553 - BEAM023 and BEFM012 UNIVERSITY OF EXETER SCHOOL OF...

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BEAM023 and BEFM012 UNIVERSITY OF EXETER SCHOOL OF BUSINESS AND ECONOMICS JANUARY 2007 Fundamentals of Financial Management Financial Theory and Management Module Convenor: Professor Richard Harris Duration: TWO HOURS Answer ALL questions in Section A – all questions carry 1 mark Answer TWO questions out of four in Section B – all questions carry 30 marks Approved calculators are permitted This is a closed note paper BEAM023/BEFM012 Jan 2007
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SECTION A (Multiple Choice) Answer ALL questions in this section Each question in this section is worth 1 mark Give ONE answer only for each question Do NOT show your working 1. Which of the following statements is most correct? a. If the stock market is weak-form efficient, then information about recent trends in stock prices would be very useful when it comes to selecting stocks. b. If the stock market is semistrong-form efficient, stocks and bonds should have the same expected return. c. If the stock market is semistrong-form efficient, all stocks should have the same expected return. d. Statements a and c are correct. e. None of the statements above is correct. 2. Which of the following statements is most correct? a. Compensating managers with stock can reduce the agency problem between stockholders and managers. b. Restrictions are included in credit agreements to protect bondholders from the agency problem that exists between bondholders and stockholders. c. The threat of a takeover can reduce the agency problem between bondholders and stockholders. d. Statements a and b are correct. e. All of the statements above are correct. 3. Which of the following statements is most correct? a. A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio. b. A two-stock portfolio will always have a lower beta than a one-stock portfolio. c. If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio. d. All of the statements above are correct. e. None of the statements above is correct. 4. In general, which of the following will tend to occur if you randomly add additional stocks to your portfolio, which currently consists of only three BEAM023/BEFM012 Jan 2007 2
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stocks? a. The expected return of your portfolio will usually decline. b. The company-specific risk of your portfolio will usually decline, but the market risk will tend to remain the same. c. Both the company-specific risk and the market risk of your portfolio will decline. d. The market risk and expected return of the portfolio will decline. e. The company-specific risk will remain the same, but the market risk will tend to decline. 5. Assume that the risk-free rate remains constant, but that the market risk premium declines. Which of the following is likely to occur? a. The required return on a stock with a beta = 1.0 will remain the
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This note was uploaded on 06/17/2008 for the course FIN 4309 taught by Professor Dt during the Spring '08 term at UCLA.

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553 - BEAM023 and BEFM012 UNIVERSITY OF EXETER SCHOOL OF...

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