Categories
Finance Flashcards

Finance 301 Exam 4

The variance is the average squared difference between which of the following? Actual return and average return
Which one of the following is the positive square root of the variance? Standard deviation
Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its standard deviation? Normal distribution
Which one of the following best describes an arithmetic average return? Return earned in an average year over a multiyear period
An efficient capital market is best defined as a market in which security prices reflect which one of the following? All available information
Which one of the following is the hypothesis that securities markets are efficient? Efficient markets hypothesis
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 could cause the total return on an investment to be a negative rate? Stock price that declines over the investment period
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.
Which answer creates a false sentence? Percentage returns: are difficult to compute.
The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield and reported in your textbook, are based on the: stocks of the 500 companies included in the S&P 500 index.
Over the period of 1926-2014, which one of the following investment classes had the highest volatility of returns? Small-company stocks
Over the period of 1926-2014: long-term government bonds underperformed long-term corporate bonds.
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 had a zero standard deviation of returns for the period of 1926-2014? All of the listed security types had a standard deviation of returns in excess of zero percent.
Which one of the following categories has the widest frequency distribution of returns for the period 1926-2014? Small-company stocks
The period 1926-2014 illustrates that U.S. Treasury bills: can either outperform or underperform inflation on an annual basis.
The historical record for the period 1926-2014 shows that the annual nominal rate of return on: U.S. Treasury bills have had a positive rate of return for every year in the period.
What was the average annual risk premium on small-company stocks for the period 1926-2014? 13.2 percent
Based on the period 1926-2014, what rate of return should you expect to earn over the long-term if you are unwilling to bear risk? Between 3 and 4 percent
Which one of the following statements is true regarding the period 1926-2014? U.S. Treasury bills had a positive average real rate of return.
For the period 1926-2014, which one of the following had the smallest risk premium? U.S. Treasury bills
Which one of the following statements is correct? The higher the expected rate of return, the wider the distribution of returns.
Which one of the following is the most apt to have the largest risk premium in the future based on the historical record for 1926-2014? Small-company stocks
The average risk premium on long-term government bonds for the period 1926-2014 was equal to: the rate of return on the bonds minus the T-bill rate.
The standard deviation measures the _____ of a security’s returns over time. volatility
Which one of the following has the narrowest distribution of returns for the period 1926-2014? Intermediate-term government bonds
What is the probability associated with a return that lies in the upper tail when the mean plus two standard deviations is graphed? 2.5 percent
When, if ever, will the geometric average return exceed the arithmetic average return for a given set of returns? Never
Assume the securities markets are strong form efficient. Given this assumption, you should expect which one of the following to occur? The price of each security in that market will frequently fluctuate.
New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient? The price of New Labs stock increases rapidly to a higher price and then remains at that price.
According to the efficient markets hypothesis, professional investors will earn: a dollar return equal to the value paid for an investment.
Semistrong form market efficiency states that the value of a security is based on: all publicly available information.
Dan is a chemist for ABC, a major drug manufacturer. Dan cannot earn excess profits on ABC stock based on the knowledge he has related to his experiments if the financial markets are: strong form efficient.
If the financial markets are semistrong form efficient, then: only individuals with private information have a marketplace advantage.
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
Stock A comprises 28 percent of Susan’s portfolio. Which one of the following terms applies to the 28 percent? Portfolio weight
Systematic risk is defined as: any risk that affects a large number of assets.
Unsystematic risk can be defined by all of the following except: market risk.
Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk? Diversification
The systematic risk principle states that the expected return on a risky asset depends only on the asset’s ___ risk. market
The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the: beta coefficient.
The security market line is a linear function that is graphed by plotting data points based on the relationship between the: expected return and beta.
The slope of the security market line represents the: market risk premium.
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.
Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive? Cost of capital
A stock is expected to return 13 percent in an economic boom, 10 percent in a normal economy, and 3 percent in a recessionary economy. Which one of the following will lower the overall expected rate of return on this stock? A decrease in the probability of an economic boom
Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security, Rf is the risk-free rate, β is the security’s beta, and E(RM) is the expected rate of return on the market. β[E(RM) -Rf]
Which one of the following statements is correct? If a risky security is correctly priced, its expected risk premium will be positive.
If a risky security is correctly priced, its expected risk premium will be positive. The weights of the securities held in any portfolio must equal 1.0.
Which one of the following is the best example of an announcement that is most apt to result in an unexpected return? Statement by a firm that it has just discovered a manufacturing defect and is recalling its product
Which one of the following is the best example of unsystematic risk? A warehouse fire
Which one of these represents systematic risk? Increase in consumption created by a reduction in personal tax rates
Which one of these is the best example of systematic risk? Decrease in gross domestic product
Standard deviation measures _____ risk while beta measures _____ risk. total; systematic
