Exam

Question 1

What questions are addressed by financial managers ?

Answer 1

• How many days customer should be given to pay for their credit card purchases
• Should firm borrow money
• should from acquire new equipment

Question 2

What is a capitol budgeting decision?

Answer 2

Deciding whether or not to purchase a new machine for the production line

Question 3

What does a zero coupon bond have?

Answer 3

More interest rate risk than a comparable coupon bond

Question 4

The average compound return earned per year over a multi-year period is called the __________ average return

Answer 4

Geometric

Question 5

What is special about small-company bonds?

Answer 5

It has had the most volatile returns over the period 1926-2010

Question 6

What is the rank of securities based on their volatility over the period of 1926-2005 from highest till lowest?

Answer 6

1. Small-company stocks
2. Long-term government bonds
3. U.S Treasury Bills

Question 7

Standard deviation is a measure of what?

Answer 7

Volatility

Question 8

Trading on inside information does not offer any advantages if the financial markets are _________

Answer 8

Strong form efficient

Question 9

Which one of the following statements is correct concerning market efficiency?
a. Real asset markets are more efficient than financial markets.
b. If a market is efficient, arbitrage opportunities should be common.
c. In an efficient market, some market participants will have an advantage over others.
D. A firm will generally receive a fair price when it sells shares of stock.
e. New information will gradually be reflected in a stock’s price to avoid any sudden change in the price of the stock.

Answer 9

D. A firm will generally receive a fair price when it sells shares of stock.

Question 10

The capitol asset pricing model equation of the SML which defines the relationship between_________ and _________.

Answer 10

Expected Return, Beta

Question 11

The equation of the SML which defines the relationship between _________ and __________.

Answer 11

Expected Return, beta

Question 12

The _____ tells us that the expected return on a risky asset depends only on that asset’s non-diversifiable risk.

Answer 12

Systematic risk principle

Question 13

The standard deviation of a portfolio can be less than the standard deviation of the _____________________________.

Answer 13

least risky security in the portfolio

Question 14

A stock with an actual return that lies above the security market line has:

Answer 14

yielded a higher return than expected for the level of risk assumed

Question 15

What is the best example of a diversifiable risk?

Answer 15

a firm’s sales decrease

Question 16

Which one of the following indicates a portfolio is being effectively diversified?

A. an increase in the portfolio beta

B. a decrease in the portfolio beta

C. an increase in the portfolio rate of return
D. an increase in the portfolio standard deviation

E. a decrease in the portfolio standard deviation

Answer 16

E. a decrease in the portfolio standard deviation

Question 17

Total risk is measured by _____ and systematic risk is measured by _____.

Answer 17

Standard deviation, beta

Question 18

When does the after cost tax of debt generally increase?

Answer 18

• when the market rate of interest increases
• when tax rates increase