CPA Core 1 - Unit 4-Questions With
100% Correct Answers 2026 Updated.
CAPM Formula - Answer Risk free rate + (Beta*(Market Return-Risk Free Rate))
Which of the following statements regarding portfolio diversification is true?
A. Diversification using investments that ideally are perfectly positively correlated allows risk to
be minimized while increasing the return of the portfolio.
B. Diversification using investments that ideally are perfectly negatively correlated allows risk to
be minimized while not significantly reducing the return of the portfolio.
C. Diversification using investments that ideally are perfectly negatively correlated allows risk to
be minimized while increasing the return of the portfolio.
D. Diversification using investments that are ideally zero correlated allows risk to be minimized
while not significantly reducing the return. - Answer B. Diversification using investments that
ideally are perfectly negatively correlated allows risk to be minimized while not significantly
reducing the return of the portfolio.
In comparing two investments, and everything else is equal, which one of the following
statements is true?
A. The investment with the higher risk will be priced higher because a higher return is required.
B. The investment with the higher risk will be priced higher because a lower return is required.
C. The investment with the higher risk will be priced lower because a lower return is required.
D. The investment with the higher risk will be priced lower because a higher return is required. -
Answer D. The investment with the higher risk will be priced lower because a higher return is
required.
You are given the following information concerning two investments:
Investment A:Standard deviation 23%Beta 0.7Investment B:Standard deviation 15%Beta 1.6
The correlation coefficient between the returns on Investments A and B is 0.78.
Based on the above information, which one of the following statements is true?
A. Investment A has greater systematic risk than that of Investment B.
B. Investment A has higher total risk than that of Investment B.
C. Returns on Investment A will tend to be high when returns on Investment B are low.
D. Investment A has lower unsystematic risk than that of Investment B. - Answer B. Investment
A has higher total risk than that of Investment B.
, Investment A has higher total risk (as measured by the standard deviation) than Investment B
has.
Which of the following statements about passive investments is true?
A. Only interest-bearing bonds traded on an exchange qualify as passive investments.
B. Passive investments include those that generate capital gains.
C. Only government bonds qualify as passive investments.
D. Common shares with voting rights do not qualify as passive investments - Answer B. Passive
investments include those that generate capital gains.
Walkerton Inc. is considering an investment in commercial paper. Which of the following
statements best describes commercial paper?
A. It is a secured, short-term debt instrument guaranteed by a bank, secured by accounts
receivable and inventory and typically maturing in 30 to 60 days.
B. It is an unsecured, short-term debt instrument issued by a company, used to finance accounts
receivable and inventory and only maturing sometime after 270 days.
C. It is an unsecured, short-term debt instrument issued by a company, used to finance accounts
receivable and inventory and typically maturing in 30 to 60 days.
D. It is a secured, short-term debt instrument issued by a company, secured by accounts
receivable and inventory and typically maturing in 30 to 60 days. - Answer C. It is an
unsecured, short-term debt instrument issued by a company, used to finance accounts
receivable and inventory and typically maturing in 30 to 60 days.
Which of the following statements is true when comparing common shares and preferred
shares issued by the same company?
A. Common shares are traded on organized exchanges, whereas preferred shares are traded
OTC.
B. While dividends on common shares are never a contractual obligation, dividends on
preferred shares become a contractual obligation if there is a cumulative provision.
C. While dividend payments on common shares are not tax deductible for the firm, dividend
payments on preferred shares are tax deductible because they are at a stated rate.
D. Preferred shares have a stated dividend rate, whereas common shares do not. - Answer D.
Preferred shares have a stated dividend rate, whereas common shares do not.
Harold is considering investing in either common shares or long-term bonds. Which of the
following statements is true with respect to comparing these two investments?
A. Common shares pay dividends only when declared, while interest must be paid on bonds
when it comes due.
