FINANCE 301 Final Exams Practice Questions
Solved 100% Correct | Verified Answers
True or False: Systematic risk can be diversified away with a proper diversification
strategy. ANSWER - False. Systematic risk cannot be avoided.
What is the calculation for the market risk premium? ANSWER - Market Return minus
Risk Free Rate
What is the formula for CAPM? ANSWER - Risk Free Rate + Beta (Market Risk Premium)
What kind of risk can be diversified away? ANSWER - Unsystematic
If an investment is above the CAPM line, is that company over or undervalued? ANSWER
- Undervalued
Based on the theory of efficient capital markets, what would you expect to happen to
the price of an investment if good news was released to the market? ANSWER - Price
would increase
How do you calculate Alpha? ANSWER - Investment Return-CAPM
Given the following Betas, rank the expected return from highest to lowest.
Investment A 1.2
Investment B 1.5
Investment C .8 ANSWER - B, A, and then C. Companies with higher betas have a
positive correlation with higher returns.
,True or False: Using net returns, a diversified mutual fund with a Beta of zero will have
an expected negative alpha that is equal to its expense ratio. ANSWER - True
A fund that invested based on the strategies put forth in the Fama and French study
would typically invest in what kind of ratios? ANSWER - Assets with low P/E ratios
Also, the Fama study shows that portfolios with high BE/ME (Book value to market
value) do better
Where is the stock plotted on the CAPM line if it has a positive alpha? ANSWER - Above
In an efficient capital market, stock prices react to news ______ and _________.
ANSWER - Immediately; randomly
Which of the following forms of efficient markets is characterized by stock prices
reflecting all publically available information? ANSWER - Semi-Strong
What form reflects information contained in the history of past stock prices and trading
volume? ANSWER - Weak (This is what technical analysts do)
What form reflects all information, including information that is not available to the
investment community? ANSWER - Strong
In the CAPM equation, what does Beta measure?
A) Risk that you are not paid to take
B) Risk that you are paid to take
C) Firm specific risk
D) Riskless rate of return
,E) Market risk premium ANSWER - B) Risk that you are paid to take
What type of risk cannot be diversified away? ANSWER - Systematic
If a firm's observed return was 10%, calculate the firm's alpha given the following
information: S&P 500: 13%, T-Bills: 3%, Beta: 0.5 ANSWER - CAPM= 3% + .5 (13%-3%)=
8%
Investment Return= 10%
Alpha= Investment Return-CAPM= 2%
True or False: A fund's positive net investment performance versus its benchmark index
is a good indicator of positive future performance ANSWER - False. Past results do not
indicate future performance.
True or False: If a market is efficient, the price of the investment will equal the value of
an investment. ANSWER - True
Begin of Session 24: Interest Rates and Bond Valuations Part One ANSWER -
Which of the following is NOT one of the types of risk associated with fixed-rate debt
obligations?
A) Reinvestment risk
B) Default risk
C) Prepayment risk
D) Coupon risk
E) Interest risk ANSWER - D) Coupon Risk
, The difference between the yield on a non-callable US Treasury bond and the yield on a
non-callable corporate bond with identical maturities is known as ______.
A) Coupon premium
B) Interest premium
C) Market premium
D) Spread to treasuries
E) Interest spread ANSWER - D) Spread to Treasuries
Which of the following bonds would require the greatest yield? Bond 1: AAA rating,
Bond 2: BBB Rating, Bond 3: B Rating
A) Bond 1
B) Bond 2
C) Bond 3
D) There is no difference in the bonds' yields
E) Cannot be determined ANSWER - C) Bond 3. Bonds with lower ratings are considered
more risky, and thus require a greater yield.
A callable bond will have a higher interest rate than its otherwise identical, non-callable
bond.
A) True
B) False ANSWER - A) True
This is because a callable bond must have a premium attached for being able to taken
before its maturity.
Which of the following types of risk is most difficult to evaluate?
