ADM3352 | ADM 3352 Quiz 1 with Solutions, all 100% correct_ Latest Winter 2025/26.

ADM 3352 Quiz 1_Answered, 2025. Complete Answer Key Below. MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Systemic risk is A) credit risk. B) an insurance contract against the default of one or more borrowers. C) firm-specific risk. D) default risk. E) the potential breakdown of the financial system when problems in one market spill over and disrupt others. 2) The value of a derivative security A) depends on the value of the related security. B) is unable to be calculated. C) is unrelated to the value of the related security. D) has been enhanced due to the recent misuse and negative publicity regarding these instruments. E) is worthless today. 3) Financial assets permit all of the following except A) consumption timing. B) allocation of risk. C) separation of ownership and control. D) elimination of risk. 4) Although derivatives can be used as speculative instruments, businesses most often use them to A) attract customers. B) appease stockholders. C) offset debt. D) hedge risks. E) enhance their balance sheets. 5) New issues of securities are sold in the market(s). A) primary B) secondary C) over-the-counter D) primary and secondary 6) Conventional theories presume that investors , and behavioral finance presumes that they . A) are irrational; are irrational B) are rational; may not be rational C) are rational; are rational D) may not be rational; may not be rational E) may not be rational; are rational 7) In regard to moving averages, it is considered to be a signal when market price breaks through the moving average from . A) bearish; below B) bullish; below C) bullish; above D) None of the options are correct. 8) The premise of behavioral finance is that A) conventional financial theory ignores how real people make decisions and that people make a difference. B) conventional financial theory considers how emotional people make decisions, but the market is driven by rational utility-maximizing investors. C) conventional financial theory should ignore how the average person makes decisions because the market is driven by investors who are much more sophisticated than the average person. D) conventional financial theory considers how emotional people make decisions, but the market is driven by rational utility-maximizing investors and should ignore how the average person makes decisions because the market is driven by investors who are much more sophisticated than the average person. E) None of the options are correct. 9) The efficient-market hypothesis A) implies that security prices properly reflect information available to investors. B) has little empirical validity. C) implies that active traders will find it difficult to outperform a buy-and-hold strategy. D) has little empirical validity and implies that active traders will find it difficult to outperform a buy-and-hold strategy. E) implies that security prices properly reflect information available to investors and that active traders will find it difficult to outperform a buy-and-hold strategy. 10) Over the past year, you earned a nominal rate of interest of 10% on your money. The inflation rate was 4% over the same period. The exact actual growth rate of your purchasing power was A) 15.5%. B) 5.77%. C) 5.0%. D) 4.8%. E) 15.0%. 11) You purchased a share of stock for $20. One year later, you received $1.25 as a dividend and sold the share for $28. What was your holding-period return? A) 45% B) 50% C) 5% D) 46.25% E) None of the options are correct. 12) The risk premium for common stocks A) cannot be zero, for investors would be unwilling to invest in common stocks. B) must always be positive, in theory. C) is negative, as common stocks are risky. D) cannot be zero, for investors would be unwilling to invest in common stocks and must always be positive, in theory. E) cannot be zero, for investors would be unwilling to invest in common stocks and is negative, as common stocks are risky. 13) If a portfolio had a return of 16%, the risk-free asset return was 4%, and the standard deviation of the portfolio's excess returns was 33%, the risk premium would be A) 13%. B) 18%. C) 49%. D) 12%. E) 29%. 14) Goldcorp Inc. stock has the following probability distribution of expected prices one year from now: State Probability Price 1 25% $12 2 40% $20 3 35% $10 If you buy Goldcorp Inc. today for $15 and it will pay a dividend during the year of $2 per share, what is your expected holding-period return on Goldcorp Inc.? A) 17.72% B) 18.89% C) 17.91% D) 18.18% E) 10% 15) The holding-period return (HPR) for a stock is equal to A) the real yield minus the inflation rate. B) the nominal yield minus the real yield. C) the capital gains yield minus the tax rate. D) the capital gains yield minus the dividend yield. E) the dividend yield plus the capital gains yield. 16) Which of the following measures of risk best highlights the potential loss from extreme negative returns? A) Standard deviation B) Variance C) Upper partial standard deviation D) Value at risk (VaR) E) None of the options are correct. 17) If an investment provides a 1.25% return quarterly, its effective annual rate is A) 5.23%. B) 5.09%. C) 4.02%. D) 4.04%. 18) Which combination of returns and standard deviation provides the highest Sharpe ratio? Assume a 3% risk free rate. A) return = 12%, standard deviation = 20% B) return = 15%, standard deviation = 22% C) return = 21%, standard deviation = 25% D) return = 25%, standard deviation = 35% 19) Which of the following statements regarding risk-averse investors is true? A) They only care about the rate of return. B) They accept investments that are fair games. C) They only accept risky investments that offer risk premiums over the risk-free rate. D) They are willing to accept lower returns and high risk. E) They only care about the rate of return, and they accept investments that are fair games. 20) In the mean-standard deviation graph, an indifference curve has a slope. A) negative B) zero C) positive D) vertical E) Cannot be determined. 21) Elias is a risk-averse investor. David is a less risk-averse investor than Elias. Therefore, A) for the same risk, David requires a higher rate of return than Elias. B) for the same return, Elias tolerates higher risk than David. C) for the same risk, Elias requires a lower rate of return than David. D) for the same return, David tolerates higher risk than Elias. E) Cannot be determined. 22) A portfolio has an expected rate of return of 14.22% and a standard deviation of 18%. The risk-free rate is 4.5%. An investor has the following utility function: U = E( r) - ( A/2) s2. Which value of A makes this investor indifferent between the risky portfolio and the risk-free asset? A) 5 B) 6 C) 7 D) 8 E) 4 23) You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with two risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a variance of 0.0081. What would be the dollar values of your positions in X and Y, respectively, if you decide to hold 40% of your money in the risky portfolio and 60% in T-bills? A) $240; $360 B) $360; $240 C) $100; $240 D) $240; $160 E) Cannot be determined. 24) You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.20? A) 30% and 70% B) 50% and 50% C) 60% and 40% D) 40% and 60% E) Cannot be determined.