FINA 3315 Exam 1 Review Questions with Correct Answers Latest Update 2025/2026
An investment produced annual rates of return of 4%, 8%, 14% and 6%, respectively, over the
past four years. What is the standard deviation of these returns? - Answers 4.3%
Investment A has an expected return of 8% with a standard deviation of 12%. Investment B has
an expected return of 10% with a standard deviation 15%. - Answers Preference for A or B would
depend on the investor's risk tolerance
Roy is going to receive a payment of $5000 one year from today. He earns an average of 6% on
his investments. What is the present value of this payment. - Answers PV = FV/(1+R)^n
= 5000/(1+6%)^1
= 4,716.9
The returns on the stock of DEF and GHI companies over a 4 year period are shown below
From this limited data you should conclude that returns on - Answers DEF and GHI are
somewhat positively correlated
The returns on small company stocks are 10.7%, U.S. Treasury bill offer a 1.3% return and a
bank savings account offers an 0.8% return. What is the risk premium on small company stocks?
- Answers Rr = Rf + Rp
10.7% = 1.3% +Rp
Rp = 10.7% - 1.3%
= 9.4%
If there is no relationship between the rates of return of two assets over time, these assets are -
Answers Uncorrelated
If the expected rate of return on AZNG is 12.72 , its beta is 1.09 and the market risk premium is
8%, what is the risk-free rate? - Answers Rr = Rf + B(Rm-Rf)
12.72% = Rf + 1.09 * 8%
12.72% = Rf + 8.72%
12.72% - 8.72% = Rf
4%
A capital loss is computed by - Answers Subtracting the original cost of an investment from the
proceeds received from the sale of that investment.
,Portfolio objectives should be established before beginning to invest - Answers True
Krishna bought a stock at a price of $33.75. She received a $1.25 dividend and sold the stock
for $36.10. What is Kelly's capital gain on this investment? - Answers 36.1-33.75
2.35
Ashley purchased a stock at $54 per share. She received quarterly dividends of $0.80 per share.
After one year, Ashley sold the stock at a price of $53.25 a share. What is her percentage
holding period return on this investment? - Answers (3.2 + (53.25 - 54))/54 = 4.53%
The stock of a technology company has an expected return of 15% and a standard deviation of
20% The stock of a pharmaceutical company has an expected return of 13% and a standard
deviation of 18%. A portfolio consisting of 50% invested in each stock will have an expected
return of 14 % and a standard deviation - Answers less than the average of 20% and 18%
(diversification lowers the standard deviation)
Adding stocks with higher standard deviations to a portfolio will necessarily increase the
portfolio's risk - Answers False
The present value of $1,000 discounted at the rate of 5% per year, to be received at the end of 3
years is equal to - Answers 1,000/(1.05)^3
Christopher invests $400 at a 4% rate of return which is compounded annually. What is the
future value of this investment after four years? - Answers PV=FV/(1+R)^n
FV=PV*(1+R)^n
=400*(1+6%)^4
=467.9
The return that fully compensates for the risk of an investment is called the risk-free rate of
return - Answers False
The holding period return includes the time value of money - Answers False
According to MSN money, the stock or Orange Corporation has a beta of 1.5, but according to
Yahoo Finance it is 1.75. The expected rate of return on the market is 12% and the risk free rate
is 2%. What is the difference between the required rates of return calculated using each of these
betas? - Answers Rr=Rf+B(Rm-Rf)
MSN:
R = 2% + 1.5 * (12%-2%)
=2% + 1.5 * 10% =17%
,Yahoo:
R = 2% + 1.75 * (12% -2%) = 19.5%
Difference:
19.5% - 17%
The Capital Asset Pricing Model (CAPM) includes which of the following in its base
assumptions? - Answers Investors buying positive beta stocks should earn a minimum return
equal to the risk-free rare.
Investors should be rewarded for the amount of risk they assume.
