FIN 300 MANAGERIAL FINANCE
COMPREHENSIVE QUESTIONS AND CORRECT
ANSWERS
◉ The expected rate of return from an investment is equal to the
expected cash flows divided by the initial investment.
Answer: True
◉ Another name for an asset's expected rate of return is
holding−period
return.
Answer: False
◉ The
risk−return
trade−off
that investors face on a
day−to−day
basis is based on realized rates of return because expected returns
involve too much uncertainty.
Answer: False
,◉ The relevant variable a financial manager uses to measure returns
is
Answer: cash flows.
◉ Variation in the rate of return of an investment is a measure of the
riskiness of that investment.
Answer: True
◉ For a
well−diversified
investor, an investment with an expected return of 10% with a
standard deviation of 3% dominates an investment with an expected
return of 10% with a standard deviation of 5%.
Answer: False
◉ Investment A and Investment B both have the same expected
return, but Investment A is more risky than Investment B. In the
technical jargon of modern portfolio theory, Investment A is said to
"dominate" Investment B.
Answer: False
◉ Historically, investments with the highest returns have the lowest
standard deviations because investors do not like risk.
Answer: False
, ◉ Negative historical returns are not possible during periods of high
volatility (high standard deviations of returns) due to the
risk−return
trade−off.
Answer: False
◉ Of the following different types of securities, which is typically
considered most risky?
Answer: common stocks of small companies
◉ If you were to use the standard deviation as a measure of
investment risk, which of the following has historically been the
least risky investment?
Answer: U.S. Treasury bills
◉ The benefits of diversification occur as long as the investments in
a portfolio are not perfectly positively correlated.
Answer: True
◉ A stock with a beta of 1 has systematic or market risk equal to the
"typical" stock in the marketplace.
Answer: True
COMPREHENSIVE QUESTIONS AND CORRECT
ANSWERS
◉ The expected rate of return from an investment is equal to the
expected cash flows divided by the initial investment.
Answer: True
◉ Another name for an asset's expected rate of return is
holding−period
return.
Answer: False
◉ The
risk−return
trade−off
that investors face on a
day−to−day
basis is based on realized rates of return because expected returns
involve too much uncertainty.
Answer: False
,◉ The relevant variable a financial manager uses to measure returns
is
Answer: cash flows.
◉ Variation in the rate of return of an investment is a measure of the
riskiness of that investment.
Answer: True
◉ For a
well−diversified
investor, an investment with an expected return of 10% with a
standard deviation of 3% dominates an investment with an expected
return of 10% with a standard deviation of 5%.
Answer: False
◉ Investment A and Investment B both have the same expected
return, but Investment A is more risky than Investment B. In the
technical jargon of modern portfolio theory, Investment A is said to
"dominate" Investment B.
Answer: False
◉ Historically, investments with the highest returns have the lowest
standard deviations because investors do not like risk.
Answer: False
, ◉ Negative historical returns are not possible during periods of high
volatility (high standard deviations of returns) due to the
risk−return
trade−off.
Answer: False
◉ Of the following different types of securities, which is typically
considered most risky?
Answer: common stocks of small companies
◉ If you were to use the standard deviation as a measure of
investment risk, which of the following has historically been the
least risky investment?
Answer: U.S. Treasury bills
◉ The benefits of diversification occur as long as the investments in
a portfolio are not perfectly positively correlated.
Answer: True
◉ A stock with a beta of 1 has systematic or market risk equal to the
"typical" stock in the marketplace.
Answer: True
