Fundamentals of Corporate Finance 3e Test Bank
53.
Niles is making an investment with an expected return of 12 percent. If the standard deviation
of the return is 4.5 percent, and if Niles is investing $100,000, then what dollar amount is Niles
90 percent sure that he will have at the end of the year? (Do not round intermediate
computations).
A)
$100,000.00
B)
$104,597.50
C)
$116,500.00
D)
$119,402.50
Ans:
B
54.
Given the historical information in the chapter, which of the following investment classes had
the greatest average return?
A)
Intermediate-Term Government Bonds
B)
Long-Term Government Bonds
C)
Large U.S. Stocks
D)
Small U.S. Stocks
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
55.
Given the historical information in the chapter, which of the following investment classes had
the greatest variability in returns?
A)
Intermediate-Term Government Bonds
B)
Long-Term Government Bonds
C)
Large U.S. Stocks
D)
Small U.S. Stocks
Ans:
D
56.
The expected return for an asset is 18.75 percent. If the return distribution for the asset is
described as in the following table, what is the variance for the asset’s returns? Round
intermediate computations and final answer to 6 decimal places.
Return
Probability
0.10
0.25
0.20
0.50
0.25
0.25
A)
0.002969
B)
0.000613
C)
0.015195
D)
0.054486
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
57.
The expected return for the asset shown in the following table is 18.75 percent. If the return
distribution for the asset is described as below, what is the standard deviation for the asset’s
returns? Round intermediate computations and final answer to 6 decimal places.
Return
Probability
0.10
0.25
0.20
0.50
0.25
0.25
A)
0.002969
B)
0.000613
C)
0.015195
D)
0.054486
Ans:
D
58.
You have observed that the average size of a particular goldfish is 1.5 inches long. The standard
deviation of the size of the goldfish is 0.25 inches. What is the size of a goldfish such that 90
percent of the goldfish are smaller from such size? Assume a normal distribution for the size of
goldfish. Round your final answer to two decimal places.
A)
1.01 inches
B)
1.09 inches
C)
1.91 inches
D)
1.99 inches
Ans:
C
Number of standard deviations from mean for 90% observations is 1.645
Fundamentals of Corporate Finance 3e Test Bank
59.
You know that the average college student eats 0.75 pounds of food at lunch. If the standard
deviation is 0.2 pounds of food, then what is the total amount of food that a cafeteria should
have on hand to be 90 percent confident that it will not run out of food when feeding 50 college
students?
A)
17.90 pounds
B)
21.05 pounds
C)
53.95 pounds
D)
57.10 pounds
Ans:
C
food required.
60.
If a random variable follows a normal distribution, what is the probability that the random
variable is larger than 1.96 standard deviations larger than the mean?
A)
1.25%
B)
2.50%
C)
3.75%
D)
5.00%
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Measurement
61.
If a random variable follows a normal distribution, what is the probability that the random
variable is larger than 1.96 standard deviations below the mean?
A)
95.00%
B)
96.25%
C)
97.50%
D)
98.75%
Ans:
C
62.
Tommie has made an investment that will generate returns that are subject to the state of the
economy during the year. Use the following information to calculate the standard deviation of
the return distribution for Tommie’s investment. Do not round intermediate computations.
Round your final answer to four decimal places.
State
Probability
Weak
0.30
OK
0.40
Great
0.30
A)
0.0453
B)
0.0467
C)
0.0481
D)
0.0495
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
63.
Elrond has made an investment that will generate returns that are subject to the state of the
economy. Use the following information to calculate the variance of the return distribution for
Elrond’s investment. Do not round intermediate computations. Round your final answer to four
decimal places.
State
Return
Probability
Weak
0.10
0.8
OK
0.17
0.1
Great
0.28
0.1
A)
0.0536
B)
0.0543
C)
0.0550
D)
0.0031
Ans:
D
64.
Stock A has exhibited a standard deviation in stock returns of 0.5, whereas Stock B has
exhibited a standard deviation of 0.6. The correlation coefficient between the stock returns is
0.5. What is the variance of a portfolio composed of 70 percent Stock A and 30 percent Stock
B?
A)
0.1549
B)
0.2179
C)
0.4668
D)
0.5500
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Measurement
65.
Aquaman Stock has exhibited a standard deviation in stock returns of 0.7, whereas Green
Lantern Stock has exhibited a standard deviation of 0.8. The correlation coefficient between the
stock returns is 0.1. What is the standard deviation of a portfolio composed of 70 percent
Aquaman and 30 percent Green Lantern? Round the answer to five decimal points.
A)
0.32122
B)
0.54562
C)
0.56676
D)
0.75000
Ans:
C
AICPA: Measurement
66.
View Point Industries has forecast a rate of return of 20.00% if the economy booms (25.00%
probability); a rate of return of 15.00% if the economy is in a growth phase (45.00%
probability); a rate of return of 2.50% if the economy is in decline (20.00% probability); and a
rate of return of –15.00% if the economy is in a depression (10.00% probability). What is View
Point’s standard deviation of returns? Do not round intermediate computations. Round your
final answer to two decimal points.
A)
17.31%
B)
9.25%
C)
15.00%
D)
10.29%
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Measurement
67.
Braniff Ground Services stock has an expected return of 9 percent and a variance of 0.25
percent. What is the coefficient of variation for Braniff? Round your final answer to four
decimal places.
A)
0.0278
B)
0.5556
C)
1.8001
D)
36.0002
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
68.
Sayers purchased a stock with a coefficient of variation equal to 0.125. The expected return on
the stock is 20 percent. What is the variance of the stock?
A)
0.000625
B)
0.025000
C)
0.625000
D)
0.790500
Ans:
A
69.
You have invested 40 percent of your portfolio in an investment with an expected return of 12
percent and 60 percent of your portfolio in an investment with an expected return of 20 percent.
What is the expected return of your portfolio?
A)
15.2%
B)
16.0%
C)
16.8%
D)
17.6%
Ans:
C
E(R) = 0.4 × 0.12 + 0.60 × 0.20 = 0.168 = 16.8%
Fundamentals of Corporate Finance 3e Test Bank
70.
You have invested 20 percent of your portfolio in Homer, Inc., 40 percent in Marge Co., and 20
percent in Bart Resources. What is the expected return of your portfolio if Homer, Marge, and
Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectively?
A)
7.7%
B)
8.2%
C)
8.7%
D)
9.2%
Ans:
B
E(R) = (0.2 × 0.02) + (0.4 × 0.18) + (0.2 × 0.03) = 0.082 = 8.2%
71.
You invested $3,000 in a portfolio with an expected return of 10 percent and $2,000 in a
portfolio with an expected return of 16 percent. What is the expected return of the combined
portfolio?
A)
6.2%
B)
12.4%
C)
13.0%
D)
13.6%
Ans:
B
= 12.4%
Fundamentals of Corporate Finance 3e Test Bank
72.
Given the returns for two stocks with the following information, calculate the covariance of the
returns for the two stocks. Assume the expected return is 10.8 percent for Stock 1 and 9.7
percent for Stock 2.
Prob
Stock 1
Stock 2
0.4
0.09
0.11
0.5
0.11
0.08
0.1
0.17
0.13
A)
0.000094
B)
0.000516
C)
0.000321
D)
0.717507
Ans:
A