FNCE 4 EXAM WITH QUESTIONS AND
ANSWERS
Which one of the following statements related to capital gains is correct? -
ANSWER An increase in an unrealized capital gain will increase the capital gains
yield.
Which one of the following is most indicative of an efficient stock market? -
ANSWER Zero net present values for all stock investments
Which one of the following statements related to market efficiency tends to be
supported by current evidence? - ANSWER Markets tend to respond quickly to
new information.
One year ago, you purchased 200 shares of SL Industries stock for $18.97 a share.
The stock pays an annual dividend of $1.42 per share. Today, you sold all of your
shares for $17.86 per share. What is your total dollar return on this investment? -
ANSWER Total dollar return = ($17.86 − 18.97 + 1.42) (200)
Total dollar return = $62
Leo purchased a stock for $63.80 a share, received a dividend of $2.68 a share, and
sold the shares for $59.74 each. During the time he owned the stock, inflation
averaged 2.8 percent. What is his approximate real rate of return on this
investment? - ANSWER Nominal return = ($59.74 − 63.80 + 2.68)/$63.80
Nominal return = −.0216, or −2.16%
Approximate real return = −.0216 − .028
Approximate real return = −.0496, or −4.96%
A stock had returns of 12.4 percent, 16.6 percent, 10.2 percent, 19.0 percent, −15.7
percent, and 6.3 percent over the last six years. What is the geometric average
return on the stock for this period? - ANSWER Geometric average = (1.124)
(1.166) (1.102) (1.190) (.843) (1.063)1/6 − 1
,Geometric average = .0746, or 7.46%
A stock had annual returns of 6 percent, 13 percent, 11 percent, −8 percent, and 3
percent for the past five years, respectively. What is the standard deviation of
returns for this stock? - ANSWER Average return = (.06 + .13 + .11 − .08 + .03)/5
Average return = .05, or 5%
σ = {[1/(5 − 1)] [(.06 − .05)2 + (.13 − .05)2 +(.11 − .05)2 +(−.08 − .05)2 + (.03
− .05)2]}.5
σ = .0828, or 8.28%
Which one of the following events would be included in the expected return on
Sussex stock? - ANSWER This morning, Sussex confirmed that its CEO is retiring
at the end of the year as was anticipated.
The expected rate of return on a stock portfolio is a weighted average where the
weights are based on the: - ANSWER market value of the investment in each stock.
Steve has invested in twelve different stocks that have a combined value today of
$121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15
percent is a measure of which one of the following? - ANSWER Portfolio weight
Which one of the following statements is correct concerning a portfolio of 20
securities with multiple states of the economy when both the securities and the
economic states have unequal weights? - ANSWER Given both the unequal
weights of the securities and the economic states, an investor might be able to
create a portfolio that has an expected standard deviation of zero.
Which one of the following statements related to risk is correct? - ANSWER The
systematic risk of a portfolio can be effectively lowered by adding T-bills to the
portfolio
A news flash just appeared that caused about a dozen stocks to suddenly increase in
value by 12 percent. What type of risk does this news flash best represent? -
ANSWER Unsystematic
The _____ of a security divided by the beta of that security is equal to the slope of
the security market line if the security is priced fairly. - ANSWER risk premium
, Treynor Industries is investing in a new project. The minimum rate of return the
firm requires on this project is referred to as the: - ANSWER cost of capital.
Which one of the following statements is correct concerning a portfolio beta? -
ANSWER A portfolio beta is a weighted average of the betas of the individual
securities contained in the portfolio.
You own a portfolio that has $2,800 invested in Stock A and $3,250 invested in
Stock B. The expected returns on these stocks are 14.7 percent and 9.3 percent,
respectively. What is the expected return on the portfolio? - ANSWER E(Rp) =
[$2,800/($2,800 + 3,250)](.147) + [$3,250/($2,800 + 3,250)](.093)
E(Rp) = .1180, or 11.80%
What is the expected return on a portfolio comprised of $9,750 of Stock X and
$4,520 of Stock Y if the economy enjoys a boom period?
State of Economy Probability Rate of Return
Stock X Stock Y
Boom .25 .108 .156
Normal .65 .087 .097
Recession .10 .024 − .069 - ANSWER E(r)Boom = [$9,750/($9,750 +
4,520)](.108) + [$4,520/($9,750 + 4,520)](.156)
E(r)Boom = .1232, or 12.32%
What is the standard deviation of the returns on a $30,000 portfolio that consists of
Stocks S and T? Stock S is valued at $18,000.
