exam02 - 1 FNCE 3010 (Durham). Fall 2007. Exam 2. Form A....

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Unformatted text preview: 1 FNCE 3010 (Durham). Fall 2007. 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 amount of systematic risk present in an asset is measured by the assets (a) Solution: beta coefficient. (b) reward-to-risk ratio. (c) total risk. (d) diversifiable risk. (e) Treynor index. 3. The linear relation between an assets expected return and its beta coefficient is the: (a) reward-to-risk ratio. (b) portfolio weight. (c) portfolio risk. (d) Solution: security market line. (e) market risk premium. 4. The standard deviation of an assets returns measures its ______ risk. (a) Solution: total (b) nondiversifiable (c) unsystematic (d) systematic (e) economic 5. An efficient capital market is one in which: (a) brokerage commissions are zero. (b) taxes are irrelevant. (c) securities always offer a positive rate of return to investors. (d) security prices are guaranteed by the U.S. Securities and Exchange Commission to be fair. (e) Solution: security prices reflect available information. 1 6. The use of WACC to select investments is acceptable when the: (a) correlation of all new projects are equal. (b) NPV is positive when discounted by the WACC. (c) Solution: projects have the same degree of risk as that of the firm as a whole. (d) firm is well diversified and the unsystematic risk is negligible. (e) None of the above. 7. Comparing two otherwise equal firms, the beta of the common stock of a levered firm is _________ than the beta of the common stock of an unlevered firm. (a) equal to (b) significantly less (c) slightly less (d) Solution: greater (e) None of the above. 8. The cost of capital for a project: (a) will decrease as the risk level of a firm increases. (b) is primarily dependent upon the source of the funds used for a project. (c) implies a project will produce a positive net present value only when the rate of return on the project is less than the predetermined cost of capital. (d) remains constant for all projects undertaken by the same firm. (e) Solution: depends on how the funds are going to be utilized. 9. The capital structure weights used in computing the weighted average cost of capital: (a) are based on the book values of total debt and total equity....
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exam02 - 1 FNCE 3010 (Durham). Fall 2007. Exam 2. Form A....

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