FNAN 522 MIDTERM QUESTIONS & ANSWERS
A company needs to raise cash to cover its operating expenses. The company will only
need the funds for a short period of time. What financial market is the most appropriate
for the company to use to raise money (that is, likely the lowest cost and best-matched
maturity)? - Answer -A. Money market.
B. Capital Market
C. Derivative market
D. All of the above
Answer: A MONEY MARKET
What is the primary goal of the Sarbanes-Oxley act according to the Module 1 video-
"The Goal of Financial Management"? - Answer -a. To protect investors from corporate
abuse.
b. To help maintain a primary bull market.
c. To protect corporate executives from frivolous shareholder lawsuits.
d. To prevent a secular bear market.
ANSWER: a. To protect investors from corporate abuse.
Which of the following is an accurate characteristic of a sole proprietorship? - Answer -
a. The owner is personally liable for the business's debt and obligations.
b. There is more than one answer.
c. A sole proprietorship typically elects board members for staggered terms.
d. The owner must file for a separate tax return for the business.
ANSWER: a. The owner is personally liable for the business's debt and obligations.
Which of the following is a source of agency costs in an organization? - Answer -a.
Parties associates with the organization have different risk preferences.
b. The people who make the day-to-day decisions are not the owners.
c. All of these answers.
d. The managers of the organization have different objectives than the other
shareholders.
ANSWER: c. All of these answers.
A portfolio is composed of 40% stock, 20% bonds, and 40% mutual funds. The stock is
expected to have a 8% return, the bonds a 4% return and the mutual funds a 6% return.
What is the expected return of the portfolio? - Answer -6.4%
A portfolio is composed of 60% stock and 40% bonds. The variance of stock is 160 and
the variance of the bonds is 120. The covariance is 40. What is the portfolio's variance?
- Answer -96
A relatively new tech company issues a bond that is publicly traded. The company is
based in the US and pays interest in dollars. The potential investor lives in the UK.
, Which of the following risks does the investor face if he buys the bond? - Answer -a.
Market risk.
b. All of these answers.
c. Foreign investment risk.
d. Credit risk.
ANSWERS: b. All of these answers.
An investment portfolio has a 20% chance of earning $125,000 in a year, a 50% chance
of earning $50,000, a 15% chance of earning nothing and a 15% chance of losing
$20,000. What is the expected return? - Answer -$47,000
Over a period of three days, a company stock increased by 6%, decreased by 3%, then
increased by 9%. During that same period, the Dow Jones increased by 2%, decreased
by 1%, and then increased by 3%. What is the company's beta? - Answer -3
The most common measure of risk in finance is the: - Answer -a. Standard Outcome
b. Standard Deviation
c. Expected Deviation
d. Expected Outcome
ANSWER: b. Standard Deviation
Under the capital asset pricing model (CAPM), which of the following beta values is
considered the most risky? - Answer -a. A beta between 0 and 1
b. A beta between 0 and 1
c. A beta above 1
d. A beta equal to 0
ANSWER: C. A beta above 1
Which of the following accurately describes unsystemic risk? - Answer -a. Unsystemic
risk is correlated to investing in only one company or security.
b. A company losing a lawsuit which creates a massive legal liability is an example of
unsystemic risk.
c. Unsystemic risk can be diversified away.
D. All of these answers.
ANSWER: D. All of these answers.
Which of the following statements regarding the Security Market Line (SML) is true? -
Answer -a. The SML graphs unsystematic risk
b. The slope of the SML is equal to the market risk premium and reflects the risk-return
trade off.
c. All of these answers.
d. The x-intercept of the SML is equal to the risk-free interest rate.
ANSWER. B. The slode of the SML is equal to the market risk premium and reflects the
risk-return trade off.
A company needs to raise cash to cover its operating expenses. The company will only
need the funds for a short period of time. What financial market is the most appropriate
for the company to use to raise money (that is, likely the lowest cost and best-matched
maturity)? - Answer -A. Money market.
B. Capital Market
C. Derivative market
D. All of the above
Answer: A MONEY MARKET
What is the primary goal of the Sarbanes-Oxley act according to the Module 1 video-
"The Goal of Financial Management"? - Answer -a. To protect investors from corporate
abuse.
b. To help maintain a primary bull market.
c. To protect corporate executives from frivolous shareholder lawsuits.
d. To prevent a secular bear market.
ANSWER: a. To protect investors from corporate abuse.
Which of the following is an accurate characteristic of a sole proprietorship? - Answer -
a. The owner is personally liable for the business's debt and obligations.
b. There is more than one answer.
c. A sole proprietorship typically elects board members for staggered terms.
d. The owner must file for a separate tax return for the business.
ANSWER: a. The owner is personally liable for the business's debt and obligations.
Which of the following is a source of agency costs in an organization? - Answer -a.
Parties associates with the organization have different risk preferences.
b. The people who make the day-to-day decisions are not the owners.
c. All of these answers.
d. The managers of the organization have different objectives than the other
shareholders.
ANSWER: c. All of these answers.
A portfolio is composed of 40% stock, 20% bonds, and 40% mutual funds. The stock is
expected to have a 8% return, the bonds a 4% return and the mutual funds a 6% return.
What is the expected return of the portfolio? - Answer -6.4%
A portfolio is composed of 60% stock and 40% bonds. The variance of stock is 160 and
the variance of the bonds is 120. The covariance is 40. What is the portfolio's variance?
- Answer -96
A relatively new tech company issues a bond that is publicly traded. The company is
based in the US and pays interest in dollars. The potential investor lives in the UK.
, Which of the following risks does the investor face if he buys the bond? - Answer -a.
Market risk.
b. All of these answers.
c. Foreign investment risk.
d. Credit risk.
ANSWERS: b. All of these answers.
An investment portfolio has a 20% chance of earning $125,000 in a year, a 50% chance
of earning $50,000, a 15% chance of earning nothing and a 15% chance of losing
$20,000. What is the expected return? - Answer -$47,000
Over a period of three days, a company stock increased by 6%, decreased by 3%, then
increased by 9%. During that same period, the Dow Jones increased by 2%, decreased
by 1%, and then increased by 3%. What is the company's beta? - Answer -3
The most common measure of risk in finance is the: - Answer -a. Standard Outcome
b. Standard Deviation
c. Expected Deviation
d. Expected Outcome
ANSWER: b. Standard Deviation
Under the capital asset pricing model (CAPM), which of the following beta values is
considered the most risky? - Answer -a. A beta between 0 and 1
b. A beta between 0 and 1
c. A beta above 1
d. A beta equal to 0
ANSWER: C. A beta above 1
Which of the following accurately describes unsystemic risk? - Answer -a. Unsystemic
risk is correlated to investing in only one company or security.
b. A company losing a lawsuit which creates a massive legal liability is an example of
unsystemic risk.
c. Unsystemic risk can be diversified away.
D. All of these answers.
ANSWER: D. All of these answers.
Which of the following statements regarding the Security Market Line (SML) is true? -
Answer -a. The SML graphs unsystematic risk
b. The slope of the SML is equal to the market risk premium and reflects the risk-return
trade off.
c. All of these answers.
d. The x-intercept of the SML is equal to the risk-free interest rate.
ANSWER. B. The slode of the SML is equal to the market risk premium and reflects the
risk-return trade off.
