Finance Questions

5. The Security Market Line (SML) relates risk to return, for a given set of financial market conditions. If investors conclude that the inflation rate is going to increase, which of the following changes would be most likely to occur?a. The market risk premium would increase.b. Beta would increase.c. The slope of the SML would increase.d. The required return on an average stock, rA = rM, would increase.e. None of the indicated changes would be likely to occur.

15. The ____ the probability distribution, the ____ variability there is and the ____ likely it is that the actual outcome will approach the expected value.a. looser; less; moreb. tighter; more; lessc. tighter; less; mored. looser; more; lesse. both c and d are correct.

1. Which of the following statements about risk is false?a. Risk requires the possibility of at least one outcome less favorable than the expected value.b. Risk requires the possibility of more than one outcome.c. Risk is one of the determinants of the required return.d. Risk aversion generally is assumed in finance to be a characteristic of the "marginal investor."e. All of the above statements are true.

16. Risk averse investors require ____ rates of return for investments with ____ risk.a. higher; lowerb. lower; higherc. lower; lowerd. higher; highere. both c and d are correct

6. You have developed the following data on three stocks:Stock/Standard Deviation/BetaA/0.15/0.79B/0.25/0.61C/0.20/1.29If you are a risk minimizer, you should choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.a. A; Ab. A; Bc. B; Ad. C; Ae. C; B

9. Other things held constant, (1) if the expected inflation rate decreases, and (2) investors become more risk averse, the Security Market Line would shifta. Down and have steeper slope.b. Up and have less steep slope.c. Up and keep same slope.d.Down and keep same slope.e.Down and have less steep slope.

4. The systematic (market) risk associated with an individual stock is most closely identified with thea. Standard deviation of the returns on the stock.b. Standard deviation of the returns on the market.c. Beta of the stock.d. Coefficient of variation of returns on the stock.e. Coefficient of variation of returns on the market.

17. The beta of any portfolio can be computed as thea. slope of the security market lineb. sum of the betas for each asset held in the portfolio divided by the number of assets in the portfolio.c. the standard deviation of the expected returns of the portfolio minus the risk-free rate.d. weighted average of the betas for each asset held in the portfolio.

8. You have developed data which give (1) the average annual returns on the market for the past five years, and (2) similar information on Stocks A and B. If these data are as follows, which of the possible answers best describes the historical betas for A and B?Years/Market/Stock A/Stock B1/0.03/0.16/0.052/−0.05/0.20/0.053/0.01/0.18/0.054/−0.10/0.25/0.055/0.06/0.14/0.05a.βA > 0; βB = 1b.βA > +1; βB = 0c.βA = 0; βB = −1d.βA < 0; βB = 0e.βA < −1; βB = 1

2. Choose the correct answer for the following: (1) Which is the best measure of risk for choosing an asset which is to be held in isolation? (2) Which is the best measure for choosing an asset to be held as part of a diversified portfolio?a. Variance; correlation coefficient.b. Standard deviation; correlation coefficient.c. Beta; variance.d. Coefficient of variation; beta.e. Beta; beta.

16. The total expected future yield on a bond consists of a(n) ____ yield which is usually positive and a(n) ____ yield which can be positive or negative.a. current; interestb. capital gain; currentc. interest; currentd. interest; capital gain

3. If the expected rate of return on a stock exceeds the required rate,a. The stock is experiencing supernormal growth.b. The stock should be sold.c. The company is probably not trying to maximize price per share.d. The stock is a good buy.e. Dividends are not being declared.

15. The ____ yield is the percentage change in the value of an investment.a. interestb. totalc. currentd. capital gains

4. One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the ____ the time to maturity, the ____ the change in price.a. longer; smallerb. shorter; largerc. longer; greaterd. shorter; smallere. Answers c and d are both correct.

2. An increase in a firm's expected growth rate would normally cause the firm's required rate of return toa. Increase.b. Decrease.c. Fluctuate.d. Remain constant.e. Possibly increase, possibly decrease, or possibly remain unchanged.

14. Which of the following will generally result in a higher price for a bond?a. Higher coupon rate.b. Longer maturity.c. Shorter maturity.d. Higher required rate of return.

1. Assuming g will remain constant, the dividend yield is a good measure of the required return on a common stock under which of the following circumstances?a. g = 0.b. g > 0.c. g < 0.d. Under no circumstances.e. Answers a and b are both correct.

5. If the model below is to give a "reasonable" valuation of a stock, which of the following is not a valid assumption for the model?a. Growth, g, is negative.b. There will be no growth, i.e., g is zero.c. The growth rate exceeds the required rate of return.d. The required return is exceptionally high (rs > 30%).e. All of the above are workable assumptions and are valid in the sense that the model can be used even if they hold true.

A contract can only have one performance obligation

Deferred revenues, also called unearned revenues, arise when a business collects cash before earning the revenue