Ralston Finance &
Investments Ch. 11 Exam
Study Guide 2025/2026:
Master Key Terms to Pass on
Your First Attempt
,Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that
stock. Which one of the following best describes the 16.5 percent rate?
A. Expected return
B. Real return
C. Market rate
D. Systematic return
E. Risk premium - CORRECT ANSWERSA. expected return
Investors require a 4 percent return on risk-free investments. On a particular risky
investment, investors require an excess return of 7 percent in addition to the risk-free
rate of 4 percent. What is this excess return called?
A. Inflation premium
B. Required return
C. Real return
D. Average return
E. Risk premium - CORRECT ANSWERSE. risk premium
The use of borrowing by an individual to adjust his or her overall exposure to financial
leverage is referred to as:
A. M&M Proposition I.
B. capital restructuring.
C. homemade leverage.
D. M&M Proposition II.
E. financial risk management. - CORRECT ANSWERSC. homemade leverage
The variance is the average squared difference between which of the following?
A. Actual return and average return
B. Actual return and (average return/N - 1)
C. Actual return and the real return
D. Average return and the standard deviation
E. Actual return and the risk-free rate - CORRECT ANSWERSA. actual return and
average return
1. Katie owns 100 shares of ABC stock. Which one of the following terms is used to
refer to the return that Katie and the other shareholders require on their investment in
ABC?
A. Weighted average cost of capital
B. Pure play cost
C. Cost of equity
D. Subjective cost
E. Cost of debt - CORRECT ANSWERSC. cost of equity
Which one of the following is the positive square root of the variance?
,A. Standard deviation
B. Mean
C. Risk-free rate
D. Average return
E. Real return - CORRECT ANSWERSA. standard deviation
Which one of the following best describes a portfolio?
A. Risky security
B. Security equally as risky as the overall market
C. New issue of stock
D. Group of assets held by an investor
E. Investment in a risk-free security - CORRECT ANSWERSD. group of assets held by
an investor
Which one of the following is defined as a bell-shaped frequency distribution that is
defined by its average and its standard deviation?
A. Arithmetic average return
B. Variance
C. Standard deviation
D. Probability curve
E. Normal distribution - CORRECT ANSWERSE. normal distribution
2. Lester lent money to The Corner Store by purchasing bonds issued by the store. The
rate of return that he and the other lenders require is referred to as the:
A. pure play cost.
B. cost of debt.
C. weighted average cost of capital.
D. subjective cost.
E. cost of equity. - CORRECT ANSWERSB. cost of debt
Which one of the following is defined as the average compound return earned per year
over a multiyear period?
A. Geometric average return
B. Variance of returns
C. Standard deviation of returns D. Arithmetic average return
E. Normal distribution of returns - CORRECT ANSWERSA. geometric average return
Which one of the following statements matches M&M Proposition I?
A. The cost of equity capital has a positive linear relationship with a firm's capital
structure.
B. The dividends paid by a firm determine the firm's value.
C. The cost of equity capital varies in response to changes in a firm's capital structure.
D. The value of a firm is independent of the firm's capital structure.
E. The value of a firm is dependent on the firm's capital structure. - CORRECT
ANSWERSD. the value of a firm is independent of the firm's capital structure
, Which one of the following best describes an arithmetic average return?
A. Total return divided by N - 1, where N equals the number of individual returns
B. Average compound return earned per year over a multiyear period
C. Total compound return divided by the number of individual returns
D. Return earned in an average year over a multiyear period
E. Positive square root of the average compound return - CORRECT ANSWERSD.
return earned in an average year over a multiyear period
Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms
applies to the 28 percent?
A. Portfolio variance
B. Portfolio standard deviation
C. Portfolio weight
D. Portfolio expected return
E. Portfolio beta - CORRECT ANSWERSC. portfolio weight
An efficient capital market is best defined as a market in which security prices reflect
which one of the following?
A. Current inflation
B. A risk premium
C. Available information
D. The historical arithmetic rate of return
E. The historical geometric rate of return - CORRECT ANSWERSC. available
information
3. The weighted average cost of capital is defined as the weighted average of a firm's:
A. return on its investments.
B. cost of equity and its aftertax cost of debt.
C. pretax cost of debt and equity securities.
D. bond coupon rates.
E. dividend and capital gains yields. - CORRECT ANSWERSB. cost of equity and its
aftertax cost of debt
Which one of the following is the hypothesis that securities markets are efficient?
A. Geometric market hypothesis
B. Standard deviation hypothesis
C. Efficient markets hypothesis
D. Capital market hypothesis
E. Financial markets hypothesis - CORRECT ANSWERSC. efficient markets hypothesis
Which one of the following states that a firm's cost of equity capital is a positive linear
function of the firm's capital structure?
