2. When the return on short-term securities are higher than return on long-term securities of similar risk,

a. the economy is said to have normal yield curve

b. the economy is said to have inverted yield curve

c. the economy is said to have flat yield curve

d. the shape of the yield curve cannot be determined.

16. Which of the following is true about diversification?

A) Beta is a measure of unsystematic risk.

B) Portfolio diversification is the investment in several but same asset classes or sectors/industry

C) The expected return on a risky asset depends on that assets systematic risk

D) There is a large portion of unsystematic risk in a well diversified portfolio

17. Which of the following are correct statements concerning corporate dividends?

A) Dividends are generally paid to the shareholders before the payment of interests to the bondholders

B) Dividends are legal liability of a corporation to its shareholders

C) Dividends payments are considered tax deductible expense while interest payments are not

D) Dividends paid by a corporation to another corporation receive preferential tax treatment (minimum 50% exclusion from taxable income)

18. According to CAPM,

A) the expected rate of return on an asset is the risk free rate plus risk premium

B) the higher the beta coefficient, the lower the expected return.

C) the higher the systematic risk or beta coefficient, the lower is the risk premium

D) all of the above

19. Risk premium is

A) the total return required on a risky asset

B) the risk-free rate of return earned on risk-free asset

C) the excess return required on a risky asset over the average return of the risky portfolio

D) the excess return required on a risky asset over that earned on a risk-free asset

20. Which of the following statements(s) is (are) false regarding preferred stock:

A) Preferred stock dividends must be paid before dividends can be paid to common stockholders

B) Preferred stock does not carry voting rights

C) Like bonds, preferred stocks have maturity

D) Preferred stock dividends are not a liability of the firm unless they are declared