Chapter 29: Basic Financial Tools: A review
POINTS:
1
QUESTION TYPE:
True / False
1. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
a.
True
b.
False
ANSWER:
False
1
DIFFICULTY:
Difficulty: Easy
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.01 – LO: 29-1
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Time value of money
United States – OH – Default City – TBA
TOPICS:
Compounding
KEYWORDS:
Bloom’s: Knowledge
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
2. Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven
amounts.
a.
True
b.
False
ANSWER:
True
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.01 – LO: 29-1
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Time value of money
LOCAL STANDARDS:
United States – OH – Default City – TBA
Compounding
KEYWORDS:
Bloom’s: Knowledge
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
3. If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the
future value of the same series.
a.
True
b.
False
ANSWER:
False
1
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.01 – LO: 29-1
STATE STANDARDS:
United States – TN – DISC: Time value of money
TOPICS:
Effective annual rate
4. Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present
value.
a.
True
b.
False
ANSWER:
False
1
DIFFICULTY:
Difficulty: Easy
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.01 – LO: 29-1
United States – TN – DISC: Time value of money
TOPICS:
Bloom’s: Comprehension
DATE CREATED:
10/30/2017 8:22 PM
1/10/2018 11:43 AM
5. If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.
a.
True
b.
False
ANSWER:
True
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.01 – LO: 29-1
STATE STANDARDS:
United States – TN – DISC: Time value of money
United States – OH – Default City – TBA
TOPICS:
Bloom’s: Comprehension
DATE CREATED:
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
6. A “growing annuity” is a cash flow stream that grows at a constant rate for a specified number of periods.
a.
True
b.
False
ANSWER:
True
POINTS:
1
Difficulty: Easy
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.01 – LO: 29-1
STATE STANDARDS:
United States – TN – DISC: Time value of money
United States – OH – Default City – TBA
TOPICS:
Growing annuity
Bloom’s: Knowledge
DATE CREATED:
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
7. A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds
provide compensation to investors in the form of capital appreciation.
a.
True
b.
False
ANSWER:
1
DIFFICULTY:
Difficulty: Easy
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.02 – LO: 29-2
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Stocks and bonds
United States – OH – Default City – TBA
TOPICS:
Zero coupon bond
KEYWORDS:
Bloom’s: Knowledge
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
8. The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a
profit, may be estimated by determining future cash flows and then discounting them back to the present.
a.
True
b.
False
ANSWER:
DATE CREATED:
10/30/2017 8:22 PM
1/10/2018 11:43 AM
1
DIFFICULTY:
Difficulty: Easy
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.02 – LO: 29-2
STATE STANDARDS:
United States – TN – DISC: Stocks and bonds
9. For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.
a.
True
b.
False
ANSWER:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.02 – LO: 29-2
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Stocks and bonds
LOCAL STANDARDS:
United States – OH – Default City – TBA
Bond prices and interest rates
KEYWORDS:
Bloom’s: Comprehension
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
10. A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year
original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates,
and they cannot be called.)
a.
True
b.
False
ANSWER:
POINTS:
1
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
IFMG.DAVE.19.29.02 – LO: 29-2
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
United States – TN – DISC: Stocks and bonds
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Discounted cash flows
Bloom’s: Knowledge
DATE CREATED:
10/30/2017 8:22 PM
1/10/2018 11:43 AM
Copyright Cengage Learning. Powered by Cognero.
Page 5
11. Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally
be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.
a.
True
b.
False
ANSWER:
1
DIFFICULTY:
HAS VARIABLES:
False
LEARNING OBJECTIVES:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
10/30/2017 8:22 PM
DATE MODIFIED:
12. The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as
measured by its standard deviation.
a.
True
b.
False
ANSWER:
1
DIFFICULTY:
QUESTION TYPE:
False
LEARNING OBJECTIVES:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
LOCAL STANDARDS:
Standard deviation
KEYWORDS:
10/30/2017 8:22 PM
DATE MODIFIED:
13. The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is
a standardized measure of the risk per unit of expected return.
a.
True
TOPICS:
Bloom’s: Comprehension
DATE CREATED:
DATE MODIFIED:
Chapter 29: Basic Financial Tools: A review
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
b.
False
ANSWER:
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Coefficient of variation
KEYWORDS:
Bloom’s: Knowledge
DATE CREATED:
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
14. When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of
correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the
portfolio’s risk.
a.