A. Static theory of capital structure
B. M&M Proposition I
C. M&M Proposition II
D. Homemade leverage theory
Investments Ch. 11 Exam
Study Guide 2025/2026:
Master Key Terms to Pass on
Your First Attempt
,Mary owns a risky stock and anticipates earning 16.5 percent on her investment in that
stock. Which one of the following best describes the 16.5 percent rate?
A. Expected return
B. Real return
C. Market rate
D. Systematic return
E. Risk premium - CORRECT ANSWERSA. expected return
Investors require a 4 percent return on risk-free investments. On a particular risky
investment, investors require an excess return of 7 percent in addition to the risk-free
rate of 4 percent. What is this excess return called?
A. Inflation premium
B. Required return
C. Real return
D. Average return
E. Risk premium - CORRECT ANSWERSE. risk premium
The use of borrowing by an individual to adjust his or her overall exposure to financial
leverage is referred to as:
A. M&M Proposition I.
B. capital restructuring.
C. homemade leverage.
D. M&M Proposition II.
E. financial risk management. - CORRECT ANSWERSC. homemade leverage
The variance is the average squared difference between which of the following?
A. Actual return and average return
B. Actual return and (average return/N - 1)
C. Actual return and the real return
D. Average return and the standard deviation
E. Actual return and the risk-free rate - CORRECT ANSWERSA. actual return and
average return
1. Katie owns 100 shares of ABC stock. Which one of the following terms is used to
refer to the return that Katie and the other shareholders require on their investment in
ABC?
A. Weighted average cost of capital
B. Pure play cost
C. Cost of equity
D. Subjective cost
E. Cost of debt - CORRECT ANSWERSC. cost of equity
Which one of the following is the positive square root of the variance?
,A. Standard deviation
B. Mean
C. Risk-free rate
D. Average return
E. Real return - CORRECT ANSWERSA. standard deviation
Which one of the following best describes a portfolio?
A. Risky security
B. Security equally as risky as the overall market
C. New issue of stock
D. Group of assets held by an investor
E. Investment in a risk-free security - CORRECT ANSWERSD. group of assets held by
an investor
Which one of the following is defined as a bell-shaped frequency distribution that is
defined by its average and its standard deviation?
A. Arithmetic average return
B. Variance
C. Standard deviation
D. Probability curve
E. Normal distribution - CORRECT ANSWERSE. normal distribution
2. Lester lent money to The Corner Store by purchasing bonds issued by the store. The
rate of return that he and the other lenders require is referred to as the:
A. pure play cost.
B. cost of debt.
C. weighted average cost of capital.
D. subjective cost.
E. cost of equity. - CORRECT ANSWERSB. cost of debt
Which one of the following is defined as the average compound return earned per year
over a multiyear period?
A. Geometric average return
B. Variance of returns
C. Standard deviation of returns D. Arithmetic average return
E. Normal distribution of returns - CORRECT ANSWERSA. geometric average return
Which one of the following statements matches M&M Proposition I?
A. The cost of equity capital has a positive linear relationship with a firm's capital
structure.
B. The dividends paid by a firm determine the firm's value.
C. The cost of equity capital varies in response to changes in a firm's capital structure.
D. The value of a firm is independent of the firm's capital structure.
E. The value of a firm is dependent on the firm's capital structure. - CORRECT
ANSWERSD. the value of a firm is independent of the firm's capital structure
, Which one of the following best describes an arithmetic average return?
A. Total return divided by N - 1, where N equals the number of individual returns
B. Average compound return earned per year over a multiyear period
C. Total compound return divided by the number of individual returns
D. Return earned in an average year over a multiyear period
E. Positive square root of the average compound return - CORRECT ANSWERSD.
return earned in an average year over a multiyear period
Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms
applies to the 28 percent?
A. Portfolio variance
B. Portfolio standard deviation
C. Portfolio weight
D. Portfolio expected return
E. Portfolio beta - CORRECT ANSWERSC. portfolio weight
An efficient capital market is best defined as a market in which security prices reflect
which one of the following?
A. Current inflation
B. A risk premium
C. Available information
D. The historical arithmetic rate of return
E. The historical geometric rate of return - CORRECT ANSWERSC. available
information
3. The weighted average cost of capital is defined as the weighted average of a firm's:
A. return on its investments.
B. cost of equity and its aftertax cost of debt.
C. pretax cost of debt and equity securities.
D. bond coupon rates.
E. dividend and capital gains yields. - CORRECT ANSWERSB. cost of equity and its
aftertax cost of debt
Which one of the following is the hypothesis that securities markets are efficient?
A. Geometric market hypothesis
B. Standard deviation hypothesis
C. Efficient markets hypothesis
D. Capital market hypothesis
E. Financial markets hypothesis - CORRECT ANSWERSC. efficient markets hypothesis
Which one of the following states that a firm's cost of equity capital is a positive linear
function of the firm's capital structure?
A. Static theory of capital structure
B. M&M Proposition I
C. M&M Proposition II
D. Homemade leverage theory
