Question

Question 1

The variance of Stock A is .004, the variance of the market is .007 and the covariance between the two is .0026. What is the correlation coefficient?

A. .9285

B. .8542

C. .5010

D. .4913

E. .3510

Standard deviation of A = .06325, Standard deviation of the market = .08366

CORR = COV/(SDa.(SDm) = .0026/(.06325)(.08366) = .4913

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Question 2

Which one of the following is an example of systematic risk?

A. the price of lumber declines sharply

B. airline pilots go on strike

C. the Federal Reserve increases interest rates

D. a hurricane hits a tourist destination

E. people become diet conscious and avoid fast food restaurants

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Question 3

According to the Capital Asset Pricing Model:

A. the expected return on a security is negatively and non-linearly related to the security’s beta.

B. the expected return on a security is negatively and linearly related to the security’s beta.

C. the expected return on a security is positively and linearly related to the security’s variance.

D. the expected return on a security is positively and non-linearly related to the security’s beta.

E. the expected return on a security is positively and linearly related to the security’s beta.

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Question 4

Which one of the following would indicate a portfolio is being effectively diversified?

A. an increase in the portfolio beta

B. a decrease in the portfolio beta

C. an increase in the portfolio rate of return

D. an increase in the portfolio standard deviation

E. a decrease in the portfolio standard deviation

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Question 5

Which one of the following is an example of unsystematic risk?

A. the inflation rate increases unexpectedly

B. the federal government lowers income taxes

C. an oil tanker runs aground and spills its cargo

D. interest rates decline by one-half of one percent

E. the GDP rises by 2% more than anticipated

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Question 6

Diversification can effectively reduce risk. Once a portfolio is diversified, the type of risk remaining is:

A. individual security risk.

B. riskless security risk.

C. risk related to the market portfolio.

D. total standard deviations.

E. None of these.

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Question 7

A portfolio contains two assets. The first asset comprises 40% of the portfolio and has a beta of 1.2. The other asset has a beta of 1.5. The portfolio beta is:

A. 1.35

B. 1.38

C. 1.42

D. 1.50

E. 1.55

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Question 8

Excelsior share are currently selling for $25 each. You bought 200 shares one year ago at $24 and received dividend payments of $1.50 per share. What was your total rate of return?

A. 4.17%

B. 6.25%

C. 10.42%

D. 104.67%

E. 110.42%

Total Return = ($25-$24+$1.50)/$24=0.1041=10.41%

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Question 9

You just sold 200 shares of Langley, Inc. stock at a price of $38.75 a share. Last year you paid $41.50 a share to buy this stock. Over the course of the year, you received dividends totaling $1.64 per share. What is your capital gain on this investment?

A. -$550

B. -$222

C. -$3

D. $550

E. $878

Capital gain = ($38.75 – $41.50)×200 = -$550 (capital loss

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Question 10

Over the past five years, a stock produced returns of 14%, 22%, -16%, 2%, and 10%. What is the probability that an investor in this stock will NOT lose more than 8% nor earn more than 21% in any one given year?

A. 34%

B. 68%

C. 95%

D. 99%

E. 100%

Average Return = (.14+.22-.16+.02+.10) ½5=6.4%; Total squared deviation = (.14-.064)2 +(.22-.064)2 +(.16-.064)2 +(.02-.0.064)2 + (.10-.064)2 =.005776+0.24336+.050176+.001936+.001296=.08352; Standard deviation =.08352½ (5-1) =.02088=14.45%; 68% range = 6.4%±14.45%=-8.05% to 20.85%

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Question 11

Excelsior shares are currently selling for $25 each. You bought 200 shares one year ago at $24 and received dividend payments of $1.50 per share. What was your percentage capital gain this year?

A. 4.17%

B. 6.25%

C. 10.42%

D. 104.17%

E. 110.42%

Total Return = ($25-$24 + $1.50)/$24 = .1041 =10.41%

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Question 12

A symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the _____ distribution.

A. gamma

B. Poisson

C. bi-modal

D. Normal

E. Uniform

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Question 13

What are the arithmetic and geometric average returns for a stock with annual returns of 21%, 8%, -32%, 41%, and 5%?

A. 5.6%; 8.6%

B. 5.6%; 6.3%

C. 8.6%; 5.6%

D. 8.6%; 8.6%

E. 8.6%; 6.3%

ra =

rg = [(1.21)(1.08)(.68)(1.41)(1.05)]1/5 -1=5.6%

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Question 14

The return pattern on your favorite stock has been 5%, 8%, -12%, 15%, 21% over the last five years. What has been your average return and holding period return over the last 5 years?

A. 4.5%; 6.5%

B. 7.4%; 38.9%

C. 7.4%; 7.76%

D. 7.4%; 76.73%

E. None of these

Average return = (5+8-12+15+21)/5 = 37/5 = 7.4%

HPR = [(1.05)(1.08)(.88)(1.15)(1.21)] – 1 = (1.389) – 1 = .3886 = 38.9%

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Question 15

A year ago, you purchased 300 shares of IXC Technologies, Inc. stock at a price of $9.03 per share. The stock pays an annual dividend of $.10 per share. Today, you sold all of your shares for $28.14 per share. What is your total dollar return on this investment?

A. $5,703

B. $5,733

C. $5,753

D. $5,763

E. $5,853

Total dollar return = ($28.14-$9.03+$.10)   300=$5,763

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