_____ (7) Owning common stock in a corporation

(a)means you are a lender to the company

(b)means you are a part owner of the company

(c)is the same as owning convertible bonds of the company

(d)is the same as owning preferred stock of the company

(e)none of the above

_____ (8) For a particular common stock, you believe that r = 20%, g = 10%, and that the assumptions underlying the constant dividend growth model are applicable to this company.Your estimate of the intrinsic value of a share of this stock

(a)must be > $10

(b)must = $10

(c)must be < $10

(d)you dont have enough information to estimate the intrinsic value

(e)none of the above

_____ (9) Assume the constant dividend growth model is applicable to a particular stock.Other things constant, the higher the required (minimally acceptable) rate of return

(a)the higher the intrinsic value of the stock

(b)the lower the intrinsic value of the stock

(c)r has no impact on the intrinsic value of the stock

(d)all of the above are possible

(e)none of the above

_____ (10) The annual rates of return on two stocks have a zero correlation with one another and these returns have standard deviations that are > 0.A 50/50 portfolio consisting of these two stocks

(a)will have no benefits from diversification

(b)will have a portfolio standard deviation greater than the weighted average of the two individual standard deviations

(c)will have a portfolio standard deviation less than the weighted average of the two individual standard deviations

(d)all of the above are possible

(e)none of the above

_____ (11) Sufficient diversification, assuming stocks are not perfectly positively correlated, can eliminate most

(a)market risk

(b)systematic risk

(c)non-diversifiable risk

(d)all of the above

(e)none of the above

_____ (12)Last year the annual return on stock A was 10%, on stock B was 12%, and on stock C was 14%.You invested 25% of your money in A, 25% in B, and 50% in C.Last year the annual return on your 3 stock portfolio was

(a)10%

(b)12%

(c)14%

(d)12.5%

(e)none of the above

_____ (13) You invest 80% of your money in stock A and 20% in stock B. The standard deviation of the returns on stock A = 15% and on stock B = 20%.The portfolio standard deviation = 16%.Forming an 80/20portfolio of these two stocks

(a)has reduced risk in this case

(b)has increased risk in this case

(c)hasnt helped you to diversify

(d)all of the above are possible

(e)none of the above

_____ (14) You had a portfolio that contained 3 stocks (A, B, and C).The Betas are, respectively, 0.7, 1.1, and 1.3.You sold off your investment in B and replaced it with stock D, which has a Beta = 0.9.The required return on your portfolio

(a) rose

(b) fell

(c) wont change

(d) you cant tell what happens to the required return on the portfolio

(e) none of the above

_____ (15) Suppose the risk-free rate of return (R_RF) = 0 and the expected return on the market as a whole (R_M) = 10%.A stock with a Beta =1.2 will have a required rate of return =

(a)10%

(b)20%

(c)1.2%

(d)12%

(e)you need more information to determine the required rate of return

_____ (16) Assume the required annual return on an investment= 4%, the expected return on the market as a whole (R_M) = 10%, and the risk-free rate (R_RF) = 4%.The Beta of this investment must be

(a)1

(b)2

(c).5

(d)0

(e)none of the above

_____ (17) You have invested all of your savings in a portfolio of 50 U.S. pharmaceutical stocks.You are

a) well diversified

b) not sufficiently diversified

c) over-diversified

d) all of the above

e) none of the above

_____ (18) A companys sales are all made on a strictly cash-only basis.It has no inventory because it only places orders from other firms for suppliesafter it receives an order from its own customers.Finally, this company is having a lot of financial problems and its suppliers only sell supplies to it if the company pays cash on delivery.The companys CCC =

(a) infinite

(b) zero

(c) negative

(d) you need more information to answer this question

(e) none of the above