| 1. | Question : | (TCO 8) The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield, are based on: |
| | Student Answer: | | the largest 20 percent of the stocks traded on the NYSE. | | | | the stocks of the largest 10 percent of the publicly traded firms in the U.S. | | | | all of the stocks listed on the NYSE. | | | | the stocks of the 500 companies included in the S&P 500 index. | |
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| 2. | Question : | (TCO 8) Which of the following is true regarding the efficient market hypothesis? |
| | Student Answer: | | It argues that efficient markets are not volatile throughout a trading day. | | | | It suggests that an efficient market can only consider historical information when determining current security prices. | | | | It proves that market inefficiencies do not exist in either the short-run or the long-run. | | | | It implies that all investments in an efficient market have a net present value of zero. | | |
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| 3. | Question : | (TCO 8) Which of the following factors will affect the expected rate of return on a security? Select all that apply: |
| | Student Answer: | | multiple states of the economy | | | | probability of occurrence for any one economic state | | | | market rate of return given a particular economic state | | | | security beta | |
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| 4. | Question : | (TCO 8) Assume a project that has the following returns for years 1 to 5: 15%, 4%, -13%, 34%, and 17%. What is the approximate variance of this investment? |
| | Student Answer: | | 0.03 | | | | 0.15 | | | | 17% | | | | 20% | |
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| 5. | Question : | (TCO 8) Assume you are considering investing in two stocks, A & B. Stock A has an expected return of 16% and Stock B has an expected return of 9.5%. Your goal is to create a two-security portfolio that will have an expected return of 12%. If you have $250,000 to invest today, which of the following statements is true? |
| | Student Answer: | | You would invest more in Stock A than you would invest in Stock B | | | | You would invest approximately $96,000 in Stock A and $154,000 in Stock B | | | | You would invest the same amount in each stock | | | | Regardless of your investment choices, you cannot obtain a return of 12%. | |
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| 6. | Question : | (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows: The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. What is the standard deviation of Stock I and II respectively? |
| | Student Answer: | | 12 and 20% | | | | 12.5 and 23% | | | | 1.25 and 2.326% | | | | Cannot be determined with the information given | |
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| 7. | Question : | (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows: The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. Which statement is true? Select all that apply: |
| | Student Answer: | | Stock I has more overall risk than Stock II | | | | Stock II has less systematic risk than Stock I | | | | Stock I has a higher risk premium than Stock II | | | | None of the above are correct statements | |
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| 8. | Question : | (TCO 8) Which statements are false regarding risk? Select all that apply: |
| | Student Answer: | | The expected return is always the same as the actual return | | | | A key to assessing risk is determining how much risk an investment adds to a portfolio | | | | Risks can always be diversified | | | | The higher the risk, the higher the return investors require for the investment | |
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| 9. | Question : | (TCO 8) Which type of risk does beta measure? Look at Table 11.8 in your textbook. Does this table indicate that Citibank has a higher overall risk than Home Depot? Why or why not? |
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