5. Which of the following is an example of a good incentive? (multiple choice)

1. Investors want to make money so they invest in companies that are doing well.
2. Pension funds invest in high-quality companies because they want to take care of their retirees.
3. A CEO takes large risks, because if successful her stock options would greatly increase in value.
4. Sell-side analysts are afraid to say bad things about a company because that company may not do business with their employer in the future.
5. A director of a company's board avoid criticizing the CEO at board meetings because he is the friend of the CEO.

6. You are the manager of a hedge fund and believe that Toyota is going to do really well

next year. Specifically, you are certain that Toyota is going to outperform Honda, a rival

car company, and you wish to set up a trade. Which of the following is an investment strategy that will make money if you are right?

1. Long Toyota, short Honda
2. Long Toyota, long Honda
3. Short Toyota, long Honda
4. Short Toyota, short Honda

7. What is the main benefit of diversification?

1. It increases the amount of risk in your portfolio, relative to the amount of return.
2. It decreases the number of stocks in your portfolio.
3. It increases the amount of risk and return for your portfolio.
4. It decreases the amount of risk in your portfolio, relative to the amount of return.

8. Why should companies invest in positive NPV projects?

1. To shift their capital structures toward more equity and less debt
2. Because they are riskier, they have higher returns
3. Because they create value by having returns greater than the cost of capital
4. Because all projects are positive NPV projects

9. Which of the following can be a source of value creation? (multiple choice)

1. Earnings per share
2. Reinvesting profits to grow
3. Focus on EBITDA
4. Gross profits
5. Returns to capital that exceed costs of capital

10. What is a beta?

1. A measure of how much taxes affect a companys weighted average cost of capital (WACC)
2. A measure of how much ROE is higher than the cost of capital
3. A measure of how much a stock moves with the broader market
4. A measure of diversification
5. A return on equity (ROE)