Question 1

Stock market indexes are found in many countries outside the United States.

Accepted Answer

A) True 
 B)False

Question 2

The benefits of portfolio diversification are highest when the individual securities within the portfolio have returns that:

Accepted Answer

A)   vary directly with the rest of the portfolio.
B)   vary proportionally with the rest of the portfolio.
C)   are largely uncorrelated with the rest of the portfolio.
D)   are perfectly correlated with the market portfolio.

Question 3

Real rates of return are typically less than nominal rates of return due to:

Accepted Answer

A)   inflation.
B)   capital gains.
C)   dividend payments.
D)   depreciation.

Question 4

Which one of the following security classes has the highest standard deviation of returns?

Accepted Answer

A)   Common stocks
B)   Long-term Treasury bonds
C)   Treasury bills
D)   Corporate bonds

Question 5

As you add more stocks to a portfolio:

Accepted Answer

A)   specific risk at first falls, then rises.
B)   market risk is increasingly diversified away.
C)   specific risk is increasingly diversified away.
D)   market risk declines but specific risk rises.

Question 6

A firm is said to be countercyclical if its returns:

Accepted Answer

A)   continue to decrease, year after year.
B)   continue to increase, year after year.
C)   outperform when most stocks do poorly.
D)   are negative in real terms.

Question 7

One common reason for reporting standard deviations of percentage returns rather than variances is that standard deviations:

Accepted Answer

A)   are lower.
B)   are stated in understandable percentages.
C)   account properly for negative returns.
D)   take probability estimates into consideration.

Question 8

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the expected rate of return on:

Accepted Answer

A)   Treasury bills.
B)   the market portfolio.
C)   the market portfolio minus the rate of return on Treasury bills.
D)   Treasury bonds plus a maturity premium.

Question 9

When viewing the long-term trend of the price volatility of U.S.stocks,it is readily apparent that volatility has:

Accepted Answer

A)   continually increased.
B)   continually decreased.
C)   increased and decreased but has no specific pattern.
D)   remained constant for years.

Question 10

Which one of the following risks is most important to a well-diversified investor in common stocks?

Accepted Answer

A)   Market risk
B)   Specific risk
C)   Unsystematic risk
D)   Diversifiable risk

Question 11

Which one of the following companies is most likely to be exposed to the least amount of macro risk?

Accepted Answer

A)   A producer of dog biscuits
B)   A regional airline
C)   A major commercial bank
D)   A machine tool manufacturer

Question 12

Which statement is correct concerning macro risk exposure?

Accepted Answer

A)   All firms face equal macro risk exposure.
B)   Only portfolios of stocks face macro risk exposure.
C)   Macro risk exposure affects the cost of capital.
D)   Macro risk exposure is less important to diversified investors than micro risk exposure.

Question 13

The major benefit of diversification is the:

Accepted Answer

A)   increased expected return.
B)   removal of all negative risk assets from the portfolio.
C)   reduction in the portfolio's market risk.
D)   reduction in the portfolio's total risk.

Question 14

The wider the dispersion of returns on a stock,the:

Accepted Answer

A)   lower the expected rate of return.
B)   higher the standard deviation.
C)   lower the real rate of return.
D)   lower the variance.

Question 15

Over the past 3 years an investment returned 18%,−12%,and 15%.What is the variance of returns?

Accepted Answer

A)   231
B)   182
C)   546
D)   961

Question 16

What was the percentage return on a non-dividend-paying stock that was purchased for $40.00 and then sold after one year for $39.00?

Accepted Answer

A)   −2.50%
B)   −0.39%
C)   −0.04%
D)   −2.56%

Question 17

The S&P 500 accounts for most of the total market value of stocks traded in the United States.

Accepted Answer

A) True 
 B)False

Question 18

If a stock's returns are volatile,then the stock:

Accepted Answer

A)   cannot be considered a negative risk asset.
B)   can still be considered a negative risk asset.
C)   has macro risk, but no specific risk.
D)   does not offer diversification potential.

Question 19

Which one of these is the safest investment?

Accepted Answer

A)   Corporate bonds
B)   Common stock
C)   U.S. Treasury bills
D)   Preferred stock

Question 20

If the standard deviation of a portfolio's returns is known to be 30%,then its variance is:

Accepted Answer

A)   5.48.
B)   5.48 squared.
C)   900.00 squared.
D)   900.00

Exam 11: Introduction to Risk, Return, and the Opportunity Cost of Capital

An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the expected rate of return on:

Correct AnswerverifiedShow Answer

Which one of the following security classes has the highest standard deviation of returns?

Correct AnswerverifiedShow Answer

The wider the dispersion of returns on a stock,the:

Correct AnswerverifiedShow Answer

Which statement is correct concerning macro risk exposure?

Correct AnswerverifiedShow Answer

As you add more stocks to a portfolio:

Correct AnswerverifiedShow Answer

If a stock's returns are volatile,then the stock:

Correct AnswerverifiedShow Answer

Which one of these is the safest investment?

Correct AnswerverifiedShow Answer

The major benefit of diversification is the:

Correct AnswerverifiedShow Answer

Over the past 3 years an investment returned 18%,−12%,and 15%.What is the variance of returns?

Correct AnswerverifiedShow Answer

When viewing the long-term trend of the price volatility of U.S.stocks,it is readily apparent that volatility has:

Correct AnswerverifiedShow Answer

Which one of the following risks is most important to a well-diversified investor in common stocks?

Correct AnswerverifiedShow Answer

One common reason for reporting standard deviations of percentage returns rather than variances is that standard deviations:

Correct AnswerverifiedShow Answer

Real rates of return are typically less than nominal rates of return due to:

Correct AnswerverifiedShow Answer

Which one of the following companies is most likely to be exposed to the least amount of macro risk?

Correct AnswerverifiedShow Answer

The S&P 500 accounts for most of the total market value of stocks traded in the United States.

Correct AnswerverifiedShow Answer

Stock market indexes are found in many countries outside the United States.

Correct AnswerverifiedShow Answer

What was the percentage return on a non-dividend-paying stock that was purchased for $40.00 and then sold after one year for $39.00?

Correct AnswerverifiedShow Answer

The benefits of portfolio diversification are highest when the individual securities within the portfolio have returns that:

Correct AnswerverifiedShow Answer

If the standard deviation of a portfolio's returns is known to be 30%,then its variance is:

Correct AnswerverifiedShow Answer

A firm is said to be countercyclical if its returns:

Correct AnswerverifiedShow Answer

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