Multiple choice business questions
. You have the following data on three stocks:
Stock Standard Deviation Beta
A 0.15 0.79
B 0.25 0.61
C 0.20 1.29
As a risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.
a. A; A.
b. A; B.
c. B; C.
d. C; A.
e. C; B.
5 points
Question 2
. Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?
a. Variance; correlation coefficient.
b. Standard deviation; correlation coefficient.
c. Beta; variance.
d. Coefficient of variation; beta.
e. Beta; beta.
5 points
Question 3
. For markets to be in equilibrium (that is, for there to be no strong pressure for prices to depart from their current levels),
a. The expected rate of return must be equal to the required rate of return; that is, .
b. The past realized rate of return must be equal to the expected rate of return; that is, .
c. The required rate of return must equal the realized rate of return; that is,.
d. All three of the above statements must hold for equilibrium to exist; that is, .
e. None of the above statements is correct.
5 points
Question 4
. Which of the following statements is CORRECT?
a. The Capital Market Line (CML) is a curved line that connects the risk-free rate and the market portfolio.c. All portfolios that lie on the CML to the right of sM are inefficient.
b. The slope of the CML is ( M – rRF)/bM.
c. All portfolios that lie on the CML to the right of sM are inefficient.
d. All portfolios that lie on the CML to the left of sM are inefficient.
e. None of the above statements is correct.
5 points
Question 5
. Calculate the required rate of return for Mercury, Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Mercury has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.
. a. 10.29%
. b. 10.83%
. c. 11.40%
. d. 12.00%
. e. 12.60%
.
5 points
Question 6
. You are holding a stock with a beta of 2.0 that is currently in equilibrium. The required rate of return on the stock is 15% versus a required return on an average stock of 10%. Now the required return on an average stock increases by 30.0% (not percentage points). The risk-free rate is unchanged. By what percentage (not percentage points) would the required return on your stock increase as a result of this event?
a. 36.10%
b. 38.00%
c. 40.00%
d. 42.00%
e. 44.10%
5 points
Question 7
. Consider the following information and then calculate the required rate of return for the Scientific Investment Fund, which holds 4 stocks. The market’s required rate of return is 15.0%, the risk-free rate is 7.0%, and the Fund’s assets are as follows:
Stock Investment Beta
A $ 200,000 1.50
B 300,000 -0.50
C 500,000 1.25
D 1,000,000 0.75
a. 10.67%
b. 11.23%
c. 11.82%
d. 12.45%
e. 13.10%
5 points
Question 8
. Data for Oakdale Furniture, Inc. is shown below. Now the expected inflation rate and thus the inflation premium increase by 2.0 percentage points, and Oakdale acquires risky assets that increase its beta by the indicated percentage. What is the firm’s new required rate of return?
Beta: 1.50Required return (rs) 10.20% RPM:6.00%Percentage increase in beta: 20%
a. 14.00%
b. 14.70%
c. 15.44%
d. 16.21%
e. 17.02%
5 points
Question 9
. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
a. A reduction in market interest rates.
b. The company’s bonds are downgraded.
c. An increase in the call premium.
d. Answers a and b are correct.
e. Answers a, b, and c are correct.
5 points
Question 10
. Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be _________________ the YTM with it.
a. higher than
b. lower than
c. the same as
d. either higher or lower, depending on the level of call premium, than
e. unrelated to
5 points
Question 11
. All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issued at par, except a
a. Sinking fund.
b. Restrictive covenant.
c. Call provision.
d. Change in rating from Aa to Aaa.
e. None of the answers above (all may reduce the required coupon rate).
5 points
Question 12
Which of the following statements is most correct?
a. Sinking fund provisions do not require companies to retire their debt; they only establish “targets” for the company to reduce its debt over time.
b. Sinking fund provisions sometimes work to the detriment of bondholders – particularly if interest rates have declined over time.
c. If interest rates have increased since the time a company issues bonds with a sinking fund provision, the company is more likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.
d. Statements a and b are correct.
e. Statements b and c are correct.
