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1. Investors require a 4 percent return on risk-free investments. 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?
A. Inflation premium
B. Required return
C. Real return
D. Average return
E. Risk premium
2. The variance is the average squared difference between which of the following?
A. Actual return and average return
B. Actual return and (average return/N – 1)
C. Actual return and the real return
D. Average return and the standard deviation
3. Which one of the following is the positive square root of the variance?
A. Standard deviation
C. Risk-free rate
D. Average return
4. Which one of the following is defined as a bell-shaped frequency distribution that is defined by its average and its
A. Arithmetic average return
C. Standard deviation
D. Probability curve
E. Normal distribution
5. Which one of the following is defined as the average compound return earned per year over a multiyear period?
A. Geometric average return
B. Variance of returns
C. Standard deviation of returns
D. Arithmetic average return
6. The standard deviation measures the _____ of a security’s returns over time.
A. average value
7. One year ago, you purchased 400 shares of stock for $12 a share. The stock pays $0.22 a share in dividends each
year. Today, you sold your shares for $28.30 a share. What is your total dollar return on this investment?
8. One year ago, you bought a stock for $36.48 a share. You received a dividend of $1.62 per share last month and
sold the stock today for $40.18 a share. What is the capital gains yield on this investment?
A. 2.86 percent
B. 3.70 percent
C. 10.14 percent
D. 12.29 percent
9. Over the past five years, a stock returned 8.3 percent, -32.5 percent, -2.2 percent, 46.9 percent and 11.8 percent.
What is the variance of these returns?
10. Over the past six years, a stock had annual returns of 14 percent, -3 percent, 8 percent, 21 percent, -16 percent,
and 4 percent, respectively. What is the standard deviation of these returns?
A. 11.27 percent
B. 13.05 percent
C. 13.59 percent
D. 15.08 percent
11. 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?
A. Expected return
B. Real return
C. Market rate
D. Systematic return
12. Which one of the following best describes a portfolio?
A. Risky security
B. Security equally as risky as the overall market
C. New issue of stock
D. Group of assets held by an investor
13. Stock A comprises 28 percent of Susan’s portfolio. Which one of the following terms applies to the 28 percent?
A. Portfolio variance
B. Portfolio standard deviation
C. Portfolio weight
D. Portfolio expected return
14. Which one of the following describes systemic risk?
A. Risk that affects a large number of assets
B. An individual security’s total risk
C. Diversifiable risk
D. Asset specific risk
15. Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means
of reducing risk?
D. Security market line
16. The systematic risk principle states that the expected return on a risky asset depends only on which one of the
A. Unique risk
B. Diversifiable risk
C. Asset-specific risk
D. Market risk
17.. Which one of the following measures the amount of systematic risk present in a particular risky asset relative to
that in an average risky asset?
A. Squared deviation
B. Beta coefficient
C. Standard deviation
You own a portfolio that is invested as follows: $11,600 of stock A, $7,800 of stock B, $14,900 of stock C, and
$3,200 of stock D. What is the portfolio weight of stock C?
A. 38.47 percent
B. 39.73 percent
C. 41.26 percent
D. 41.94 percent
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?
A. Weighted average cost of capital
B. Pure play cost
C. Cost of equity
D. Subjective cost
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:
A. pure play cost.
B. cost of debt.
C. weighted average cost of capital.
D. subjective cost.
The weighted average cost of capital is defined as the weighted average of a firm’s:
A. return on its investments.
B. cost of equity and its aftertax cost of debt.
C. pretax cost of debt and equity securities.
D. bond coupon rates.
Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his
primary consideration in this decision?
A. Amount of debt used to finance the project
B. Use, or lack thereof, of preferred stock to finance the project
C. Mix of funds used to finance the project
D. Risk level of the project
Black Stone Furnaces wants to build a new facility. The cost of capital for this investment is primarily dependent
upon which one of the following?
A. Firm’s overall source of funds
B. Source of the funds used to build the facility
C. Current tax rate
D. The nature of the investment
Which one of the following statements is correct related to the dividend growth model approach to computing the
cost of equity?
A. The rate of growth must exceed the required rate of return.
B. The rate of return must be adjusted for taxes.
C. The annual dividend used in the computation must be for year one if you are using today’s stock price to
compute the return.
D. The cost of equity is equal to the return on the stock plus the risk-free rate.
The 7.5 percent preferred stock of Tanners Floors is selling for $57 a share. What is the firm’s cost of preferred
stock if the tax rate is 35 percent and the par value per share is $100?
A. 11.69 percent
B. 12.81 percent
C. 13.16 percent
D. 13.79 percent
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