Historically, what is the correct ranking of the following securities from the lowest rate of return
to the highest? - Answers Short-term government bills, long-term government bonds, stocks
In some markets it may take many months to sell a residential property. This is an example of -
Answers Liquidity risk
Hannah owns the following portfolio of stocks. What is the return on her portfolio? - Answers
10,000 + 8,000 + 7,000 = 25,000
Wa: 10,000/25,000
Wb: 8,000/25,000
Wc: 7,000/25,000
Rp = Wa * ra + Wb * rb + Wc * rc
= (10,000/25,000) * 15.5% + (8,000/25,000) * 11% + (7,000/25,000) * 6.3%
=11.48
Stock of Gould and Silber Inc. has a beta of -1. If the market declines by 10%, Gould and Silber
would be expected to - Answers Rise by 10%
A portfolio with a beta of 1.26 - Answers Is considerably more risky than the overall market
The efficient frontier - Answers Represents the best attainable tradeoff between risk and return
Over the long term, which one of the following has historically had the lowest risk and lowest
average annual rate of return? - Answers Short-term government bills
An investment that has earned a high rate of return over the last 5 years will necessarily
continue to perform well in the future. - Answers False
To determine the total return on an investment, one needs to know the purchase price, the
, current value and any income the investment produced - Answers True
1) A non-interest bearing checking account is still considered an investment. - Answers False
2) Land and buildings are examples of real property investments. - Answers True
3) Since 1900, the average return on stocks has exceeded the average return on savings
accounts by more than 6 percentage points. - Answers True
4) A United States Savings Bond is an example of an investment as defined in the text. -
Answers True
5) Most sources of investment information are in print format, expensive, and difficult to access.
- Answers False
6) Which of the following is NOT an investment as defined in the text?
A) a certificate of deposit issued by a bank
B) a new automobile
C) a United States Saving Bond
D) a mutual fund held in a retirement account - Answers B) a new automobile
7) Stocks are a(n) ________ investment representing ________ of a business.
A) direct; ownership
B) direct; debt
C) indirect; ownership
D) indirect; debt - Answers A) direct; ownership
8) An exchange traded fund that invests in the stocks of large corporations is an example of
A) direct investment.
B) indirect investment.
C) derivative investment.
D) tangible investment. - Answers B) indirect investment.
9) Which of the following has declined in recent years?
A) direct ownership of stock by individual investors
B) the percentage of foreign stocks held in typical portfolios
An investment produced annual rates of return of 4%, 8%, 14% and 6%, respectively, over the
past four years. What is the standard deviation of these returns? - Answers 4.3%
Investment A has an expected return of 8% with a standard deviation of 12%. Investment B has
an expected return of 10% with a standard deviation 15%. - Answers Preference for A or B would
depend on the investor's risk tolerance
Roy is going to receive a payment of $5000 one year from today. He earns an average of 6% on
his investments. What is the present value of this payment. - Answers PV = FV/(1+R)^n
= 5000/(1+6%)^1
= 4,716.9
The returns on the stock of DEF and GHI companies over a 4 year period are shown below
From this limited data you should conclude that returns on - Answers DEF and GHI are
somewhat positively correlated
The returns on small company stocks are 10.7%, U.S. Treasury bill offer a 1.3% return and a
bank savings account offers an 0.8% return. What is the risk premium on small company stocks?
- Answers Rr = Rf + Rp
10.7% = 1.3% +Rp
Rp = 10.7% - 1.3%
= 9.4%
If there is no relationship between the rates of return of two assets over time, these assets are -
Answers Uncorrelated
If the expected rate of return on AZNG is 12.72 , its beta is 1.09 and the market risk premium is
8%, what is the risk-free rate? - Answers Rr = Rf + B(Rm-Rf)
12.72% = Rf + 1.09 * 8%
12.72% = Rf + 8.72%
12.72% - 8.72% = Rf
4%
A capital loss is computed by - Answers Subtracting the original cost of an investment from the
proceeds received from the sale of that investment.
,Portfolio objectives should be established before beginning to invest - Answers True
Krishna bought a stock at a price of $33.75. She received a $1.25 dividend and sold the stock
for $36.10. What is Kelly's capital gain on this investment? - Answers 36.1-33.75
2.35
Ashley purchased a stock at $54 per share. She received quarterly dividends of $0.80 per share.
