Quiz 2 Chapters 5 and 6
20 Fin Questions
Chapter 5
1) Suppose a corporation
can change its depreciation method so that its tax payments will decrease by
$5,000 this year but increase by $5,000 next year.
A) The change will
have no impact on the value of the company because its cash flow over time will
be the same.
B) The change will
decrease the value of the company because investors don't like changes in
accounting methods.
C) The change will
decrease the value of the company because lower tax payments this year result
from lower reported income.
D) The change will
increase the value of the company because the value of the cash savings this
year exceeds the cost of the cash payments next year.
2) Assuming two investments have equal lives, a high discount rate
tends to favor
A) the investment
with even cash flow.
B) the investment
with large cash flow late.
C) the investment
with large cash flow early.
D) neither investment
since they have equal lives.
3) Biff deposited $9,000 in a bank account, and 10 years later he
closes out the account, which is worth $18,000. What annual rate of interest
has he earned over the 10 years?
A) 6.45%
B) 8.00%
C) 10.00%
D) 7.180%
4) How much money do I need to place into a bank account that pays a
1.08% rate in order to have $500 at the end of 7 years?
A) $332.54
B) $751.81
C) $463.78
D) $629.51
5) Auto Loans R Them loans you $24,000 for four years to buy a car.
The loan must be repaid in 48 equal monthly payments. The annual interest rate
on the loan is 9 percent. What is the monthly payment?
A) $597.24
B) $543.79
C) $563.82
D) $500.55
6) You have contracted to buy a house for
$250,000, paying $30,000 down and taking out a fully amortizing loan for the
balance, at a 5.7% annual rate for 30 years. What will your monthly payment be
if they make equal monthly installments over the next 30 years (to the
nearest dollar)?
A) $1,035
B) $1,277
C) $1,189
D) $1,123
7) If Cindy deposits $12,000 into a bank account that pays 6%
interest compounded semiannually, what will the account balance be in seven
years?
A) 18,151
B) 14,356
C) 16,987
D) 15,555
Chapter 6
8) Stock A has the following returns for various states of the
economy:
State of
the Economy Probability Stock A's Return
Recession 10% -30%
Below Average 20% -2%
Average 40% 10%
Above Average 20% 18%
Boom 10% 40%
Stock A's expected
return is
A) 5.4%.
B) 7.2%.
C) 8.2%.
D) 9.6%
9) You are considering a sales job that pays you on a commission
basis or a salaried position that pays you $50,000 per year. Historical data
suggests the following probability distribution for your commission income.
Which job has the higher expected income?
Probability
of
Commission Occurrence
$15,000 .15
$35,000 .20
$48,000 .35
$67,000 .22
$80,000 .18
A) The salary of
$50,000 is greater than the expected commission of $49,630.
B) The salary of
$50,000 is greater than the expected commission of $48,400.
C) The salary of
$50,000 is less than the expected commission of $50,050.
D) The salary of
$50,000 is less than the expected commission of $52,720.
10) Stock W has an expected return of 12% with a standard deviation
of 8%. If returns are normally distributed, then approximately two-thirds of
the time the return on stock W will be
A) between 12% and
20%.
B) between 8% and
12%.
C) between -4% and
28%.
D) between 4% and
20%.
11) Which of the following investments is clearly preferred to the
others for an investor who is not holding a well-diversified portfolio?
Investment
A 18% 20%
B 20% 20%
C 20% 22%
A) Investment A
B) Investment B
C) Investment C
D) Cannot be
determined without information regarding the risk-free rate of return.
12) Assume that you have $330,000 invested in a stock that is
returning 11.50%, $170,000 invested in a stock that is returning 22.75%, and
$470,000 invested in a stock that is returning 10.25%. What is the expected
return of your portfolio?
A) 15.6%
B) 14.9%
C) 18.3%
D) 12.9%
13) Assume that you have $100,000 invested in a stock that is
returning 14%, $150,000 invested in a stock that is returning 18%, and $200,000
invested in a stock that is returning 15%. What is the expected return of your
portfolio?
A) 15.78%
B) 14.97%
C) 15.67%
D) 12.24%
14) Investment A has an expected return of 15% per year, while
investment B has an expected return of 12% per year. A rational investor will
choose
A) investment A
because of the higher expected return.
B) investment B
because a lower return means lower risk.
C) investment A if A
and B are of equal risk.
D) investment A only
if the standard deviation of returns for A is higher than the standard
deviation of returns for B.
15) Investment A has an expected return of 14% with a standard
deviation of 4%, while investment B has an expected return of 20% with a
standard deviation of 9%. Therefore
A) a risk averse
investor will definitely select investment A because the standard deviation is
lower.
B) a rational
investor will pick investment B because the return adjusted for risk (20% - 9%)
is higher than the return adjusted for risk for investment A ($14% - 4%).
C) it is irrational
for a risk-averse investor to select investment B because its standard
deviation is more than twice as big as investment A's, but the return is not
twice as big.
D) rational investors
could pick either A or B, depending on their level of risk aversion.
16) The minimum rate of return necessary to attract an investor to
purchase or hold a security is referred to as the
A) stock's beta.
B) investor's risk
premium.
C) risk-free rate.
D) investor's
required rate of return.
17) Which of the following statements is MOST correct concerning
diversification and risk?
A) Risk-averse
investors often choose companies from different industries for their portfolios
because the correlation of returns is less than if all the companies came from
the same industry.
B) Risk-averse
investors often select portfolios that include only companies from the same
industry group because the familiarity reduces the risk.
C) Only wealthy
investors can diversify their portfolios because a portfolio must contain at
least 50 stocks to gain the benefits of diversification.
D) Proper
diversification generally results in the elimination of risk.
18) Most stocks have betas between
A) -1.00 and 1.00.
B) 0.00 and 1.00.
C) 0.60 and 1.60.
D) 1.00 and 2.00.
19) Which of the following measures the average relationship between
a stock's returns and the market's returns?
A) beta coefficient
B) standard deviation
C) geometric
regression
20) An investor currently holds the following portfolio:
Amount
Invested
4,000 shares of Stock
H $8,000 Beta = 1.3
7,500 shares of Stock
I $24,000 Beta = 1.8
12,500 shares of
Stock J $48,000 Beta = 2.2
The beta for the
portfolio is
A) 1.77.
B) 1.99.
C) 1.88.
D) 1.45.
TUTORIAL PREVIEW
Amount Invested
|
Beta
|
Weights (Amount / total invt.)
|
Weighted beta
|
$8,000
|
1.3
|
0.1
|
0.13
|
$24,000
|
1.8
|
0.3
|
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