B. Common shares pay dividends at a stated rate, and bonds pay interest based on a stated rate.
100% Correct Answers 2026 Updated.
CAPM Formula - Answer Risk free rate + (Beta*(Market Return-Risk Free Rate))
Which of the following statements regarding portfolio diversification is true?
A. Diversification using investments that ideally are perfectly positively correlated allows risk to
be minimized while increasing the return of the portfolio.
B. Diversification using investments that ideally are perfectly negatively correlated allows risk to
be minimized while not significantly reducing the return of the portfolio.
C. Diversification using investments that ideally are perfectly negatively correlated allows risk to
be minimized while increasing the return of the portfolio.
D. Diversification using investments that are ideally zero correlated allows risk to be minimized
while not significantly reducing the return. - Answer B. Diversification using investments that
ideally are perfectly negatively correlated allows risk to be minimized while not significantly
reducing the return of the portfolio.
In comparing two investments, and everything else is equal, which one of the following
statements is true?
A. The investment with the higher risk will be priced higher because a higher return is required.
B. The investment with the higher risk will be priced higher because a lower return is required.
C. The investment with the higher risk will be priced lower because a lower return is required.
D. The investment with the higher risk will be priced lower because a higher return is required. -
Answer D. The investment with the higher risk will be priced lower because a higher return is
required.
You are given the following information concerning two investments:
Investment A:Standard deviation 23%Beta 0.7Investment B:Standard deviation 15%Beta 1.6
The correlation coefficient between the returns on Investments A and B is 0.78.
Based on the above information, which one of the following statements is true?
A. Investment A has greater systematic risk than that of Investment B.
B. Investment A has higher total risk than that of Investment B.
C. Returns on Investment A will tend to be high when returns on Investment B are low.
D. Investment A has lower unsystematic risk than that of Investment B. - Answer B. Investment
A has higher total risk than that of Investment B.
, Investment A has higher total risk (as measured by the standard deviation) than Investment B
has.
Which of the following statements about passive investments is true?
A. Only interest-bearing bonds traded on an exchange qualify as passive investments.
B. Passive investments include those that generate capital gains.
C. Only government bonds qualify as passive investments.
D. Common shares with voting rights do not qualify as passive investments - Answer B. Passive
investments include those that generate capital gains.
Walkerton Inc. is considering an investment in commercial paper. Which of the following
statements best describes commercial paper?
A. It is a secured, short-term debt instrument guaranteed by a bank, secured by accounts
receivable and inventory and typically maturing in 30 to 60 days.
B. It is an unsecured, short-term debt instrument issued by a company, used to finance accounts
receivable and inventory and only maturing sometime after 270 days.
C. It is an unsecured, short-term debt instrument issued by a company, used to finance accounts
receivable and inventory and typically maturing in 30 to 60 days.
D. It is a secured, short-term debt instrument issued by a company, secured by accounts
receivable and inventory and typically maturing in 30 to 60 days. - Answer C. It is an
unsecured, short-term debt instrument issued by a company, used to finance accounts
receivable and inventory and typically maturing in 30 to 60 days.
Which of the following statements is true when comparing common shares and preferred
shares issued by the same company?
A. Common shares are traded on organized exchanges, whereas preferred shares are traded
OTC.
B. While dividends on common shares are never a contractual obligation, dividends on
preferred shares become a contractual obligation if there is a cumulative provision.
C. While dividend payments on common shares are not tax deductible for the firm, dividend
payments on preferred shares are tax deductible because they are at a stated rate.
D. Preferred shares have a stated dividend rate, whereas common shares do not. - Answer D.
Preferred shares have a stated dividend rate, whereas common shares do not.
Harold is considering investing in either common shares or long-term bonds. Which of the
following statements is true with respect to comparing these two investments?
A. Common shares pay dividends only when declared, while interest must be paid on bonds
when it comes due.
B. Common shares pay dividends at a stated rate, and bonds pay interest based on a stated rate.