A) Reinvestment risk
Solved 100% Correct | Verified Answers
True or False: Systematic risk can be diversified away with a proper diversification
strategy. ANSWER - False. Systematic risk cannot be avoided.
What is the calculation for the market risk premium? ANSWER - Market Return minus
Risk Free Rate
What is the formula for CAPM? ANSWER - Risk Free Rate + Beta (Market Risk Premium)
What kind of risk can be diversified away? ANSWER - Unsystematic
If an investment is above the CAPM line, is that company over or undervalued? ANSWER
- Undervalued
Based on the theory of efficient capital markets, what would you expect to happen to
the price of an investment if good news was released to the market? ANSWER - Price
would increase
How do you calculate Alpha? ANSWER - Investment Return-CAPM
Given the following Betas, rank the expected return from highest to lowest.
Investment A 1.2
Investment B 1.5
Investment C .8 ANSWER - B, A, and then C. Companies with higher betas have a
positive correlation with higher returns.
,True or False: Using net returns, a diversified mutual fund with a Beta of zero will have
an expected negative alpha that is equal to its expense ratio. ANSWER - True
A fund that invested based on the strategies put forth in the Fama and French study
would typically invest in what kind of ratios? ANSWER - Assets with low P/E ratios
Also, the Fama study shows that portfolios with high BE/ME (Book value to market
value) do better
Where is the stock plotted on the CAPM line if it has a positive alpha? ANSWER - Above
In an efficient capital market, stock prices react to news ______ and _________.
ANSWER - Immediately; randomly
Which of the following forms of efficient markets is characterized by stock prices
reflecting all publically available information? ANSWER - Semi-Strong
What form reflects information contained in the history of past stock prices and trading
volume? ANSWER - Weak (This is what technical analysts do)
What form reflects all information, including information that is not available to the
investment community? ANSWER - Strong
In the CAPM equation, what does Beta measure?
A) Risk that you are not paid to take
B) Risk that you are paid to take
C) Firm specific risk
D) Riskless rate of return
,E) Market risk premium ANSWER - B) Risk that you are paid to take
What type of risk cannot be diversified away? ANSWER - Systematic
If a firm's observed return was 10%, calculate the firm's alpha given the following
information: S&P 500: 13%, T-Bills: 3%, Beta: 0.5 ANSWER - CAPM= 3% + .5 (13%-3%)=
8%
Investment Return= 10%
Alpha= Investment Return-CAPM= 2%
True or False: A fund's positive net investment performance versus its benchmark index
is a good indicator of positive future performance ANSWER - False. Past results do not
indicate future performance.
True or False: If a market is efficient, the price of the investment will equal the value of
an investment. ANSWER - True
Begin of Session 24: Interest Rates and Bond Valuations Part One ANSWER -
Which of the following is NOT one of the types of risk associated with fixed-rate debt
obligations?
A) Reinvestment risk
B) Default risk
C) Prepayment risk
D) Coupon risk
E) Interest risk ANSWER - D) Coupon Risk
, The difference between the yield on a non-callable US Treasury bond and the yield on a
non-callable corporate bond with identical maturities is known as ______.
A) Coupon premium
B) Interest premium
C) Market premium
D) Spread to treasuries
E) Interest spread ANSWER - D) Spread to Treasuries
Which of the following bonds would require the greatest yield? Bond 1: AAA rating,
Bond 2: BBB Rating, Bond 3: B Rating
A) Bond 1
B) Bond 2
C) Bond 3
D) There is no difference in the bonds' yields
E) Cannot be determined ANSWER - C) Bond 3. Bonds with lower ratings are considered
more risky, and thus require a greater yield.
A callable bond will have a higher interest rate than its otherwise identical, non-callable
bond.
A) True
B) False ANSWER - A) True
This is because a callable bond must have a premium attached for being able to taken
before its maturity.
Which of the following types of risk is most difficult to evaluate?
A) Reinvestment risk