True
b.
False
ANSWER:
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Portfolio risk
KEYWORDS:
Bloom’s: Comprehension
DATE CREATED:
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
15. Diversification will normally reduce the riskiness of a portfolio of stocks.
a.
True
b.
False
ANSWER:
Copyright Cengage Learning. Powered by Cognero.
Page 7
16. An individual stock’s diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the
portfolio in which the stock is held.
a.
True
b.
False
ANSWER:
DIFFICULTY:
QUESTION TYPE:
False
LEARNING OBJECTIVES:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
LOCAL STANDARDS:
Market risk
KEYWORDS:
10/30/2017 8:22 PM
DATE MODIFIED:
17. Managers should under no conditions take actions that increase their firm’s risk relative to the market, regardless of
how much those actions would increase the firm’s expected rate of return.
a.
True
b.
False
ANSWER:
POINTS:
1
Difficulty: Easy
QUESTION TYPE:
False
LEARNING OBJECTIVES:
NATIONAL STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
Risk and expected returns
KEYWORDS:
DATE CREATED:
1/10/2018 11:43 AM
18. One key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering
STATE STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
10/30/2017 8:22 PM
DATE MODIFIED:
Chapter 29: Basic Financial Tools: A review
DIFFICULTY:
Difficulty: Easy
both the risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio. The risk of
the asset held in isolation is not relevant under the CAPM.
a.
True
b.
False
ANSWER:
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
CAPM and risk
KEYWORDS:
Bloom’s: Comprehension
DATE CREATED:
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
19. According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of
individual stocks held in isolation. Thus, the relevant risk of a stock is the stock’s contribution to the riskiness of a well-
diversified portfolio.
a.
True
b.
False
ANSWER:
POINTS:
1
DIFFICULTY:
Difficulty: Easy
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
CAPM and risk
KEYWORDS:
Bloom’s: Knowledge
DATE CREATED:
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
20. According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value
of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash
flows during the subsequent constant growth period.
a.
True
b.
False
ANSWER:
DIFFICULTY:
Difficulty: Moderate
21. The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum
investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
STATE STANDARDS:
United States – TN – DISC: Time value of money
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Compounding
KEYWORDS:
Bloom’s: Knowledge
DATE CREATED:
DATE MODIFIED:
1/10/2018 11:43 AM
22. Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security
B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than
twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)
a.
True
b.
False
ANSWER:
False
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.04 – LO: 29-4
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
KEYWORDS:
Bloom’s: Knowledge
DATE CREATED:
10/30/2017 8:22 PM
DATE MODIFIED:
POINTS:
1
Difficulty: Moderate
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.01 – LO: 29-1
NATIONAL STANDARDS:
United States – BUSPROG: o Reflective Thinking – BUSPROG: Analytic skills: Statistics
23. The present value of a future sum decreases as either the discount rate or the number of periods per year increases,
other things held constant.
a.
True
b.
False
ANSWER:
True
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.01 – LO: 29-1
STATE STANDARDS:
United States – TN – DISC: Time value of money
United States – OH – Default City – TBA
TOPICS:
Bloom’s: Comprehension
DATE CREATED:
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
24. All other things held constant, the present value of a given annual annuity decreases as the number of periods per year
increases.
a.
True
b.
False
ANSWER:
True
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.01 – LO: 29-1
and Management Science
STATE STANDARDS:
United States – TN – DISC: Time value of money
United States – OH – Default City – TBA
TOPICS:
Comparative compounding
KEYWORDS:
Bloom’s: Analysis
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
1
DIFFICULTY:
False
LEARNING OBJECTIVES:
United States – TN – DISC: Time value of money
United States – OH – Default City – TBA
Bloom’s: Comprehension
25. If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the
periodic rate by the number of periods per year.
a.
True
b.
False
ANSWER:
False
1
Difficulty: Moderate
QUESTION TYPE:
False
LEARNING OBJECTIVES:
and Management Science
STATE STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Bloom’s: Knowledge
10/30/2017 8:22 PM
DATE MODIFIED:
26. As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the
nominal rate on the deposit (or loan).
a.
True
b.
