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Exam 29: Basic Financial Tools: a Review

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Question 71

True/False

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Portfolio A has but one security,while Portfolio B has 100 securities.Because of diversification effects,we would expect Portfolio B to have the lower risk.However,it is possible for Portfolio A to be less risky.

A) True
B) False

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Question 72

Multiple Choice

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Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?

A) $10,155.68
B) $10,690.19
C) $11,252.83
D) $11,845.09
E) $12,468.51

F) A) and C)
G) A) and D)

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Question 73

Multiple Choice

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What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Since the market return represents the expected return on an average stock,the market return reflects a certain amount of risk.As a result,there exists a market risk premium,which is the amount over and above the risk-free rate,that is required to compensate stock investors for assuming an average amount of risk.

A salt mine you inherited will pay you $25,000 per year for 25 years,with the first payment being made today.If you think a fair return on the mine is 7.5%,how much should you ask for it if you decide to sell it?

Your friend is considering adding one additional stock to a 3-stock portfolio,to form a 4-stock portfolio.She is highly risk averse and has asked for your advice.The three stocks currently held all have b = 1.0,and they are perfectly positively correlated with the market.Potential new Stocks A and B both have expected returns of 15%,are in equilibrium,and are equally correlated with the market,with r = 0.75.However,Stock A's standard deviation of returns is 12% versus 8% for Stock B.Which stock should this investor add to his or her portfolio,or does the choice not matter?

A 15-year bond has an annual coupon rate of 8%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 6%.Which of the following statements is CORRECT?

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

You expect to receive $5,000 in 25 years.How much is it worth today if the discount rate is 5.5%?

Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.Your portfolio consists of 50% A and 50% B.Which of the following statements is CORRECT?

If a bank compounds savings accounts quarterly,the effective annual rate will exceed the nominal rate.

The slope of the SML is determined by the value of beta.

Stock X has a beta of 0.7 and Stock Y has a beta of 1.7.Which of the following statements must be true,according to the CAPM?

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm is negative.

A stock just paid a dividend of D₀ = $1.50.The required rate of return is r_s = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

You want to open a sushi bar 3 years from now,and you plan to save $7,000 per year,beginning immediately.You will make 3 deposits in an account that pays 5.2% interest.Under these assumptions,how much will you have 3 years from today?

Billy Thornton borrowed $20,000 at a rate of 7.25%,simple interest,with interest paid at the end of each month.The bank uses a 360-day year.How much interest would Billy have to pay in a 30-day month?

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Erickson Inc.is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%.What is the project's coefficient of variation?