5 points
Question 13
Which of the following statements is most correct?
a. All else equal, if a bond’s yield to maturity increases, its price will fall..
b. All else equal, if a bond’s yield to maturity increases, its current yield will fall.
c. If a bond’s yield to maturity exceeds the coupon rate, the bond will sell at a premium over par.
d. All of the answers above are correct.
e. None of the answers above is correct
5 points
Question 14
A bond has an annual 8 percent coupon rate, a maturity of 10 years, a face value of $1,000, and makes semiannual payments. If the price is $934.96, what is the annual nominal yield to maturity on the bond?
a. 8%
b. 9%
c. 10%
d. 11%
e. 12%
.
a. 8%
b. 9%
c
5 points
Question 15
A bond has an annual 11 percent coupon rate, an annual interest payment of $110, a maturity of 20 years, a face value of $1,000, and makes annual payments. It has a yield to maturity of 8.83 percent. If the price is $1,200, what rate of return will an investor expect to receive during the next year?
a. -0.33%
b. 8.83%
c. 9.17%
d. 11.00%
e. None of the above
5 points
Question 16
Consider a $1,000 par value bond with a 7 percent annual coupon. The bond pays interest annually. There are 9 years remaining until maturity. What is the current yield on the bond assuming that the required return on the bond is 10 percent?
.
a. 10.00%
b. 8.46%
c. 7.00%
d. 8.52%
e. 8.37%
5 points
Question 17
Assume that you wish to purchase a bond with a 30-year maturity, an annual coupon rate of 10 percent, a face value of $1,000, and semiannual interest payments. If you require a 9 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
a. $905.35
b. $1,102.74
c. $1,103.19
d. $1,106.76
e. $1,149.63
5 points
Question 18
. A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your nominal annual required rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for this bond?
a. $ 941.36
b. $1,051.25
c. $1,115.57
d. $1,391.00
e. $ 825.49
.
5 points
Question 19
. The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the nominal annual yield is 14 percent. Given these facts, what is the annual coupon rate on this bond?
a. 10%
b. 12%
c. 14%
d. 17%
e. 21%
5 points
Question 20
A 12-year bond pays an annual coupon of 8.5 percent. The bond has a yield to maturity of 9.5 percent and a par value of $1,000. What is the bond’s current yield?
a. 6.36%
b. 2.15%
c. 8.95%
d. 9.14%
e. 10.21%.
Question 1
The primary goal of a publicly-owned firm interested in serving its stockholders should be to
a. Maximize expected total corporate profit.
b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.
5 points
Question 2
Which of the following statements is most correct?
a. Compensating managers with stock can reduce the agency problem between stockholders and managers.
b. Restrictions are included in credit agreements to protect bondholders from the agency problem that exists between bondholders and stockholders
c. The threat of a takeover can reduce the agency problem between bondholders and stockholders.
d. Statements a and b are correct.
e. All of the statements above are correct.
5 points
Question 3
. Which of the following mechanisms is used to motivate managers to act in the interests of shareholders?
a. Bond covenants.
b. The threat of a takeover.
c. Executive stock options.
d. Statements a and b are correct.
e. Statements b and c are correct.
5 points
Question 4
Which of the following statements is CORRECT?
a. If expected inflation increases, interest rates are likely to increase.
b. If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.
c. If companies have fewer good investment opportunities, interest rates are likely to increase.
d. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
e. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.
5 points
Question 5
. Which of the following statements is most correct?
a. Free cash flows are called “free” because the cost of capital for these cash flows is zero.
b. Stock is valuable only because it generates cash flows for the investor.
c. Managers can affect firm value by changing the riskiness of its cash flows.
d. (a) and (b) are correct.
e. (b) and (c) are correct.
5 points
Question 6
. Which of the following statements is most correct?
a. A market is transparent when trading is inexpensive.
b. A market is transparent when accurate information is available to all market participants.
c. A transparent market has few regulations.
d. A transparent market has many opportunities for trading on insider information.
e. A market is transparent when everyone knows who the person is that they are trading with.
5 points
Question 7
. Which of the following statements is most correct?
a. Sarbanes-Oxley requires the Securities Exchange Commission to audit public companies’ financial statements.
b. Sarbanes-Oxley made it illegal for company executives to trade on insider information.
c. Sarbanes-Oxley requires the Chairman of the Board of Directors to sign and certify the company’s financial statements.
d. Sarbanes-Oxley requires the CEO sign and certify the company’s financial statements.
e. Sarbanes-Oxley requires company executives to disclose their fraudulent activities “in a timely and accurate manner.”
5 points
Question 8
Which of the following statements is most correct?
a. Sarbanes-Oxley established a new Federal agency, the Public Company Auditing Board, to audit public companies’ financial statements.
b. Sarbanes-Oxley prohibited investment banks from allowing their analysts to make recommendations on stocks the investment banks do business with.
c. Sarbanes-Oxley requires that either the CEO or CFO hand-deliver the annual and quarterly financial statements to the SEC.
d. Sarbanes-Oxley requires that auditors maintain extensive records to document that their consulting and auditing services for a given company are not conflicting.
e. Sarbanes-Oxley prohibits auditors from providing consulting services to the companies they audit.
