Multiple choice questions:
Question 1.1. Over the period of 1955-2006:
long-term government bonds underperformed large corporate stocks.
small-company stocks underperformed large-company stocks.
inflation exceeded the rate of return on U.S. Treasury bills.
U.S. Treasury bills outperformed long-term government bonds.
Question 2.2. If the financial markets are efficient, then:
stock prices should never change.
stock prices should only respond to unexpected news and events.
stock prices should increase or decrease slowly as new events are analyzed and the
information is absorbed by the markets.
stock prices will only change when an event actually occurs, not at the time the event is
anticipated.
Question 3.3. Which of the following statements is false regarding systematic risk? Select
all that apply:
is always diversifiable
is the total risk associated with surprise events
affects only a specific project or firm
is measured by standard deviation
Question 4.4. Assume a project that has the following returns for years 1 to 5: 15%, 4%,
13%, 34%, and 17%. What is the approximate expected return of this investment?
11%
17%
16.60%
10%
Question 5.5. Assume you are considering investing in two stocks, A & B. Stock A has an
expected return of 16% and Stock B has an expected return of 9.5%. Your goal is to create a
two¬security portfolio that will have an expected return of 12%. If you have $250,000 to invest
today, approximately how much would you invest in Stock B?
$96,000
$150,000
$175,000
More than $200,000
Question 6.6. For this exercise, use the information provided for Problem 30 of Chapter
11 Assume that the probability of the state of the economy has
changed as follows:
The probability of a recession has increased to 30% and the probability for a normal state of
economy is now 40%. The market risk premium has increased by 1% as well. What is the
standard deviation of Stock I and II respectively?
12 and 20%
12.5 and 23%
1.25 and 2.326%
Cannot be determined with the information given
Question 7.7. For this exercise, use the information provided for Problem 30 of Chapter
11 (page 375 of your textbook). Assume that the probability of the state of the economy has
changed as follows:
The probability of a recession has increased to 30% and the probability for a normal state of
economy is now 40%. The market risk premium has increased by 1% as well. Which statement
is true? Select all that apply:
Stock II has more risk than Stock I
Stock II has less systematic risk than Stock I
Stock I has a higher risk premium than Stock II
Stock I has a greater expected return than Stock II
Question 8.8. Which statements are true regarding risk? Select all that apply:
The expected return is usually not the same as the actual return
A key to assessing risk is determining how much risk an investment adds to a portfolio
Some risks cannot be decreased or mitigated by the financial manager.
The higher the risk, the higher the return investors require for the investment
Question 9.9. What is systematic risk? Provide two or three examples. How can you
diversify it?