Question 1

The expected return on an investment is:
A) equivalent to the actual return.
B) the mean of the distribution of possible returns.
C) equal to the required return.
D) less than the required return.

Accepted Answer

The expected return on an investment is the mean (or average) of the distribution of possible returns, reflecting the central tendency of this distribution. It is a theoretical calculation based on probabilities of various outcomes, not necessarily equal to the actual, required, or any less than the required return.

Question 2

Standard deviation is a:
A) numerical indicator of how widely dispersed possible values are distributed around the mean.
B) numerical measure of the spread between the means.
C) numerical indicator of how widely dispersed possible values are distributed around the correlation coefficient.
D) numerical indicator of how widely dispersed possible values are distributed around the coefficient of variation.

Accepted Answer

Standard deviation is a statistical measure that quantifies the amount of variation or dispersion of a set of values. A low standard deviation indicates that the values tend to be close to the mean (also called the expected value) of the set, while a high standard deviation indicates that the values are spread out over a wider range. It specifically measures how widely values are dispersed from the average value (mean).

Question 3

A risk averse manager:
A) will take a risk if he knows it is going to provide a good return.
B) will only take very small risks.
C) will be willing to take big risks if the potential return is high enough.
D) will avoid risk at all costs.

Accepted Answer

C

Question 4

If the distribution of possible future sales values is normal, then the probability that actual sales will be the expected calculated value plus or minus one standard deviation is approximately?
A) 30%
B) 68%
C) 95%
D) 50%

Accepted Answer

In a normal distribution, approximately 68% of the data falls within one standard deviation of the mean.

Question 5

What is the standard deviation of the following income statement sales projection given the following information? 
A) $400
B) $340
C) $169.26
D) $387.50

Accepted Answer

The answer of What is the standard deviation of the...

Question 6

What is the coefficient of variation of the following income statement sales projection given the following information? 
A) 18.2x
B) 0.22
C) 1.41
D) 12%

Accepted Answer

The answer of What is the coefficient of variation of...

Question 7

What is the expected return given the following information? 
A) 0.12%
B) 12%
C) 18.2%
D) 12.2%

Accepted Answer

The answer of What is the expected return given the...

Question 8

When we compare the risk of two investments that have the same expected return, the coefficient of variation:
A) always gives us a value between 0 and 1.
B) adjusts for the correlation between the two instruments.
C) gives conflicting results compared to the standard deviation.
D) provides no additional information when compared with the standard deviation.

Accepted Answer

The coefficient of variation (CV) is a standardized measure of dispersion of a probability distribution or frequency distribution. It is often used to compare the risk (volatility) of investments that have different average returns. Unlike the standard deviation, the CV standardizes the measure of risk by dividing the standard deviation by the mean, allowing for a direct comparison of the relative riskiness of investments with differing expected returns. Therefore, it provides additional information by showing the risk per unit of return, which is not directly evident when only comparing standard deviations.

Question 9

You are trying to diversify your portfolio and reduce risk. Which of the following correlations between the returns of your portfolio and those of a proposed addition would give the most diversification benefit (other things equal)?
A) - .5
B) +1
C) 0
D) - 1

Accepted Answer

A correlation of -1 between the returns of your portfolio and a proposed addition means that they move in exactly opposite directions. This provides the maximum diversification benefit by reducing overall portfolio risk.

Question 10

The beta of the market is:
A) 2
B) 0
C) 1
D) - 1

Accepted Answer

The beta of the market is always 1. This is because beta measures a security's or portfolio's volatility in relation to the overall market, and the market is the benchmark, thus it is always 1 by definition.

Question 11

The coefficient of variation is best represented by: A) mean/standard deviation. B) the square root of P(V- u)². C) standard deviation/mean. D) - 1 to +1

Accepted Answer

The coefficient of variation is calculated as the standard deviation divided by the mean, which standardizes the measure of dispersion in relation to the mean.

Question 12

Business risk is best measured after the fact as:
A) volatility added by interest expense.
B) volatility of operating income.
C) the operating leverage of the firm.
D) the systematic risk of the firm.

Accepted Answer

Business risk is best measured as the volatility of operating income because it reflects the uncertainty associated with a firm's core operations before considering the effects of financial structure, such as interest expense or leverage.

