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Finance

MGFB10H3

Derek Chau

Summer

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1. Which of the following statements is false?
a) The higher the ROA the higher the ROE.
b) The higher the financial leverage the higher the ROE.
c) The higher the net profit margin the higher the ROE.
d) ROE is determined by a company’s efficiency, productivity, and financial
leverage.
e) None of the above.
2. The risk-return relationship for each financial asset is shown on
a) the capital market line.
b) the security market line.
c) the characteristic line.
d) the efficient frontier.
e) None of the above.
3. Which of the following statements is false?
a) The relevant risk to an investor is that portion of the variability of returns that
cannot be diversified away.
b) The total risk of a security is equal to its systematic risk plus unsystematic risk.
c) Unique security risk can be eliminated from an investor’s portfolio by
diversification.
d) Elimination of all variations in returns is simply achieved by diversifying into
securities that do not have positive correlation.
e) None of the above.
4. Which of the following investments is clearly preferred to the others?
Investment Expected Return Standard deviation
A 18% 20%
B 23% 23%
C 15% 18%
D 23% 18%
a) Investment A.
b) Investment B.
c) Investment C.
d) Investment D.
e) Cannot be determined without knowing the risk aversion of the investor.
5. Which of the following statements is false?
a) Beta is a measurement of the relationship between a security’s returns and the
market portfolio’s return.
b) Beta is a measurement of the relationship between a security’s returns and the
returns of assets in the market portfolio.
c) Unique risk is standard deviation minus beta.
d) Beta is the standardized covariance with the market.
e) None of the above.
1 6. Which of the following statements is false?
a) If you choose a portfolio on the CML that lies at the right side of the market
portfolio, you are a risk-seeking investor.
b) If you choose a portfolio on the CML that lies between the market portfolio and
the risk-free asset, you are a risk-averse investor.
c) The construction of the CML is independent of investors’ risk aversion.
d) All investors will choose a portfolio on the CML.
e) None of the above.
7. Which of the following statements is true?
a) A portfolio is underpriced if it lies on the CML.
b) A portfolio is overpriced if it is below the CML.
c) A portfolio is overpriced if it is above the CML.
d) A portfolio is fairly priced if it lies on the CML.
e) None of the above.
8. An asset, with a beta of 1.2, has a required return of 11.4%. What is the risk-free
rate if the market return is 10%?
a) 1.2%.
b) 3%.
c) 7%.
d) 8.4%.
e) None of the above.
9. Which of the following statements is true?
a) If the probabilities of the possible returns are the same, the expected return must
be one of the possible returns.
b) If the probabilities of the possible returns are different, the expected return must
be one of the possible returns.
c) The expected return cannot be greater than the maximum possible return or
smaller than the minimum possible return.
d) The expected return cannot be greater than the minimum possible return or
smaller than the maximum possible return.
e) None of the above.
10. Which of the following has a beta of 0?
a) The market portfolio.
b) An equal investment in two assets which have a correlation of -1.
c) Short sell the risk-free asset and buy the market portfolio.
d) An equal investment in all risky assets.
e) None of the above.
2 11. Which of the following statements is false?
a) Daily compounding allows interest to be earned more frequently than monthly
compounding.
b) The present value of an annuity decreases as the discount rate increases.
c) The future value of a cash flow increases as the interest rate increases.
d) The present value of a growing perpetuity increases as the growth rate increases.
e) None of the above.
12. A project is accepted
a) if its profitability index is

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