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| 1 | |
While researching a stock for your school's investment club, you discover that it carries 1.5 times the non-diversifiable risk of the overall market. Accordingly, you report to the club that the stock: |
| | A) | should earn a risk premium of 1.5 percentage points |
| | B) | has a beta of 1.5 |
| | C) | is preferable to an alternative stock with the same risk but the same expected return |
| | D) | is never preferable to alternative stocks with lower risks, regardless of their returns |
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| 2 | |
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The risk-free interest rate is given by: |
| | A) | x% |
| | B) | y% |
| | C) | z% |
| | D) | (y - x)% |
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| 3 | |
Refer to the following diagram:
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A stock with a beta of 1.5 will pay a risk premium of: |
| | A) | z% |
| | B) | (z - x)% |
| | C) | (z - y)% |
| | D) | 0.5% |
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| 4 | |
Gary is considering investing in a financial asset that represents a debt contract by a large corporation. For a price of $1000, the firm promises to pay Gary a $50 every six months for ten years and return the $1000 at the end of the ten years. This type of investment is known as a: |
| | A) | stock |
| | B) | bond |
| | C) | mutual fund |
| | D) | portfolio |
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| 5 | |
Consider a financial investment priced at $100. At the end of one year, it is equally likely that the asset will be worth $90, $109, or $122. The expected rate of return on this asset is: |
| | A) | $21 |
| | B) | $321 |
| | C) | 4% |
| | D) | 7% |
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| 6 | |
Which of the following purchases best illustrates the concept of diversification? |
| | A) | Jonah invests $500 in each of two companies: one makes umbrellas and the other makes sunscreen lotion |
| | B) | Sarah invests $500 in each of two companies: one whose share price is $10 and one whose share price is $100 |
| | C) | Sharifa invests in a mutual fund consisting of shares of over 100 firms in the housing industry |
| | D) | Jose invests in both Coca Cola and Pepsico |
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| 7 | |
Because bonds represent a promise to pay, they carry no risk. |
| | A) | True |
| | B) | False |
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| 8 | |
You notice that of two stocks have recently been selling for the same price. Stock A has a beta of 1.3 and stock B has a beta of 1.7. From this information, you can infer that: |
| | A) | Stock A will have a higher expected rate of return than stock B |
| | B) | Stock B will have a higher expected rate of return than stock A |
| | C) | investing in both A and B will raise your risk relative to either one alone |
| | D) | arbitrage will force the price of A down and the price of B up. |
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| 9 | |
Which of the following illustrates a financial investment? |
| | A) | The city of Tacoma authorizes the sale of $500 million in bonds to fund the construction of a new bridge |
| | B) | The South Tacoma Women's Investment Club purchases $5000 of the city's bonds to add to its portfolio |
| | C) | The Tacoma city council releases a portion of the bond proceeds to pay the stadium's general contractor for completion of the first stage of bridge construction |
| | D) | The city of Tacoma pays its first interest obligations to holders of the bonds |
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| 10 | |
If the risk-free interest rate is 4%, what is the present value of a financial asset that will pay $2000 two years from now? |
| | A) | $160 |
| | B) | $1840 |
| | C) | $1849 |
| | D) | $2163 |
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