FIN 3060 - EXAM 3 (Conceptual Questions)

Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that stock.Which one of the following best describes the 16.5 percent rate?

Expected return

Which one of the following is defined as the average compound return earned per year over a multiyear period?

Geometric average return

Which one of the following statements is correct?

If a risky security is correctly priced, its expected risk premium will be positive.

Which one of the following statements is correct?

If the internal rate of return equals the required return, the net present value will equal zero.

The systematic risk principle states that the expected return on a risky asset depends only onthe asset's _____________ risk.

market

Unsystematic risk can be defined by all of the following except?

market risk

Jamie is analyzing the estimated net present value of a project under various conditions byrevising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamieis doing is best described as:

scenario analysis

Northern Companies has three separate divisions. Each year, the company determines theamount it can afford to spend in total for capital expenditures and then allocates one-third ofthat amount to each division. This allocation process is called:

soft rationing

One year ago, you purchased 600 shares of a stock. This morning you sold those shares and realized a total return of 3.1 percent. Given this information, you know for sure the:

sum of the dividend yield and the capital gains yield is 3.1 percent.

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

zero

Forecasting risk is best defined as:

estimation risk

The security market line is a linear function that is graphed by plotting data points based onthe relationship between the:

expected return and beta

The security market line is defined as a positively sloped straight line that displays the relationship between the:

expected return and beta of either a security or a portfolio.

The net present value profile illustrates how the net present value of an investment is affected by which one of the following?

Discount rate

Which term best refers to the practice of investing in a variety of diverse assets as a means ofreducing risk?

Diversification

Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best fits the situation facing the firm?

Capital rationing

Which one of the following combinations will always result in an increased dividend yield?

Decrease in the stock price combined with a higher dividend amount

Which one of the following is the primary advantage of payback analysis?

Ease of use

Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?

Mutually exclusive

Which one of the following is generally considered to be the best form of analysis if youhave to select a single method to analyze a variety of investment opportunities?

Net present value

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?

Portfolio weight

Which one of the following indicates that a project should be rejected? Assume the cashflows are normal, i.e., the initial cash flow is negative.

Profitability index less than 1.0

Which one of the following best describes an arithmetic average return?

Return earned in an average year over a multiyear period

On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

Risk premium

Which one of the following is the positive square root of the variance?

Standard deviation

Which one of the following could cause the total return on an investment to be a negative rate?

Stock price that declines over the investment period

The payback method of analysis ignores which one of the following?

Time value of money

The rate of return on which one of the following has a risk premium of 0%?

U.S. Treasury bills

Which one of the following statements is correct concerning both the dollar return and the percentage return on a stock investment?

Without the size of an investment, the dollar return has less value than the percentage return.

A portfolio is:

a group of assets held by an investor.

Systematic risk is defined as:

any risk that affects a large number of assets.

The amount of systematic risk present in a particular risky asset relative to that in an averagerisky asset is measured by the:

beta coefficient

The net present value:

decreases as the required rate of return increases.