Quiz 1 - Key
Quiz 1 - Key
1. One objective of risk management can be to reduce the volatility of a firm's cash flows.
a. True
b. False
2. Which of the following are NOT ways risk management can be used to increase the value of a firm?
a. Risk management can help a firm maintain its optimal capital budget.
b. Risk management can reduce the expected costs of financial distress.
c. Risk management can help firms minimize taxes.
d. Risk management can allow managers to defer receipt of their bonuses and thus postpone tax
payments.
e. Risk management can increase debt capacity.
4. 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
5. The CAPM is a multi-period model that takes account of differences in securities' maturities, and it
can be used to determine the required rate of return for any given level of systematic risk.
a. True
b. False
6. Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true,
assuming the CAPM is correct.
a. In equilibrium, the expected return on Stock B will be greater than that on Stock
A.
b. When held in isolation, Stock A has more risk than Stock B.
c. Stock B would be a more desirable addition to a portfolio than A.
d. In equilibrium, the expected return on Stock A will be greater than that on B.
e. Stock A would be a more desirable addition to a portfolio then Stock B.
7. Recession, inflation, and high interest rates are economic events that are best characterized as being
a. company-specific risk factors that can be diversified away.
b. among the factors that are responsible for market risk.
c. risks that are beyond the control of investors and thus should not be considered by security
analysts or portfolio managers.
d. irrelevant except to governmental authorities like the Federal Reserve.
e. systematic risk factors that can be diversified away.
8. Bloome Co.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12%
return, and a 25% chance of producing a −18% return. What is the firm's expected rate of return?
a. 7.72%
b. 8.12%
c. 8.55%
d. 9.00%
e. 9.50%
9. Stuart Company's manager believes that economic conditions during the next year will be strong,
normal, or weak, and she thinks that the firm's returns will have the probability distribution shown
below. What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard
deviation of a population, not a sample.)
Economic
Conditions Prob. Return
Strong 30% 32.0%
Normal 40% 10.0%
Weak 30% −16.0%
a. 17.69%
b. 18.62%
c. 19.55%
d. 20.52%
e. 21.55%
ER = 30%X32% + 40%X10% + 30%X-16% = 8.8%
=> variance = 30%x(32%-8.8%)^2 + 40%x(10%-8.8%)^2 +...
=> SD = căn 2 var
10. Which of the following statements is most CORRECT?
a. Futures contracts generally trade on an organized exchange and are marked to market daily.
b. Goods are never delivered under forward contracts, but are almost always delivered under
futures contracts.
c. There are futures contracts for currencies but no forward contracts for currencies.
d. Futures contracts don't have any margin requirements but forward contracts do.
e. One advantage of forward contracts is that they are default free.