After one year, Ashley sold the stock at a price of $53.25 a share. What is her percentage
holding period return on this investment? - Answers (3.2 + (53.25 - 54))/54 = 4.53%
The stock of a technology company has an expected return of 15% and a standard deviation of
20% The stock of a pharmaceutical company has an expected return of 13% and a standard
deviation of 18%. A portfolio consisting of 50% invested in each stock will have an expected
return of 14 % and a standard deviation - Answers less than the average of 20% and 18%
(diversification lowers the standard deviation)
Adding stocks with higher standard deviations to a portfolio will necessarily increase the
portfolio's risk - Answers False
The present value of $1,000 discounted at the rate of 5% per year, to be received at the end of 3
years is equal to - Answers 1,000/(1.05)^3
Christopher invests $400 at a 4% rate of return which is compounded annually. What is the
future value of this investment after four years? - Answers PV=FV/(1+R)^n
FV=PV*(1+R)^n
=400*(1+6%)^4
=467.9
The return that fully compensates for the risk of an investment is called the risk-free rate of
return - Answers False
The holding period return includes the time value of money - Answers False
According to MSN money, the stock or Orange Corporation has a beta of 1.5, but according to
Yahoo Finance it is 1.75. The expected rate of return on the market is 12% and the risk free rate
is 2%. What is the difference between the required rates of return calculated using each of these
betas? - Answers Rr=Rf+B(Rm-Rf)
MSN:
R = 2% + 1.5 * (12%-2%)
=2% + 1.5 * 10% =17%
,Yahoo:
R = 2% + 1.75 * (12% -2%) = 19.5%
Difference:
19.5% - 17%
The Capital Asset Pricing Model (CAPM) includes which of the following in its base
assumptions? - Answers Investors buying positive beta stocks should earn a minimum return
equal to the risk-free rare.
Investors should be rewarded for the amount of risk they assume.
Historically, what is the correct ranking of the following securities from the lowest rate of return
to the highest? - Answers Short-term government bills, long-term government bonds, stocks
In some markets it may take many months to sell a residential property. This is an example of -
Answers Liquidity risk
Hannah owns the following portfolio of stocks. What is the return on her portfolio? - Answers
10,000 + 8,000 + 7,000 = 25,000
Wa: 10,000/25,000
Wb: 8,000/25,000
Wc: 7,000/25,000
Rp = Wa * ra + Wb * rb + Wc * rc
= (10,000/25,000) * 15.5% + (8,000/25,000) * 11% + (7,000/25,000) * 6.3%
=11.48
Stock of Gould and Silber Inc. has a beta of -1. If the market declines by 10%, Gould and Silber
would be expected to - Answers Rise by 10%
A portfolio with a beta of 1.26 - Answers Is considerably more risky than the overall market
The efficient frontier - Answers Represents the best attainable tradeoff between risk and return
Over the long term, which one of the following has historically had the lowest risk and lowest
average annual rate of return? - Answers Short-term government bills
An investment that has earned a high rate of return over the last 5 years will necessarily
continue to perform well in the future. - Answers False
To determine the total return on an investment, one needs to know the purchase price, the
, current value and any income the investment produced - Answers True
1) A non-interest bearing checking account is still considered an investment. - Answers False
2) Land and buildings are examples of real property investments. - Answers True
3) Since 1900, the average return on stocks has exceeded the average return on savings
accounts by more than 6 percentage points. - Answers True
4) A United States Savings Bond is an example of an investment as defined in the text. -
Answers True
5) Most sources of investment information are in print format, expensive, and difficult to access.
- Answers False
6) Which of the following is NOT an investment as defined in the text?
A) a certificate of deposit issued by a bank
B) a new automobile
C) a United States Saving Bond
D) a mutual fund held in a retirement account - Answers B) a new automobile
7) Stocks are a(n) ________ investment representing ________ of a business.
A) direct; ownership
B) direct; debt
C) indirect; ownership
D) indirect; debt - Answers A) direct; ownership
8) An exchange traded fund that invests in the stocks of large corporations is an example of
A) direct investment.
B) indirect investment.
C) derivative investment.
D) tangible investment. - Answers B) indirect investment.
9) Which of the following has declined in recent years?
A) direct ownership of stock by individual investors
B) the percentage of foreign stocks held in typical portfolios