False
ANSWER:
False
and Management Science
STATE STANDARDS:
United States – OH – Default City – TBA
KEYWORDS:
10/30/2017 8:22 PM
DATE MODIFIED:
Copyright Cengage Learning. Powered by Cognero.
Page 12
27. When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the
early years, and the principal repayment’s percentage increases in the loan’s later years.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.01 – LO: 29-1
and Management Science
STATE STANDARDS:
United States – TN – DISC: Time value of money
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Amortization
KEYWORDS:
Bloom’s: Knowledge
DATE CREATED:
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
28. The payment made each period on an amortized loan is constant, and it consists of some interest and some principal.
The closer we are to the end of the loan’s life, the greater the percentage of the payment that will be a repayment of
principal.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.01 – LO: 29-1
and Management Science
STATE STANDARDS:
United States – TN – DISC: Time value of money
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Amortization
KEYWORDS:
Bloom’s: Knowledge
DATE CREATED:
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
29. A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and
is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest
rates are greater than 10%.
a.
True
DATE MODIFIED:
1/10/2018 11:43 AM
Chapter 29: Basic Financial Tools: A review
b.
False
ANSWER:
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.02 – LO: 29-2
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Stocks and bonds
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Bond premiums and discounts
KEYWORDS:
Bloom’s: Knowledge
DATE CREATED:
10/30/2017 8:22 PM
DATE MODIFIED:
1/10/2018 11:43 AM
30. You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper
that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10
years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on
bonds with this risk is 12%.
a.
True
b.
False
ANSWER:
True
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.02 – LO: 29-2
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Stocks and bonds
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Bond value–annual payment
KEYWORDS:
Bloom’s: Application
DATE MODIFIED:
1/10/2018 11:43 AM
31. The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds,
other things held constant.
a.
True
b.
False
ANSWER:
True
1
DIFFICULTY:
True / False
False
United States – BUSPROG: Reflective Thinking
32. Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return
from the expected return, it is always larger than its square root, its standard deviation.
a.
True
b.
False
ANSWER:
1
Difficulty: Moderate
QUESTION TYPE:
False
LEARNING OBJECTIVES:
United States – BUSPROG: Reflective Thinking
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
Variance
KEYWORDS:
10/30/2017 8:22 PM
1/10/2018 11:43 AM
33. Because of differences in the expected returns on different investments, the standard deviation is not always an
adequate measure of risk. However, the coefficient of variation adjusts for differences in expected returns and thus allows
investors to make better comparisons of investments’ stand-alone risk.
a.
True
b.
False
ANSWER:
1
DIFFICULTY:
True / False
False
LEARNING OBJECTIVES:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – OH – Default City – TBA
Prices and interest rates
KEYWORDS:
10/30/2017 8:22 PM
DATE MODIFIED:
Copyright Cengage Learning. Powered by Cognero.
Page 15
34. A stock’s beta measures its diversifiable risk relative to the diversifiable risks of other firms.
a.
True
b.
False
ANSWER:
1
DIFFICULTY:
Difficulty: Moderate
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
United States – OH – Default City – TBA
TOPICS:
Beta coefficients
KEYWORDS:
Bloom’s: Knowledge
10/30/2017 8:23 PM
DATE MODIFIED:
1/10/2018 11:43 AM
35. A stock’s beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who
holds a well-diversified portfolio.
a.
True
b.
False
ANSWER:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
Beta coefficients
KEYWORDS:
Bloom’s: Comprehension
10/30/2017 8:23 PM
DATE MODIFIED:
1/10/2018 11:43 AM
36. If the returns of two firms are negatively correlated, then one of them must have a negative beta.
a.
True
b.
False
LOCAL STANDARDS:
United States – OH – Default City – TBA
Coefficient of variation
KEYWORDS:
Bloom’s: Comprehension
DATE CREATED:
10/30/2017 8:22 PM
1/10/2018 11:43 AM
Chapter 29: Basic Financial Tools: A review
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
ANSWER:
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Beta coefficients
KEYWORDS:
Bloom’s: Comprehension
DATE CREATED:
10/30/2017 8:23 PM
DATE MODIFIED:
1/10/2018 11:43 AM
37. It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is
negative.
a.
True
b.