ANSWERS
Which one of the following statements related to capital gains is correct? -
ANSWER An increase in an unrealized capital gain will increase the capital gains
yield.
Which one of the following is most indicative of an efficient stock market? -
ANSWER Zero net present values for all stock investments
Which one of the following statements related to market efficiency tends to be
supported by current evidence? - ANSWER Markets tend to respond quickly to
new information.
One year ago, you purchased 200 shares of SL Industries stock for $18.97 a share.
The stock pays an annual dividend of $1.42 per share. Today, you sold all of your
shares for $17.86 per share. What is your total dollar return on this investment? -
ANSWER Total dollar return = ($17.86 − 18.97 + 1.42) (200)
Total dollar return = $62
Leo purchased a stock for $63.80 a share, received a dividend of $2.68 a share, and
sold the shares for $59.74 each. During the time he owned the stock, inflation
averaged 2.8 percent. What is his approximate real rate of return on this
investment? - ANSWER Nominal return = ($59.74 − 63.80 + 2.68)/$63.80
Nominal return = −.0216, or −2.16%
Approximate real return = −.0216 − .028
Approximate real return = −.0496, or −4.96%
A stock had returns of 12.4 percent, 16.6 percent, 10.2 percent, 19.0 percent, −15.7
percent, and 6.3 percent over the last six years. What is the geometric average
return on the stock for this period? - ANSWER Geometric average = (1.124)
(1.166) (1.102) (1.190) (.843) (1.063)1/6 − 1
,Geometric average = .0746, or 7.46%
A stock had annual returns of 6 percent, 13 percent, 11 percent, −8 percent, and 3
percent for the past five years, respectively. What is the standard deviation of
returns for this stock? - ANSWER Average return = (.06 + .13 + .11 − .08 + .03)/5
Average return = .05, or 5%
σ = {[1/(5 − 1)] [(.06 − .05)2 + (.13 − .05)2 +(.11 − .05)2 +(−.08 − .05)2 + (.03
− .05)2]}.5
σ = .0828, or 8.28%
Which one of the following events would be included in the expected return on
Sussex stock? - ANSWER This morning, Sussex confirmed that its CEO is retiring
at the end of the year as was anticipated.
The expected rate of return on a stock portfolio is a weighted average where the
weights are based on the: - ANSWER market value of the investment in each stock.
Steve has invested in twelve different stocks that have a combined value today of
$121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15
percent is a measure of which one of the following? - ANSWER Portfolio weight
Which one of the following statements is correct concerning a portfolio of 20
securities with multiple states of the economy when both the securities and the
economic states have unequal weights? - ANSWER Given both the unequal
weights of the securities and the economic states, an investor might be able to
create a portfolio that has an expected standard deviation of zero.
Which one of the following statements related to risk is correct? - ANSWER The
systematic risk of a portfolio can be effectively lowered by adding T-bills to the
portfolio
A news flash just appeared that caused about a dozen stocks to suddenly increase in
value by 12 percent. What type of risk does this news flash best represent? -
ANSWER Unsystematic
The _____ of a security divided by the beta of that security is equal to the slope of
the security market line if the security is priced fairly. - ANSWER risk premium
, Treynor Industries is investing in a new project. The minimum rate of return the
firm requires on this project is referred to as the: - ANSWER cost of capital.
Which one of the following statements is correct concerning a portfolio beta? -
ANSWER A portfolio beta is a weighted average of the betas of the individual
securities contained in the portfolio.
You own a portfolio that has $2,800 invested in Stock A and $3,250 invested in
Stock B. The expected returns on these stocks are 14.7 percent and 9.3 percent,
respectively. What is the expected return on the portfolio? - ANSWER E(Rp) =
[$2,800/($2,800 + 3,250)](.147) + [$3,250/($2,800 + 3,250)](.093)
E(Rp) = .1180, or 11.80%
What is the expected return on a portfolio comprised of $9,750 of Stock X and
$4,520 of Stock Y if the economy enjoys a boom period?
State of Economy Probability Rate of Return
Stock X Stock Y
Boom .25 .108 .156
Normal .65 .087 .097
Recession .10 .024 − .069 - ANSWER E(r)Boom = [$9,750/($9,750 +
4,520)](.108) + [$4,520/($9,750 + 4,520)](.156)
E(r)Boom = .1232, or 12.32%
What is the standard deviation of the returns on a $30,000 portfolio that consists of
Stocks S and T? Stock S is valued at $18,000.
