FINANCE 301 Exam study| 105 Questions all
with 100% Correct Answers-A+
3 areas of finance - ANSWER -corporate
-institutions and Markets
-investments
Tools of corporate finance - ANSWER accounting statements/ratios, present value-
future value, risk and returns models, & spreadsheet modeling
Finance-definition - ANSWER management of money
Role of Government in capital markets - ANSWER regulator, investor, market controllers
Warren Buffet - ANSWER investor, ceo of berkshire hatheway, invests in companies
versus stocks just not tech companies
Financial Metrics Buffet uses - ANSWER % profit margin
% return on equity
Berkshire Hatheway - ANSWER shares trade for over $100,000/share, insurance
company
Princ. 1 of finance: Higher Returns Require taking more risk - ANSWER Positive
relationship: higher the risk, higher the return; investors prefer less risk, higher
deviation from mean is higher risk, treasury bills=lowest risk, gov bonds=2nd lowest,
corp bonds=3rd lowest, large company stocks=2nd highest, small comp stocks= highest
risk
,-10% avg. annual return on stock market
Stock Return Formula - ANSWER SR= (change in price +dividends received)/initial price
Princ. 2: Efficient Capital Markets are Tough to Beat - ANSWER Current stock prices
reflect all public avail. info.; stock prices react completely, correctly, and almost instantly
to incorporate receipt of the new info.
Princ 3: Rational Investors are Risk Averse - ANSWER risk aversion: a rational investor
prefers less risk to more risk
Princ. 4: Supply and Demand Drive Stock Prices in Short-run - ANSWER short-run: stock's
current price influenced by temporary and extreme supply and demand imbalance, or
the stock market's reaction to the receipt of new info. that might not have anything to
do with true long-term value of comp., stocks follow random walk- prices are random
Long-run: fundamentals drive stock prices, by earnings
Princ. 5: Corporate Finance & Governance: - ANSWER -corporate managers should make
decisions that maximize shareholder value, creating shareholder value minimizes value
gaps
Princ. 6: Transaction Costs, taxes, and Inflation are enemies - ANSWER -Transaction
costs and effects of taxes and inflation can greatly reduce the real returns on your
investments
Princ. 7: Time and the Value of Money are Closely Related - ANSWER -dollar today is
worth more than dollar tomorrow
-Compounding: going from today's value(PV) to some expected unknown future
value(FV)
, Future value - ANSWER FV=PV*(1+r)^n
higher the rate of returns, the longer the time, the higher the future value
-used to figure out retirement, college funds, etc.
Present Value - ANSWER PV= FV* Discount Factor
Dis Factor=1/(1+r)^n
higher return, higher time, lower PV
-used to find time value of money
Princ. 8: Asset Allocation is very important decision: - ANSWER -involves dividing
investment funds among different asset classes. This decision reflects beliefs about the
anticipated risk and return of asset classes.
-Brinson Study: over 90% of diff in fund performance attributable to asset allocation
-most basic asset classes= cash, short-term deposits, fixed income securities and bonds,
and common stock
Princ. 9: Asset Diversification Reduces Risk - ANSWER -to reduce risk of your portfolio
it's important to diversify holdings.
-Diversification- spread wealth among a number of diff investments
-goal is to invest in a group of assets that provide with the best return possible given the
level of risk
Princ. 10: an asset pricing model should be used to value investments - ANSWER -an
asset pricing model is method to measure and put price on risk
-CAPM(capital asset pricing model) is simple model that estimates rate of return an
investor should expect to receive on risky asset
with 100% Correct Answers-A+
3 areas of finance - ANSWER -corporate
-institutions and Markets
-investments
Tools of corporate finance - ANSWER accounting statements/ratios, present value-
future value, risk and returns models, & spreadsheet modeling
Finance-definition - ANSWER management of money
Role of Government in capital markets - ANSWER regulator, investor, market controllers
Warren Buffet - ANSWER investor, ceo of berkshire hatheway, invests in companies
versus stocks just not tech companies
Financial Metrics Buffet uses - ANSWER % profit margin
% return on equity
Berkshire Hatheway - ANSWER shares trade for over $100,000/share, insurance
company
Princ. 1 of finance: Higher Returns Require taking more risk - ANSWER Positive
relationship: higher the risk, higher the return; investors prefer less risk, higher
deviation from mean is higher risk, treasury bills=lowest risk, gov bonds=2nd lowest,
corp bonds=3rd lowest, large company stocks=2nd highest, small comp stocks= highest
risk
,-10% avg. annual return on stock market
Stock Return Formula - ANSWER SR= (change in price +dividends received)/initial price
Princ. 2: Efficient Capital Markets are Tough to Beat - ANSWER Current stock prices
reflect all public avail. info.; stock prices react completely, correctly, and almost instantly
to incorporate receipt of the new info.
Princ 3: Rational Investors are Risk Averse - ANSWER risk aversion: a rational investor
prefers less risk to more risk
Princ. 4: Supply and Demand Drive Stock Prices in Short-run - ANSWER short-run: stock's
current price influenced by temporary and extreme supply and demand imbalance, or
the stock market's reaction to the receipt of new info. that might not have anything to
do with true long-term value of comp., stocks follow random walk- prices are random
Long-run: fundamentals drive stock prices, by earnings
Princ. 5: Corporate Finance & Governance: - ANSWER -corporate managers should make
decisions that maximize shareholder value, creating shareholder value minimizes value
gaps
Princ. 6: Transaction Costs, taxes, and Inflation are enemies - ANSWER -Transaction
costs and effects of taxes and inflation can greatly reduce the real returns on your
investments
Princ. 7: Time and the Value of Money are Closely Related - ANSWER -dollar today is
worth more than dollar tomorrow
-Compounding: going from today's value(PV) to some expected unknown future
value(FV)
, Future value - ANSWER FV=PV*(1+r)^n
higher the rate of returns, the longer the time, the higher the future value
-used to figure out retirement, college funds, etc.
Present Value - ANSWER PV= FV* Discount Factor
Dis Factor=1/(1+r)^n
higher return, higher time, lower PV
-used to find time value of money
Princ. 8: Asset Allocation is very important decision: - ANSWER -involves dividing
investment funds among different asset classes. This decision reflects beliefs about the
anticipated risk and return of asset classes.
-Brinson Study: over 90% of diff in fund performance attributable to asset allocation
-most basic asset classes= cash, short-term deposits, fixed income securities and bonds,
and common stock
Princ. 9: Asset Diversification Reduces Risk - ANSWER -to reduce risk of your portfolio
it's important to diversify holdings.
-Diversification- spread wealth among a number of diff investments
-goal is to invest in a group of assets that provide with the best return possible given the
level of risk
Princ. 10: an asset pricing model should be used to value investments - ANSWER -an
asset pricing model is method to measure and put price on risk
-CAPM(capital asset pricing model) is simple model that estimates rate of return an
investor should expect to receive on risky asset