Question 13

Given the following information, calculate the required return on this firm's securities: beta is 1.5, the risk- free rate is 6%, and the required return on the overall market is 9.
A) 10.5%
B) 12%
C) 13.5%
D) 4.5%

Accepted Answer

The required return on this firm's securities can be calculated using the Capital Asset Pricing Model (CAPM):Required return = Risk-free rate + Beta * (Required return on the overall market - Risk-free rate)Required return = 6% + 1.5 * (9% - 6%)Required return = 6% + 1.5 * 3%Required return = 6% + 4.5%Required return = 10.5%

Question 14

What is the beta for an investment given the following information? Investment's required return is 9.5%; market return is 13%; and the risk free rate is 6%.
A) 0.50
B) 1.5
C) 0.75
D) 1.0

Accepted Answer

The answer of What is the beta for an investment...

Question 15

What is the market return given the following information? The investment's required return is 12%; the risk free rate is 7% and the investment's beta is 1.
A) 5%
B) 10%
C) 19%
D) 12%

Accepted Answer

The answer of What is the market return given the...

Question 16

The variability of a company's operating income can be measured by calculating:
A) the standard deviation of operating income.
B) the coefficient of variation of net income.
C) the correlation coefficient between operating income and sales.
D) the beta of the company.

Accepted Answer

The standard deviation of operating income is a measure of variability, indicating how much the operating income fluctuates around its mean over a period of time.

Question 17

The higher the coefficient of variation of possible operating income values:
A) the lower the financial risk of the firm.
B) the greater the financial risk of the firm.
C) the greater the operating leverage of the firm.
D) the greater the business risk of the firm.

Accepted Answer

The coefficient of variation of possible operating income values is a measure of the relative variability of operating income, which is directly related to business risk. A higher coefficient indicates more variability in operating income, thus indicating greater business risk.

Question 18

All else equal, an increase in fixed operating expenses:
A) increases financial risk.
B) increases business risk.
C) decreases business risk.
D) decreases operating leverage.

Accepted Answer

An increase in fixed operating expenses increases business risk because it raises the company's break-even point, making it more sensitive to changes in sales volume. Financial risk is related to the structure of a company's financing (debt vs. equity), not its operating expenses. Operating leverage increases with higher fixed costs, not decreases.

Question 19

What is the standard deviation of following income statement sales projection given the following information?

A) $930
B) $500
C) $320
D) $230

Accepted Answer

The answer of What is the standard deviation of following...

Question 20

If two investments are perfectly positively correlated, it means:
A) they have a correlation coefficient of zero.
B) they have a correlation coefficient of - 1.
C) they change values proportionately in the same direction at the same time.
D) their values will change inversely to each other.

Accepted Answer

When two investments are perfectly positively correlated, it means they move in the same direction at the same time and in the same proportion, which is described by option C. A correlation coefficient of +1 indicates perfect positive correlation.

Quiz 3: Essential Concepts in Finance: Part B

The expected return on an investment is:

Standard deviation is a:

A risk averse manager:

If the distribution of possible future sales values is normal, then the probability that actual sales will be the expected calculated value plus or minus one standard deviation is approximately?

What is the standard deviation of the following income statement sales projection given the following information?

What is the coefficient of variation of the following income statement sales projection given the following information?

What is the expected return given the following information?

When we compare the risk of two investments that have the same expected return, the coefficient of variation:

You are trying to diversify your portfolio and reduce risk. Which of the following correlations between the returns of your portfolio and those of a proposed addition would give the most diversification benefit (other things equal) ?

The beta of the market is:

The coefficient of variation is best represented by:

Business risk is best measured after the fact as:

Given the following information, calculate the required return on this firm's securities: beta is 1.5, the risk- free rate is 6%, and the required return on the overall market is 9.

What is the beta for an investment given the following information? Investment's required return is 9.5%; market return is 13%; and the risk free rate is 6%.

What is the market return given the following information? The investment's required return is 12%; the risk free rate is 7% and the investment's beta is 1.

The variability of a company's operating income can be measured by calculating:

The higher the coefficient of variation of possible operating income values:

All else equal, an increase in fixed operating expenses:

What is the standard deviation of following income statement sales projection given the following information?

If two investments are perfectly positively correlated, it means: