four-year loan with an interest rate of 13 percent. The original principal amount was a. $24,462 b. $15,000 c. $ 3,092 d. $20,175

b. $15,000

The future value of $200 received today and deposited at 8 percent for three years is a. $248. b. $252. c. $158. d. $200.

b. $252

The future value of a $2,000 annuity due deposited at 8 percent compounded annually for each of the next 10 years is a. $28,974. b. $31,292. c. $14,494. d. $13,420.

b. $31,292

Asset Y has a beta of 1.2. The risk-free rate of return is 6 percent, while the return on the market portfolio of assets is 12 percent. The asset's market risk premium is a. 7.2 percent. b. 6.0 percent. c. 13.2 percent. d. 10 percent.

b. 6.0 percent

Time-value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.

false

Risk aversion is the behavior exhibited by managers who require a (n) a. increase in return, for a given decrease in risk. b. increase in return, for a given increase in risk. c. decrease in return, for a given increase in risk. d. decrease in return, for a given decrease in risk.

b. increase in return, for a given increase in risk.

As risk aversion increases a. a firm's beta will increase. b. investors' required rate of return will increase. c. a firm's beta will decrease. d. investors' required rate of return will decrease.

b. investors' required rate of return will increase.

A collection of assets is called a(n) a. grouping. b. portfolio. c. investment. d. diversity.

b. portfolio.

An example of an external factor that affects a corporation's risk or beta, and hence required rate of return would be ________ by the company. a. a change in the financing mix used b. toxic spills c. a change in the asset mix d. a change in top management.

b. toxic spills

$100 is received at the beginning of year 1, $200 is received at the beginning of year 2, and $300 is received at the beginning of year 3. If these cash flows are deposited at 12 percent, their combined future value at the end of year 3 is a. $1,536. b. $ 672. c. $ 727. d. $1,245.

c. $ 727

A college received a contribution to its endowment fund of $2 million. They can never touch the principal, but they can use the earnings. At an assumed interest rate of 9.5 percent, how much can the college earn to help its operations each year? a. $95,000 b. $19,000 c. $190,000 d. $18,000

c. $190,000

________ is an annuity with an infinite life making continual annual payments. a. An amortized loan b. A principal c. A perpetuity d. An APR

c. A perpetuity

________ in the beta coefficient normally causes ________ in the required return and therefore ________ in the price of the stock, all else remaining the same. a. An increase; an increase; an increase b. An increase; a decrease; an increase c. An increase; an increase; a decrease d. A decrease; a decrease; a decrease

c. An increase; an increase; a decrease

________ is the chance of loss or the variability of returns associated with a given asset. a. Return b. Value c. Risk d. Probability

c. Risk

The ________ is a statistical measure of the relationship between series of numbers. a. coefficient of variation b. standard deviation c. correlation d. probability

c. correlation

Systematic risk is also referred to as a. diversifiable risk. b. economic risk. c. nondiversifiable risk. d. not relevant.

c. nondiversifiable risk.

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. $ 77

Rita borrows $4,500 from the bank at 9 percent annually compounded interest to be repaid in three equal annual installments. The interest paid in the third year is ________. a. $277.95 b. $405.00 c. $352.00 d. $147.00

d. $147.00

Alexis owns stock in a company which has consistently paid a growing dividend over the last 10 years. The first year Alexis owned the stock, she received $4.50 per share and in the 10th year, she received $4.92 per share. What is the growth rate of the dividends over the last 10 years? a. 5 percent b. 4 percent c. 2 percent d. 1 percent

d. 1 percent

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. 15.9 percent

The goal of an efficient portfolio is to a. maximize risk for a given level of return. b. maximize risk in order to maximize profit. c. minimize profit in order to minimize risk. d. minimize risk for a given level of return.

d. minimize risk for a given level of return.

In the capital asset pricing model, an increase in inflationary expectations will be reflected by a(n) a. increase in the slope of the security market line. b. decrease in the slope of the security market line. c. parallel shift downward in the security market line. d. parallel shift upward in the security market line.

d. parallel shift upward in the security market line.

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. positively; +1; negatively; -1

The ________ measures the dispersion around the expected value. a. coefficient of variation b. chi square c. mean d. standard deviation

d. standard deviation

What is Nico's portfolio beta if he invests an equal amount in asset X with a beta of 0.60 and asset Y with a beta of 1.60? a. 1.80 b. 1.00 c. 1.20 d. 0.60

not b. 1.00

An efficient portfolio is a portfolio that maximizes return for a given level of risk or minimizes risk for a given level of return.

true

For a given positive interest rate, the future value of $100 increases with the passage of time. Thus, the longer the period of time, the greater the future value.

true

The difference between the return on the market portfolio of assets and the risk-free rate of return represents the premium the investor must receive for taking the average amount of risk associated with holding the market portfolio of assets.

true

The effective rate of interest differs from the nominal rate of interest in that it reflects the impact of compounding frequency.

true

The security market line is not stable over time and shifts in it can result in a change in required return.

true