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1.

Which one of the following investments is likely to bring the highest average long-term returns to investors?

Group of answer choices

investment grade bonds

preferred stocks

common stocks

the above three choices generate similar long-term returns

.

2.

Suppose two stocks do not pay dividends. A return correlation coefficient of 0.5 means that the prices of the two stocks _____.

Group of answer choices

tend to move in the same direction

move independently of each other

tend to move in opposite directions

move in exactly the same way except in opposite directions

7. An investor is considering investing in only one of the following securities:

Security A B C

Expected return 10% 10% 15%

Standard deviation 5% 6% 9%

Which of the following statements is correct?

Group of answer choices

Securities A and B are equally desirable for a risk-averse investor.

Securities B and C are equally desirable for a risk-averse investor.

Security B is better than security C for a risk-averse investor.

Security C is better than security A for a risk-averse investor.

10. Which one of the following statements about a portfolio is FALSE?

Group of answer choices

The total risk of the portfolio can be decomposed into systematic risk and unsystematic risk.

As you add more risky assets into your portfolio, the total risk of the portfolio is reduced at an increasing rate.

No matter how many risky assets you include in your portfolio, you can never eliminate all the return volatility of the portfolio.

A portfolio that includes all the risky assets in the market is called the market portfolio.

11. Which one of the following stock portfolios is likely to be best diversified?

Group of answer choices

A portfolio of 15-20 randomly selected tech company stocks.

A portfolio of 15-20 randomly selected small company stocks.

A portfolio of 15-20 randomly selected US company stocks.

A portfolio of 15-20 randomly selected world (including both domestic and foreign) stocks

12. Which one of the followings violates the risk diversification rule in personal investment?

Group of answer choices

An employee of a public company should invest less in his/her companys stock than a nonemployee.

A stock broker should invest less in stocks and more in other asset classes such as bonds, commodities, etc.

A young investor with stable job should invest more aggressively (i.e., investing more in high-risk assets such as stocks and less in low-risk assets such as bonds).

As an investor with stable job grows older, he/she needs to be more aggressive in his/her financial portfolio by tilting more toward high-risk assets such as stocks.

13. _____ can be diversified away.

Group of answer choices

Total risk

Systematic risk

Unsystematic risk

All of the above three choices

14. In finance, the systematic risk of an asset is measured by _____.

Group of answer choices

return variance

return standard deviation

return covariance

beta

15. The capital asset pricing model (CAPM) describes the relationship _____ of an investment asset.

Group of answer choices

between expected return and total risk

between expected return and unsystematic risk

between expected return and systematic risk

between expected return and return standard deviation

16. In practice, how do financial analysts estimate the beta of a publicly traded stock?

Group of answer choices

Regress the stock's returns on S&P 500 index's returns, and the slope of the regression line is the stocks beta.

Regress the stock's returns on S&P 500 index's returns, and the intercept of the regression line is the stocks beta.

The yield to maturity of Treasury securities can be used as the stocks beta.

The expected return of the S&P 500 index can be used the stocks beta.

19. The capital asset pricing model (CAPM) is most readily applied to estimate investors required rate of return on which of the following securities?

Group of answer choices

publicly traded stocks

private equity

Treasury bonds

corporate bonds

20. Which of the following pairs of securities are likely to have the highest return correlation coefficient?

Group of answer choices

Two US stocks from the same industry

Two US stocks from very different industries

One US stock and one Japanese stock

One Treasury bond and one US stock

21. If investors believe a public companys senior executives know substantial inside information, then the managements decision to issue additional shares signals ____ of the companys stock, and the management decision to repurchase (or buy back) existing shares signals _____ of the companys stock.

Group of answer choices

undervaluation, undervaluation

undervaluation, overvaluation

overvaluation, undervaluation

overvaluation, overvaluation

22. A German companys stock is traded in the US over-the-counter (OTC) stock market in the form of American Depository Receipt (ADR). Most of this companys sales revenues come from the European market. Ceteris paribus, if euro depreciates (or loses value) relative to US dollar, then the dollar price of this companys ADR would _____.

Group of answer choices

increase

decrease

unchange

first increase and then decrease