finance data bank

1. Market risk is the chance that a totally unexpected event will have a significant effect on the value of the firm or a specific investment.

2. Purchasing-power risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall.

3. If a person's required return does not change when risk increases, that person is said to be

A) risk-seeking.

B) risk-indifferent.

C) risk-averse.

D) risk-aware.

4. If a person's required return decreases for an increase in risk, that person is said to be

A) risk-seeking.

B) risk-indifferent.

C) risk-averse.

D) risk-aware.

5. ________ is the chance of loss or the variability of returns associated with a given asset.

A) Return

B) Value

C) Risk

D) Probability

6. The ________ of an asset is the change in value plus any cash distributions expressed as a percentage of the initial price or amount invested

A) return

B) value

C) risk

D) probability

7. Risk aversion is the behavior exhibited by managers who require a (n) ________.

A)increase in return, for a given decrease in risk

B) increase in return, for a given increase in risk

C) decrease in return, for a given increase in risk

D) decrease in return, for a given decrease in risk

8. Perry purchased 100 shares of Ferro, Inc. common stock for $25 per share one year ago. During the year, Ferro, Inc. paid cash dividends of $2 per share. The stock is currently selling for $30 per share. If Perry sells all of his shares of Ferro, Inc. today, what rate of return would he realize?

9. Tim purchased a bounce house one year ago for $6,500. During the year it generated $4,000 in cash flow. If Time sells the bounce house today, he could receive $6,100 for it. What would be his rate of return under these conditions?

10. On average, during the past 75 years, the return on small-company stocks has exceeded the return on large-company stocks.

11. On average, during the past 75 years, the return on long-term government bonds has exceeded the return on long-term corporate bonds.

12. On average, during the past 75 years, the return on long-term corporate bonds has exceeded the return on long-term government bonds.

13. Which asset would the risk-averse financial manager prefer? (See below.)

A) Asset A.

B) Asset B.

C) Asset C.

D) Asset D.

14. The expected value and the standard deviation of returns for asset A is (See below.)

Asset A

A) 12 percent and 4 percent.

B) 12.7 percent and 2.3 percent.

C) 12.7 percent and 4 percent.

D) 12 percent and 2.3 percent.

15. Nico bought 100 shares of Cisco Systems stock for $24.00 per share on January 1, 2002. He received a dividend of $2.00 per share at the end of 2002 and $3.00 per share at the end of 2003. At the end of 2004, Nicocollected a dividend of $4.00 per share and sold his stock for $18.00 per share. What was Nico's realized holding period return? What was Nico's compound annual rate of return?

A) -12.5%; -4.4%

B) +12.5%; +4.4%

C) -16.7%; -4.4%

D) +16.7%; +4.4%

16. Given the following information about the two assets A and B, determine which asset is preferred.

17. Assuming the following returns and corresponding probabilities for asset A, compute its standard deviation and coefficient of variation.

18. Akai has a portfolio of three assets. Find the expected rate of return for the portfolio assuming he invests 50 percent of its money in asset A with 10 percent rate of return, 30 percent in asset B with a rate of return of 20 percent, and the rest in asset C with 30 percent rate of return.

19. The creation of a portfolio by combining two assets having perfectly positively correlated returns cannot reduce the portfolio's overall risk below the risk of the least risky asset. On the other hand, a portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

20. The risk of a portfolio containing international stocks generally contains less nondiversifiable risk than one that contains only American stocks.

21. The risk of a portfolio containing international stocks generally does not contain less nondiversifiable risk than one that contains only American stocks.

22. Diversified investors should be concerned solely with nondiversifiable risk because it can create a portfolio of assets that will eliminate all, or virtually all, diversifiable risk.

23. Nondiversifiable risk reflects the contribution of an asset to the risk, or standard deviation, of the portfolio.

24. Systematic risk is that portion of an asset's risk that is attributable to firm-specific, random causes.

25. Unsystematic risk can be eliminated through diversification.