False
ANSWER:
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Beta coefficients
KEYWORDS:
Bloom’s: Comprehension
DATE CREATED:
10/30/2017 8:23 PM
DATE MODIFIED:
1/10/2018 11:43 AM
38. Portfolio A has but one security, while Portfolio B has 100 securities. Because of diversification effects, we would
expect Portfolio B to have the lower risk. However, it is possible for Portfolio A to be less risky.
a.
True
b.
False
ANSWER:
1
Difficulty: Moderate
QUESTION TYPE:
False
LEARNING OBJECTIVES:
United States – BUSPROG: Reflective Thinking
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
Portfolio risk
KEYWORDS:
10/30/2017 8:23 PM
1/10/2018 11:43 AM
39. Portfolio A has but one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion
to its market value. Because of its diversification, Portfolio B will by definition be riskless.
a.
True
b.
False
ANSWER:
1
True / False
False
LEARNING OBJECTIVES:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – OH – Default City – TBA
Portfolio risk
KEYWORDS:
10/30/2017 8:23 PM
DATE MODIFIED:
40. A portfolio’s risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is
this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.
a.
True
b.
False
ANSWER:
United States – OH – Default City – TBA
TOPICS:
Bloom’s: Comprehension
10/30/2017 8:23 PM
DATE MODIFIED:
POINTS:
1
QUESTION TYPE:
True / False
42. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in
owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.
a.
True
b.
False
ANSWER:
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Diversification effects
KEYWORDS:
Bloom’s: Comprehension
DATE CREATED:
10/30/2017 8:23 PM
DATE MODIFIED:
1/10/2018 11:43 AM
43. The CAPM is built on historic conditions, although in most cases we use expected future data in applying it. Because
betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility. This
is one of the strengths of the CAPM.
a.
True
b.
False
ANSWER:
a.
True
b.
False
ANSWER:
False
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
Cor. coefficient and risk
KEYWORDS:
Bloom’s: Knowledge
DATE CREATED:
10/30/2017 8:23 PM
DATE MODIFIED:
1/10/2018 11:43 AM
1
QUESTION TYPE:
True / False
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
KEYWORDS:
Bloom’s: Comprehension
44. Under the CAPM, the required rate of return on a firm’s common stock is determined only by the firm’s market risk. If
its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to
calculate the firm’s required rate of return.
a.
True
b.
False
ANSWER:
1
DIFFICULTY:
Difficulty: Moderate
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
United States – OH – Default City – TBA
TOPICS:
Required return
KEYWORDS:
Bloom’s: Comprehension
10/30/2017 8:23 PM
DATE MODIFIED:
1/10/2018 11:43 AM
45. Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will
likely have an impact on the stock’s price, other things held constant.
a.
True
b.
False
ANSWER:
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
CAPM
KEYWORDS:
Bloom’s: Knowledge
10/30/2017 8:23 PM
DATE MODIFIED:
1/10/2018 11:43 AM
Copyright Cengage Learning. Powered by Cognero.
Page 20
46. The slope of the SML is determined by the value of beta.
a.
True
b.
False
ANSWER:
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
SML
KEYWORDS:
Bloom’s: Knowledge
DATE CREATED:
10/30/2017 8:23 PM
DATE MODIFIED:
1/10/2018 11:43 AM
47. If you plotted the returns of a company against those of the market and found that the slope of your line was negative,
the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-
diversified investor, assuming that the observed relationship is expected to continue in the future.
a.
True
b.
False
ANSWER:
POINTS:
1
DIFFICULTY:
Difficulty: Moderate
QUESTION TYPE:
True / False
HAS VARIABLES:
False
LEARNING OBJECTIVES:
IFMG.DAVE.19.29.03 – LO: 29-3
NATIONAL STANDARDS:
United States – BUSPROG: Reflective Thinking
STATE STANDARDS:
United States – TN – DISC: Risk and return
LOCAL STANDARDS:
United States – OH – Default City – TBA
TOPICS:
SML
KEYWORDS:
Bloom’s: Application
DATE CREATED:
10/30/2017 8:23 PM
DATE MODIFIED:
1/10/2018 11:43 AM
48. If you plotted the returns on a given stock against those of the market, and if you found that the slope of the regression
line was negative, the CAPM would indicate that the required rate of return on the stock should be greater than the risk-
free rate for a well-diversified investor, assuming that the observed relationship is expected to continue into the future.
a.
True
b.
False
ANSWER:
DATE MODIFIED:
1/10/2018 11:43 AM