Which one of the following best exemplifies unsystematic risk? Unexpected increase in the variable costs for a firm
The risk premium for an individual security is based on which one of the following types of risk? Systematic
Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security? Zero
Which statement is correct? An underpriced security will plot above the security market line.
Portfolio diversification eliminates: unsystematic risk.
Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following? Reduce the portfolio’s unique risks
For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta: that is > 0 but < 1.
The addition of a risky security to a fully diversified portfolio: may or may not affect the portfolio beta.
A portfolio is comprised of 35 securities with varying betas. The lowest beta for an individual security is .74 and the highest of the security betas of 1.51. Given this information, you know that the portfolio beta: will be greater than or equal to .74 but less than or equal to 1.51.
The beta of a risky portfolio cannot be less than _____ nor greater than ____. the lowest individual beta in the portfolio; the highest individual beta in the portfolio
If a security plots to the right and below the security market line, then the security has ____ systematic risk than the market and is ____. more; overpriced
Assume you own a portfolio of diverse securities which are each correctly priced. Given this, the reward-to-risk ratio: of each security must equal the slope of the security market line.
Which statement is correct? A security with a beta of 1.54 will plot on the security market line if it is correctly priced.
Which one of the following is the vertical intercept of the security market line? Risk-free rate
According to the capital asset pricing model, the expected return on a security will be affected by all of the following except the: security’s standard deviation.
World United stock currently plots on the security market line and has a beta of 1.04. Which one of the following will increase that stock’s rate of return without affecting the risk level of the stock, all else constant? Increase in the market risk-to-reward ratio
The expected return on a security is not affected by the: security’s unique risks.
The capital asset pricing model: considers the relationship between the fluctuations in a security’s returns versus the market’s returns.
Julie wants to create a $5,000 portfolio. She also wants to invest as much as possible in a high risk stock with the hope of earning a high rate of return. However, she wants her portfolio to have no more risk than the overall market. Which one of the following portfolios is most apt to meet all of her objectives? Invest $2,500 in a risk-free asset and $2,500 in a stock with a beta of 2.0
Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC? Cost of equity
Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate of return that he and the other lenders require is referred to as the: cost of debt.
In an efficient market, the cost of equity for a highly risky firm: increases in direct relation to the stock’s systematic risk.
Assume a firm has a beta of 1.2. All else held constant, the cost of equity for this firm will increase if the: risk-free rate decreases.
Which one of the following will increase the cost of equity, all else held constant? Increase in the dividend growth rate
Which one of the following is used as the pretax cost of debt? Weighted average yield to maturity on the firm’s outstanding debt
Which one of the following will decrease the aftertax cost of debt for a firm? Increase in tax rates
All else constant, an increase in a firm’s cost of debt: will result in an increase in the firm’s cost of capital.
The cost of preferred stock: is equal to the stock’s dividend yield.
is equal to the stock’s dividend yield. The cost of preferred stock is unaffected by the issuer’s tax rate.
Which one of the following will affect the capital structure weights used to compute a firm’s weighted average cost of capital? Increase in the market value of the firm’s common stock
Which one of the following statements concerning capital structure weights is correct? The repurchase of preferred stock will increase the weight of debt.
Which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities? Weighted average cost of capital
All else constant, the weighted average cost of capital for a risky, levered firm will decrease if: the firm’s bonds start selling at a premium rather than at a discount.
Which one of the following is most apt to cause a wise manager to increase a project’s cost of capital? Assume the firm is levered. She learns the project is riskier than previously believed.
The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as: homemade leverage.
Which one of the following states that a firm’s cost of equity capital is a positive linear function of the firm’s capital structure? M&M Proposition II without taxes
Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship? Interest tax shield
Assume you are comparing two firms that are identical in every aspect, except one is levered and one is unlevered. Which one of the following statements is correct regarding these two firms? The unlevered firm will have higher EPS at relatively low levels of EBIT.
You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $3.8 million of debt. The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000. Given this, you know that leverage is beneficial to the firm: whenever EBIT exceeds $428,000.
Which one of the following statements concerning financial leverage is correct? Changes in the capital structure of a firm will generally change the firm’s earnings per share.
T.L.C. Enterprises just revised its capital structure from a debt-equity ratio of .37 to a debt-equity ratio of .48. The firm’s shareholders who prefer the old capital structure should: sell some shares and loan out the sale proceeds.
Which one of the following statements is the core principle of M&M Proposition I, without taxes? The capital structure of a firm is totally irrelevant.
Which one of the following supports the theory that the value of a firm increases as the firm’s level of debt increases? M&M Proposition I with taxes
M&M Proposition II, without taxes, states that the: cost of equity increases as a firm increases its debt-equity ratio.
Which one of the following represents the present value of the interest tax shield? Tc ×D
According to M&M Proposition I with taxes, the value of a levered firm will increase when the: value of the unlevered firm increases.
M&M Proposition I with taxes states that: the levered value of a firm exceeds the firm’s unlevered value.
Which one of the following conditions exists at the point where a firm maximizes its value? WACC is minimized.

Leave a Reply

Your email address will not be published. Required fields are marked *