Flervalg

Question 1

According to the security market line, the expected return of any security is a function of:

Answer 1

Systematic risk

Question 2

In the figure, what is the line from Rf through M called?

Answer 2

Security market line (SML)

Question 3

The term structure of intrest rates are constructed of?

Answer 3

• Intrest rate risk premium
• Real rate
• Inflation premium

Question 4

Both [blank] and [blank] measure the responsiveness of a security to movement in the market.

Answer 4

Beta and covariance

Question 5

PE ratio is a function of which factors?

Answer 5

• The type of accounting method used by a firm
• The per share amount of the firms valuable growth opportunities
• The risk of the stock

Question 6

From a shareholders perspective, which break even point(s) is most important?

Answer 6

Financial break-even

Question 7

When considering risk analysis, which of the follwing is correct?

Forecasting risk is the risk that a bad decision is made because of errors in the projected cash flows

From a shareholders perspective. A project that exceeds the accounting and cash break even points hould under all circumstances be accepted

With scenario analysis, one variable is examined over a broad range of values

With sensitivity analysis, all variables are examined for a limited range of values

Answer 7

Forecasting risk is the risk that a bad decision is made because of errors in the projected cash flows

Question 8

When considering risk analysis, which of the following is correct?

With sensitivity analysis, all variables are examined for limited range of values

From a shareholders perspective. A project that exceeds the accounting and cash break even points should under all circumstances be accepted.

With scenario analysis, one variable is examined over a broad range of values.

Forecasting risk is the risk that a bad decisions is made because of errors in projected cash flows

Answer 8

With scenario analysis, one variable is examined over a broad range of values.

Question 9

Operating cash flow reflects:

Answer 9

Tax payment

Question 10

Is it possible that a risky asset could have a beta of zero and why/why not?

Answer 10

Yes, as it is possible to construct a zero beta portfolio of risky assets whose return would be equal to the risk free rate.

Question 11

Given the following alternatives, capital asset pricing theory asserts that portfolio returns are best explained by:

Economic factors
Specific risk
Systematic risk
Diversification

Answer 11

Systematic risk

Question 12

True or false
Variable costs change as output changes?

Answer 12

True (?)

Question 13

True or false
Fixed costs are not dependent on the amount of goods and services produced during the period

Answer 13

False

Question 14

On risk and return, which of the follwing is true?

A diversified portfolio can eliminate all the risk associated with individual securities

Unsystematic risk increases proportionally with increased number of securities in a portfolio

Market risk can be eliminated with diversification

Expected return on a security is positively related to the security´s BETA

Answer 14

Expected return on a security is positively related to the security´s BETA

Question 15

When considering the Payback period method which of the following is correct?

• The payback period is the cost of the investment divided by the annual cash flow.
• The payback period does account for what happens after payback, taking into account the overall profitability of an investment.
• The payback period disregards the time value of money
• Shorter paybacks mean more attractive investments, while longer payback periods are less desirable.
• The shorter the payback, the more desirable the investment

Answer 15

• The payback period is the cost of the investment divided by the annual cash flow.
• The payback period disregards the time value of money
• Shorter paybacks mean more attractive investments, while longer payback periods are less desirable.
• The shorter the payback, the more desirable the investment

Question 16

On bond price sensitivity. All other things being equal, which of the following are true?
* The shorter the time to maturity the greater the interest rate risk

• The lower the coupon rate, the greater the interest rate risk
• The longer the time to maturity the greater the interest rate risk
• The higher the coupon rate the greater the interest rate risk

Answer 16

• The longer the time to maturity the greater the interest rate risk
• The lower the coupon rate, the greater the interest rate risk

Question 17

Assume that the risk-free rate is 5% and the market risk premium is 8%. Security A has a beta of 0.75 and Security B has a beta of 1.25. Suppose that Security C has a risk-return characteristic such that it lies below the security market line. Is Security C a desirable investment? Why or why not?

• It is a desirable investment and can be purchased.
• Security C lies above the SML and so it is underpriced. In other words, it is yielding a return greater than what can be expected.
• Security C lies above the SML and so it is overpriced. In other words, it is yielding a return lower than what can be expected.
• Security C lies below the SML and so it is underpriced. In other words, it is yielding a return greater than what can be expected.
• Security C lies below the SML and so it is overpriced. In other words, it is yielding a return lower than what can be expected.
• It is not a desirable investment and should not be purchased

Answer 17

• It is a desirable investment and can be purchased.
• Security C lies below the SML and so it is overpriced. In other words, it is yielding a return lower than what can be expected.

Question 18

When considering investment projects using IRR. Which are correct?

• IRR does not give the same decision as NPV when considering independent investment projects where the initial outflows are only followed by a series of inflows
• When considering mutually exclusive investments. One can always reach a correct decision by accepting the larger project if the incremental IRR is greater than the discount rate
• If we choose independent investment projects with highest IRR, NPV always gives the same decision
• When a project has cash inflow followed by one or more outflows: One should accept when the IRR is below the discount rate

Answer 18

• When considering mutually exclusive investments. One can always reach a correct decision by accepting the larger project if the incremental IRR is greater than the discount rate
• When a project has cash inflow followed by one or more outflows: One should accept when the IRR is below the discount rate