Exam 2 Solutions - Spring 2003 Exam 2 1. * Select the...

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Spring 2003 Exam 2 1. Select the statement that is most correct . * A. I have correctly filled in my Name and UF ID# and have signed the front of this exam and I have correctly filled in and bubbled in my Name, UF ID#, and Exam Code on my scantron sheet. Therefore I should receive 5 points. B. I have failed to correctly fill in my Name and UF ID# and sign the front of this exam and/or I have failed to correctly fill in and bubble in my Name, UF ID#, and Exam Code on my scantron sheet. Therefore I should not receive 5 points. 2. Which of the following statements is most correct ? A. Portfolio diversification reduces the variability of the returns on the individual stocks held in the portfolio. B. If an investor buys enough stocks, he or she can, through diversification, eliminate virtually all of the non-market (or company-specific) risk inherent in owning stocks. Indeed, if the portfolio contained all publicly traded stocks, it would be riskless. C. The required return on a firm’s common stock is determined by its systematic (or market) risk. If the systematic risk is known, and if that risk is expected to remain constant, then no other information, including market information, is required to specify the firm’s required return. * D. A security’s beta measures its non-diversifiable (systematic, or market) risk relative to that of the market or an “average stock” within the market. E. A stock’s beta is less relevant as a measure of risk to an investor with a well- diversified portfolio than to an investor who holds only that one stock. 3. Which of the following statements is incorrect (least correct)? A. If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series. B. To increase present consumption beyond present income normally requires either the payment of interest (because you have borrowed money) or else an opportunity cost of interest forgone (because you have sold off some of your investments). C. Disregarding risk, if money has time value, it is impossible for the present value of a given sum to be greater than its future value. D. Disregarding risk, if the present value of a sum is equal to its future value, either the interest rate = 0, or the number of time periods = 0. * E. If the discount (or interest) rate is positive, the future value of an annuity due will always be less than the future value of an equivalent regular annuity, and the present value of an annuity due will always be less than the present value of an equivalent regular annuity. 4. You are considering investing in three different bonds. Each bond matures in 10 years and has a face value of $1,000. The bonds have the same level of risk, so the yield to maturity is the same for each (you may assume a flat term structure). Bond A has an 8 percent annual coupon, Bond B has a 10 percent annual coupon, and Bond C has a 12 percent annual FIN 3403 - 2003 Spring Term - Exam 2 Page 1 of 10 Pages
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coupon. Bond B sells at par.
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This note was uploaded on 02/10/2011 for the course FIN 3403 taught by Professor Tapley during the Spring '06 term at University of Florida.

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Exam 2 Solutions - Spring 2003 Exam 2 1. * Select the...

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