5 points
Question 9
Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?
a. Prices and interest rates would both rise.
b. Prices would rise and interest rates would decline.
c. Prices and interest rates would both decline.
d. There would be no changes in either prices or interest rates.
e. Prices would decline and interest rates would rise.
5 points
Question 10
Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?
a. Households start saving a larger percentage of their income.
b. The economy moves from a boom to a recession.
c. The level of inflation begins to decline.
d. Corporations step up their expansion plans and thus increase their demand for capital.
e. The Federal Reserve uses monetary policy in an attempt to stimulate the economy.
5 points
Question 11
Which of the following statements is most correct?
a. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events.
b. Portfolio diversification reduces the variability of returns on an individual stock.
c. When company-specific risk has been diversified, the inherent risk that remains is market risk which is constant for all securities in the market.
d. A stock with a beta of -1.0 has zero market risk.
e. The SML relates required returns to firms’ market risk. The slope and intercept of this line cannot be controlled by the financial manager.
5 points
Question 12
Which of the following statements is incorrect?
a. The slope of the security market line is measured by beta.
b. Two securities with the same stand-alone risk can have different betas.
c. Company-specific risk can be diversified away.
d. The market risk premium is affected by attitudes about risk.
e. Higher beta stocks have a higher required return.
5 points
Question 13
Which of the following statements is most correct?
a. The slope of the security market line is beta..
b. The slope of the security market line is the market risk premium, (rM – rRF).
c. If you double a company’s beta its required return more than doubles.
d. Statements a and c are correct.
e. Statements b and c are correct
5 points
Question 14
. You have developed the following data on three stocks: Stock Standard Deviation Beta
A 0.15 0.79
B 0.25 0.61
C 0.20 1.29
If you are a risk minimizer, you should choose Stock _____ if it is to be held in isolation and Stock _____ if it is to be held as part of a well-diversified portfolio.
a. A; A
b. A; B
c. B; A
5 points
Question 15
Inflation, recession, and high interest rates are economic events which are characterized as
a. Company-specific risk that can be diversified away.
b. Market risk.
c. Systematic risk that can be diversified away.
d. Diversifiable risk.
e. Unsystematic risk that can be diversified away.
5 points
Question 16
. Which of the following statements is most correct?
a. If you add enough randomly selected stocks to a portfolio, you can completely eliminate all the market risk from the portfolio.
. . .
b. If you form a large portfolio of stocks each with a beta greater than 1.0, this portfolio will have more market risk than a single stock with a beta = 0.8..
. . .
c. Company-specific (or unsystematic) risk can be reduced by forming a large portfolio, but normally even highly diversified portfolios are subject to market (or systematic) risk.
. . .
d. Answers a, b, and c are correct.
. . .
e. Answers b and c are correct
5 points
Question 17
.
Which of the following statements is most correct?
a. The beta coefficient of a stock is normally found by running a regression of past returns on the stock against past returns on a stock market index. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta.
. . .
b. It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the riskless (default-free) rate of return, rRF.
c. If you found a stock with a zero beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio. Your 1-stock portfolio would be even less risky if the stock had a negative beta.
d. The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.
e. All of the statements above are true.
5 points
Question 18
Which of the following statements is most correct?
a. An increase in expected inflation could be expected to increase the required return on a riskless asset and on an average stock by the same amount, other things held constant.
b. A graph of the SML would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
c. If two “normal” or “typical” stocks were combined to form a 2-stock portfolio, the portfolio’s expected return would be a weighted average of the stocks’ expected returns, but the portfolio’s standard deviation would probably be greater than the average of the stocks’ standard deviations.
d. If investors became more averse to risk, then (1) the slope of the SML would increase and (2) the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.
e. The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt.
5 points
Question 19
. Calculate the required rate of return for Mars Inc.’s stock. The Mars’s beta is 1.2, the rate on a T-bill is 4 percent,the rate on a long-term T-bond is 6 percent, the expected return on the market is 11.5 percent, the market has averaged a14 percent annual return over the last six years, and Mars has averaged a 14.4 return over the last six years (hint:capital asset pricing model).
a. 12.6%
b. 13.2%
c. 14.0%
d. 15.6%
e. 16.2%
5 points
Question 20
. Calculate the required rate of return for Mercury Inc., assuming that investors expect a 5 percent rate of inflation in the future. The real risk-free rate is equal to 3 percent and the market risk premium is 5 percent. Mercury has a beta of 2.0, and its realized rate of return has averaged 15 percent over the last 5 years.
a. 15%
b. 16%
c. 17%
d. 18%
e. 20%
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