Chp5-8 Review

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Review for Exam 2 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation questions. The calculation questions will be similar to those in the homework and review. However, the concept questions will be related to any topic we have covered in the class. The concept questions in the review are only some sample questions. You should NOT study only topics in the review. For the work problems, you need to solve the problems without knowing the possible answers. The questions will be similar to those in the homework and the review except that the possible solutions are not given. You can bring a formula sheet to the exam. However, you should not write definitions/concepts on the sheet.

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Chapter 5 1. Of the alternatives available, __________ typically have the highest standard deviation of returns. A) commercial paper B) corporate bonds C) stocks D) treasury bills 2. The holding period return on a stock is equal to __________. A) the capital gain yield over the period plus the inflation rate B) the capital gain yield over the period plus the dividend yield C) the current yield plus the dividend yield D) the dividend yield plus the risk premium 3. .Suppose you pay \$9,800 for a Treasury bill maturing in two months. What is the annual percentage rate of return for this investment? A) 2% B) 12% C) 12.2% D) 16.4% 4. The market risk premium is defined as ___________. A) the difference between the return on an index fund and the return on Treasury bills B) the difference between the return on a small firm mutual fund and the return on the Standard and Poor's 500 index C) the difference between the return on the risky asset with the lowest returns and the return on Treasury bills D) the difference between the return on the highest yielding asset and the lowest yielding asset. 5. The reward/variability ratio is given by __________. A) the slope of the capital allocation line B) the second derivative of the capital allocation line C) the point at which the second derivative of the investor's indifference curve reaches zero D) none of the above
6. A Treasury bill pays a 6% rate of return. A risk averse investor __________ invest in a risky portfolio that pays 12% with a probability of 40% or 2% with a probability of 60% because __________. A) might; she is rewarded a risk premium B) would not; because she is not rewarded any risk premium C) would not; because the risk premium is small D) cannot be determined 7. The holding period return on a stock was 30%. Its ending price was \$26 and its cash dividend was \$1.50. Its beginning price must have been __________. A) \$20.00

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