Texas 14FABUS305350 BUSINESS FINANCE final exam

Question 1

1. Compute the expected return given these three economic states, their likelihoods, and the potential returns. Fast growth state: probability is 0.1 and return is 50%. Slow growth state: probability is 0.6 and return is 8%. Recession state: probability is 0.3 and return is -10%.

   		6.8%
   		12.8%
   		16.0%
   		22.7%

5.9 points

Question 2

1. The standard deviation of returns of: I.small capitalization stocks is higher than that of large capitalization stocks. II. large capitalization stocks is lower than that of corporate bonds.III.corporate bonds is higher than that of Treasury bills.Which statement is true?

   		I and III
   		I, II, and III
   		I and II
   		I only

5.9 points

Question 3

1. Diversification is a process that

   		reduces idiosyncratic risk by holding a huge number of stocks.
   		reduces stock returns by holding a huge number of stocks.
   		reduces idiosyncratic risk by holding stocks that do not move together.
   		reduces stock returns by investing more on risk-free assets.

5.9 points

Question 4

1. Treasury bill returns are 5%, 4%, 3%, and 6% over four years. The standard deviation of returns of Treasury bills is:

   		1.51%
   		1.11%
   		1.00%
   		1.29%

5.9 points

Question 5

1. Common risk is also

   		diversifiable risk
   		systematic risk
   		unsystematic risk
   		independent risk

5.9 points

Question 6

1. Which of the following is NOT a diversifiable risk?

   		the risk that oil prices rise, increasing production costs
   		the risk that the CEO is killed in a plane crash
   		the risk of a key employee being hired away by a competitor
   		the risk of a product liability lawsuit

5.9 points

Question 7

1. Compute the expected return given these three economic states, their likelihoods, and the potential returns: Fast Growth State has a probability of 0.3 and 40% return. Slow Growth State has a probability of 0.4 and 15% return. Recession State has a probability of 0.3 and -15% return.

   		7.1%
   		13.50%
   		21.34%
   		38.95%

5.9 points

Question 8

1. A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return?

   		33.25%
   		39.375%
   		48.875%
   		55.625%

5.9 points

Question 9

1. This is defined as the portion of total risk that is not diversifiable.

   		firm specific risk
   		market risk
   		modern portfolio risk
   		total risk

5.9 points

Question 10

1. Which statement is incorrect about portfolios and single stocks.

   		Usually portfolios have better risk return tradeoff than single stocks.
   		Investors should hold portfolios instead of one single stock in their retirement accounts.
   		Single stocks always provide better returns because they are riskier.
   		Single stocks are not necessary to provide higher returns than portfolios.

5.9 points

Question 11

1. If you hold a portfolio composed of Apple stocks and Costco stocks and you have 100 shares of Apple and 200 shares of Costco. Apple stocks are trading at $189 per share and Costco stocks are trading at $112 per share. What are the weights of Apple and Costco?

   		45.8%, 54.2%
   		45.8%, 44.2%
   		61.3%, 38.7%
   		61.3%, 44.7%

5.9 points

Question 12

1. A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are

   		not perfectly correlated
   		perfectly correlated
   		susceptible to common risks only
   		both B and C

5.9 points

Question 13

1. A stock is bought for $22.00 and sold for $26.00 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction

   		0.27%
   		4.00%
   		15.00%
   		18.18%

5.9 points

Question 14

1. Stock A s beta is 1.4 with standard deviation 23%. Stock B s beta is 0.9 with standard deviation 26%. Both stock A and stock B are fairly priced and traded on the US market only. Which one of the following statement is correct?

   		Stock A has more unsystematic risk.
   		Stock A has lower beta.
   		Stock B has more unsystematic risk.
   		Stock B has less total risk.

5.9 points

Question 15

1. Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. The weight of Abbott Labs in your portfolio is

   		50%
   		40%
   		30%
   		20%

5.9 points

Question 16

1. This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification.

   		firm specific risk
   		market risk
   		modern portfolio risk
   		total risk

5.9 points

Question 17

1. MedTech Corp stock was $50.95 per share at the end of last year. Since then, it paid a $0.45 per share dividend. The stock price is currently $62.50. If you owned 500 shares of MedTech, what was your percent return?

   		7.20%
   		8.83%
   		22.67%
   		23.55%