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Unformatted text preview: FNCE 3010 (Durham). Fall 2006. Exam 2. Form A. Multiple choice (3 pts each) 1. The principle of diversification tells us that: (a) concentrating an investment in two or three large stocks will eliminate all of your risk. (b) concentrating an investment in three companies all within the same industry will greatly reduce your overall risk. (c) spreading an investment across five diverse companies will not lower your overall risk at all. (d) spreading an investment across many diverse assets will eliminate all of the risk. (e) Solution: spreading an investment across many diverse assets will eliminate some of the risk. 2. The risk premium for an individual security is computed by: (a) Solution: multiplying the securitys beta by the market risk premium. (b) multiplying the securitys beta by the risk-free rate of return. (c) adding the risk-free rate to the securitys expected return. (d) dividing the market risk premium by the quantity (1 - beta). (e) dividing the market risk premium by the beta of the security. 3. Which one of the following would tend to indicate that 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) Solution: a decrease in the portfolio standard deviation 4. The systematic risk principle implies that the _______ an asset depends only on that assets systematic risk. (a) variance of the returns on (b) standard deviation of the returns on (c) Solution: expected return on (d) total risk assumed by owning (e) diversification benefits of 5. The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the options: (a) opening price. (b) intrinsic value. (c) Solution: strike price. (d) market price. (e) time value. 6. A trading opportunity that offers a riskless profit is called a(n): (a) put option. (b) call option. (c) market equilibrium....
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- Fall '06