CPA Core 1 - Unit 4 With Accurate Solutions
Latest Update
formula (CAPM) - ANSWER Risk free rate + [Beta*(Market Return-Risk Free Rate)]
Which of the following statements about portfolio diversification is CORRECT?
A. By diversifying, investors can attain the lowest level of risk while at the same time,
they increase the return of their portfolio by incorporating investments that optimally
are perfectly positively correlated.
B. Investors can optimally diversify their portfolios and minimize their risk without
sacrificing a substantial decline in the portfolio return by incorporating investments that
are optimally perfectly negatively correlated.
C. Diversification by means of investments that are perfectly negatively correlated
ideally allows for minimization of risk while increasing the return of the portfolio.
D. Diversification by means of investments that are zero correlated ideally allows for
minimization of risk with insignificant reduction of return. -ANSWER B. Diversification by
means of investments that are perfectly negatively correlated ideally allows for the
minimization of risk without significant reduction in the return of the portfolio.
Which of the following statements is correct, given that two investments are being
compared and all else held constant?
A. A higher risk investment will have a higher price because a higher return is
demanded
B. A higher risk investment will have a higher price because a lower return is demanded
C. A higher risk investment will have a lower price because a lower return is demanded.
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.
From the above, which one of the following statements is correct?
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 compared to Investment B. - ANSWER B.
Investment A has higher total risk compared to Investment A.
Investment A has higher total risk, based on standard deviation, relative to Investment
B.
Which of the following is NOT correct about passive investments?
A. Passive investments only include interest-bearing bonds that trade on an exchange.
B. Passive investments include capital gain generating investments.
C. Passive investments include only government bonds.
D. Common shares with voting rights are not passive investments - ANSWER B. Passive
investments include those that yield capital gains
Walkerton Inc. is considering the purchase of commercial paper. Which of the following
best describes commercial paper?
A. It is a secured, short-term debt instrument guaranteed by a bank collateralized by
accounts receivable and inventory, due in 30 to 60 days.
B. It is an unsecured, short-term debt instrument issued by a company to finance
accounts receivable and inventory that matures only sometime after 270 days.
C. A short-term, unsecured debt instrument issued by a firm to finance accounts
receivable and inventories that customarily matures 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 normally matures 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 normally matures in 30 to 60 days.
, Which of the following statements is correct about common shares relative to preferred
shares issued by the same company?
A. Common shares always trade on organized exchanges while preferred shares trade
OTC.
B. Dividends on common shares are never a contractual obligation while 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 must decide between 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.
C. Both common shares and bonds do not have the future amount to be returned from
the initial investment pre-determined by the issuer.
d. The risk on a common share investment is less than that for a long-term bond
investment. - ANSWER A. Common shares pay dividends only when declared, while
interest must be paid on bonds when it comes due.
Which of the following statements describes a hybrid security?
A. It is a security that contains the combined features of a derivative and equity.
B. It is security, having a mixture of the characteristics of a derivative and a short-term
security.
C. It is a security having features of both fixed-income and equity.
D. It is a security that has a mixture of a short-term and long-term fixed-income
characteristics. - ANSWER C. It is a security that has a mixture of fixed-income and
Latest Update
formula (CAPM) - ANSWER Risk free rate + [Beta*(Market Return-Risk Free Rate)]
Which of the following statements about portfolio diversification is CORRECT?
A. By diversifying, investors can attain the lowest level of risk while at the same time,
they increase the return of their portfolio by incorporating investments that optimally
are perfectly positively correlated.
B. Investors can optimally diversify their portfolios and minimize their risk without
sacrificing a substantial decline in the portfolio return by incorporating investments that
are optimally perfectly negatively correlated.
C. Diversification by means of investments that are perfectly negatively correlated
ideally allows for minimization of risk while increasing the return of the portfolio.
D. Diversification by means of investments that are zero correlated ideally allows for
minimization of risk with insignificant reduction of return. -ANSWER B. Diversification by
means of investments that are perfectly negatively correlated ideally allows for the
minimization of risk without significant reduction in the return of the portfolio.
Which of the following statements is correct, given that two investments are being
compared and all else held constant?
A. A higher risk investment will have a higher price because a higher return is
demanded
B. A higher risk investment will have a higher price because a lower return is demanded
C. A higher risk investment will have a lower price because a lower return is demanded.
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.
From the above, which one of the following statements is correct?
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 compared to Investment B. - ANSWER B.
Investment A has higher total risk compared to Investment A.
Investment A has higher total risk, based on standard deviation, relative to Investment
B.
Which of the following is NOT correct about passive investments?
A. Passive investments only include interest-bearing bonds that trade on an exchange.
B. Passive investments include capital gain generating investments.
C. Passive investments include only government bonds.
D. Common shares with voting rights are not passive investments - ANSWER B. Passive
investments include those that yield capital gains
Walkerton Inc. is considering the purchase of commercial paper. Which of the following
best describes commercial paper?
A. It is a secured, short-term debt instrument guaranteed by a bank collateralized by
accounts receivable and inventory, due in 30 to 60 days.
B. It is an unsecured, short-term debt instrument issued by a company to finance
accounts receivable and inventory that matures only sometime after 270 days.
C. A short-term, unsecured debt instrument issued by a firm to finance accounts
receivable and inventories that customarily matures 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 normally matures 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 normally matures in 30 to 60 days.
, Which of the following statements is correct about common shares relative to preferred
shares issued by the same company?
A. Common shares always trade on organized exchanges while preferred shares trade
OTC.
B. Dividends on common shares are never a contractual obligation while 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 must decide between 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.
C. Both common shares and bonds do not have the future amount to be returned from
the initial investment pre-determined by the issuer.
d. The risk on a common share investment is less than that for a long-term bond
investment. - ANSWER A. Common shares pay dividends only when declared, while
interest must be paid on bonds when it comes due.
Which of the following statements describes a hybrid security?
A. It is a security that contains the combined features of a derivative and equity.
B. It is security, having a mixture of the characteristics of a derivative and a short-term
security.
C. It is a security having features of both fixed-income and equity.
D. It is a security that has a mixture of a short-term and long-term fixed-income
characteristics. - ANSWER C. It is a security that has a mixture of fixed-income and
