quiz 3 Flashcards
1
Q
1. Risk is usually measured as the A. potential loss. B. variability of outcomes around some expected value. C. probability of expected values. D. potential expected loss.
A
B. variability of outcomes around some expected value.
2
Q
- In order to reduce risk in a firm, the firm would seek to enter a business that
A. has high positive correlation with its present business.
B. has zero correlation with its present business.
C. has high negative correlation with its present business.
D. has high negative variation with its present business
A
C. has high negative correlation with its present business.
3
Q
- Risk may be integrated into capital budgeting decisions by
A. adjusting the standard deviation of possible outcomes.
B. determining the expected value.
C. adjusting the discount rate.
D. adjusting the time horizon.
A
C. adjusting the discount rate.
4
Q
- Which of the following is a characteristic of beta?
A. Beta measures only the volatility of returns on an individual bond relative to a bond
market index.
B. A beta of 1.0 is of equal risk with the market.
C. A beta of greater than 1.0 has less risk than the market.
D. two of the above are true
A
B. A beta of 1.0 is of equal risk with the market.
5
Q
- The concept of being risk averse means
A. for a given situation investors would prefer relative certainty to uncertainty.
B. investors would prefer investments with low standard deviations and greater
opportunity for gain.
C. that the lower the risk the lower the expected return must be.
D. all of the other answers are correct
A
D. all of the other answers are correct
6
Q
- Which of the following statements is not true with respect to organized securities
exchanges?
A. organized exchanges have a physical location
B. exchanges operate as “auction” markets
C. stocks traded on exchanges are referred to as unlisted securities
D. securities exchanges provide corporations and shareholders increased liquidity for
their securities
A
C. stocks traded on exchanges are referred to as unlisted securities
7
Q
- The purpose of secondary trading is to
A. provide liquidity and competition between investments.
B. provide a market for securities not handled in primary trading.
C. provide jobs for brokers and dealers.
D. provide lower commissions than on the organized exchanges.
A
A. provide liquidity and competition between investments.
8
Q
- The efficient market hypothesis deals primarily with
A. random speculation in securities.
B. the degree to which prices adjust to new information.
C. degrees to which price movements are the result of past trends.
D. how an investor can significantly outperform the market in general.
A
B. the degree to which prices adjust to new information
9
Q
- Which of the following statements about the “payback period” is true?
A. The payback period considers cash flows after the payback has been reached.
B. The payback period does not consider the time value of money.
C. The payback period uses discounted cash-flow techniques.
D. The payback period generally leads to the same decision as other investment
selection methods.
A
B. The payback period does not consider the time value of money.
10
Q
- Assuming that a firm has no capital rationing constraint and that a firm’s investment
alternatives are not mutually exclusive, the firm should accept all investment
proposals:
A. for which it can obtain financing.
B. that have a positive net present value.
C. that have positive cash flows.
D. that provide returns greater than the after tax cost of debt.
A
B. that have a positive net present value.
11
Q
11. Capital budgeting is primarily concerned with: A. capital formation in the economy. B. planning future financing needs. C. evaluating investment alternatives. D. minimizing the cost of capital.
A
C. evaluating investment alternatives.
