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Corporate Finance, 2
Chapter 10 Capital Markets and the Pricing of Risk
10.1 A First Look at Risk and Return
1) Which of the following investments offered the lowest overall return over the past eighty years?
A) Small stocks
B) Treasury Bills
C) S&P 500
D) Corporate bonds
2) Which of the following investments offered the highest overall return over the past eighty years?
A) Treasury Bills
B) S&P 500
C) Small stocks
D) Corporate bonds
3) Which of the following investments had the largest fluctuations overall return over the past eighty years?
A) Small stocks
B) S&P 500
C) Corporate bonds
D) Treasury Bills
10.2 Common Measures of Risk and Return
1) Which of the following statements is false?
A) The variance increases with the magnitude of the deviations from the mean.
B) The variance is the expected squared deviation from the mean.
C) Two common measures of the risk of a probability distribution are its variance and standard deviation.
D) If the return is riskless and never deviates from its mean, the variance is equal to one.
2) Which of the following statements is false?
A) When an investment is risky, there are different returns it may earn.
B) In finance, the variance of a return is also referred to as its volatility.
C) The expected or mean return is calculated as a weighted average of the possible returns, where the weights correspond to the probabilities.
D) The variance is a measure of how "spread out" the distribution of the return is.
.
3) Which of the following statements is false?
A) The standard deviation is the square root of the variance.
B) Because investors dislike only negative resolutions of uncertainty, alternative measures that focus solely on downside risk have been developed, such as the semivariance and the expected tail loss.
C) While the variance and the standard deviation are the most common measures of risk, they do not differentiate between upside and downside risk.
D) While the variance and the standard deviation both measure the variability of the returns, the variance is easier to interpret because it is in the same units as the returns themselves.
4) Which of the following equations is incorrect?
A)
B
C)
D)
Use the table for the question(s) below.
Consider the following probability distribution of returns for Alpha Corporation:
Current Stock Price ($) 
Stock Price in One Year ($) 
Return R 
Probability PR 
$35 
40% 
25% 

$25 
$25 
0% 
50% 
$20 
20% 
25% 
5) The expected return for Alpha Corporation is closest to:
A) 6.67%
B) 5.00%
C) 10%
D) 0.00%
6) The variance of the return on Alpha Corporation is closest to:
A) 5.00%
B) 4.75%
C) 3.625%
D) 3.75%
7) The standard deviation of the return on Alpha Corporation is closest to:
A) 22.4%
B) 19.0%
C) 21.8%
D) 19.4%
8) Suppose an investment is equally likely to have a 35% return or a  20% return. The expected return for this investment is closest to:
A) 7.5%
B) 15%
C) 5%
D) 10%
9) Suppose an investment is equally likely to have a 35% return or a  20% return. The variance on the return for this investment is closest to:
A) .151
B) .0378
C) 0
D) .075
10) Suppose an investment is equally likely to have a 35% return or a 20% return. The standard deviation on the return for this investment is closest to:
A) 38.9%
B) 0%
C) 19.4%
D) 27.5%

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