1. Which of the following statement is incorrect?

A. The income component of return for a common stock comes from the cash dividend a firm pays.

B. With complete diversification, all of the unsystematic risk is eliminated from the portfolio.

C. The variance of a distribution cannot be a negative value.

D. A beta of 0 tells us that an asset has just as much systematic risk as the market.

E. Most of the answers are correct except one.

2. Which of the following statement is incorrect?

A. Most of the answers are correct except one.

B. U.S. Treasury securities are the best proxy measure for the risk-free rate.

C. State and federal laws typically require commercial banks, insurance companies, pension funds, other financial institutions, and government agencies to purchase securities rated only as investment grade.

D. The yield to maturity is the return earned on a bond given the cash flows actually received by the investor when a bond is sold at market prices before its maturity.

E. The risk that the lender may not receive payments as promised is called default risk.

3. Which of the following statement is incorrect?

A. The value, or price, of any asset, including bonds, is the future value of its future cash flows.

B. Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity.

C. Bonds that sell at prices above par are called premium bonds.

D. The real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession.

E. Most of the answers are correct except one.

4. Which of the following statements is incorrect?

A. An independent project is one that can be selected with no effect on the viability of any other project.

B. The NPV method assumes that cash flows from a project are reinvested at the cost of capital, whereas the IRR technique assumes they are reinvested at the IRR.

C. Most of the answers are correct except one.

D. A project with conventional cash flows is one with an initial cash outflow followed by one or more cash inflows.

E. Capital rationing does not put any funding constraint on investments and does not make some projects mutually exclusive.