BA 4140
Fundamentals of Investments
MIDTERM EXAM
Q&S
©2024/2025
,1. Multiple Choice: Which of the following is not a characteristic of
common stock?
a) Voting rights
b) Fixed dividend payouts
c) Ownership in a corporation
d) Potential for capital appreciation
Answer: b) Fixed dividend payouts
Rationale: Common stock typically does not offer fixed dividend
payouts; this is a characteristic of preferred stock.
2. Fill-in-the-Blank: The __________ is the risk that comes from
the fluctuating market conditions that affect all firms.
Answer: Market Risk
Rationale: Market risk, also known as systematic risk, affects all
firms and is linked to the volatility of the financial markets.
3. True/False: The Capital Asset Pricing Model (CAPM) assumes
that all investors have access to all relevant information regarding
investment decisions.
Answer: True
©2024/2025
, Rationale: CAPM assumes markets are efficient, and all
information is available to all investors, affecting their decision-
making process.
4. Multiple Response: Select all that apply. Which of the following
are assumptions of the Efficient Market Hypothesis (EMH)?
a) Prices reflect all available information.
b) Investors cannot consistently achieve returns in excess of
average market returns.
c) Stock prices are predictable.
d) No transaction costs exist.
Answers: a), b), and d)
Rationale: EMH assumes that prices reflect all available
information and that it is impossible to consistently outperform the
market. It also assumes no transaction costs. However, EMH does
not assume that stock prices are predictable.
5. Multiple Choice: What is the primary goal of portfolio
diversification?
a) Maximizing return
b) Minimizing risk
c) Ensuring liquidity
d) Beating the market
©2024/2025
, Answer: b) Minimizing risk
Rationale: Portfolio diversification aims to minimize risk by
spreading investments across various assets, reducing the impact of
any single asset's performance on the overall portfolio.
6. Fill-in-the-Blank: The __________ model is used to determine
the discounted present value of expected future cash flows.
Answer: Dividend Discount Model
Rationale: The Dividend Discount Model (DDM) is used to
estimate the value of a company's stock based on the theory that its
stock is worth the sum of all its future dividend payments,
discounted back to their present value.
7. True/False: A high beta indicates that a stock is less volatile than
the market.
Answer: False
Rationale: A high beta indicates that a stock is more volatile than
the market. A beta greater than 1 means the stock's price tends to
be more volatile than the market.
8. Multiple Response: Which of the following factors affect the
interest rate risk of a bond?
a) Time to maturity
b) Coupon rate
©2024/2025
Fundamentals of Investments
MIDTERM EXAM
Q&S
©2024/2025
,1. Multiple Choice: Which of the following is not a characteristic of
common stock?
a) Voting rights
b) Fixed dividend payouts
c) Ownership in a corporation
d) Potential for capital appreciation
Answer: b) Fixed dividend payouts
Rationale: Common stock typically does not offer fixed dividend
payouts; this is a characteristic of preferred stock.
2. Fill-in-the-Blank: The __________ is the risk that comes from
the fluctuating market conditions that affect all firms.
Answer: Market Risk
Rationale: Market risk, also known as systematic risk, affects all
firms and is linked to the volatility of the financial markets.
3. True/False: The Capital Asset Pricing Model (CAPM) assumes
that all investors have access to all relevant information regarding
investment decisions.
Answer: True
©2024/2025
, Rationale: CAPM assumes markets are efficient, and all
information is available to all investors, affecting their decision-
making process.
4. Multiple Response: Select all that apply. Which of the following
are assumptions of the Efficient Market Hypothesis (EMH)?
a) Prices reflect all available information.
b) Investors cannot consistently achieve returns in excess of
average market returns.
c) Stock prices are predictable.
d) No transaction costs exist.
Answers: a), b), and d)
Rationale: EMH assumes that prices reflect all available
information and that it is impossible to consistently outperform the
market. It also assumes no transaction costs. However, EMH does
not assume that stock prices are predictable.
5. Multiple Choice: What is the primary goal of portfolio
diversification?
a) Maximizing return
b) Minimizing risk
c) Ensuring liquidity
d) Beating the market
©2024/2025
, Answer: b) Minimizing risk
Rationale: Portfolio diversification aims to minimize risk by
spreading investments across various assets, reducing the impact of
any single asset's performance on the overall portfolio.
6. Fill-in-the-Blank: The __________ model is used to determine
the discounted present value of expected future cash flows.
Answer: Dividend Discount Model
Rationale: The Dividend Discount Model (DDM) is used to
estimate the value of a company's stock based on the theory that its
stock is worth the sum of all its future dividend payments,
discounted back to their present value.
7. True/False: A high beta indicates that a stock is less volatile than
the market.
Answer: False
Rationale: A high beta indicates that a stock is more volatile than
the market. A beta greater than 1 means the stock's price tends to
be more volatile than the market.
8. Multiple Response: Which of the following factors affect the
interest rate risk of a bond?
a) Time to maturity
b) Coupon rate
©2024/2025
