Question 15

1. Securities with returns that lie above the security market line are overvalued.

   True

   False

Question 16

1. The security market line (SML) graphs the expected relationship between

   		Business risk and financial risk
   		Systematic risk and unsystematic risk
   		Risk and return
   		Systematic risk and unsystematic return
   		None of the above

Question 17

1. A friend has information that the stock of Zip Incorporated is going to rise from $62.00 to $65.00 per share over the next year. You know that the annual market return has been 10% and the 90-day T-bill rate (risk free rate of return) has been yielding 6% per year over the past 10 years. If beta for Zip is 0.9, will you purchase the stock?

   [Formula: Required Rate of Return using CAPM = Risk free rate + Market risk premium * Beta]

   		Yes, because it is overvalued
   		Yes, because it is undervalued
   		No, because it is undervalued
   		No, because it is overvalued
   		Yes, because the expected return equals the estimated return

Question 18

1. The geometric mean of a series of returns is always larger than the arithmetic mean, and the difference increases with the volatility of the series

   True

   False

Question 19

1. Two measures of the risk premium are the standard deviation and the variance.

   True

   False

Question 20

1. The ability to sell an asset quickly at a fair price is associated with

   		Market risk.
   		Financial risk.
   		Exchange rate risk.
   		Liquidity risk.
   		Business risk.

Question 21

1. In the phrase "nominal risk free rate," nominal means

   		Market.
   		Computed.
   		Historical.
   		Average.
   		Risk adverse.

Question 22

1. Given investments A and B with the following risk return characteristics, which one would you prefer and why?

   		Standard Deviation
   Investment	Expected Return	of Expected Returns
   A	12.2%	7%
   B	8.8%	5%

   		Investment A because it has the highest expected return.
   		Investment B because it has the lowest coefficient of variation.
   		Investment B because it has the lowest absolute risk.
   		Investment A because it has the lowest relative risk.
   		Investment A because it has the highest coefficient of variation.

Question 23

1. Measures of risk for an investment include

   		variance of returns and business risk.
   		coefficient of variation of returns and financial risk
   		business risk and financial risk.
   		variance of returns and coefficient of variation of returns.
   		variance of returns and economic risk.

Question 24

Which of the following is NOT a component of the risk premium?

		business risk
		unsystematic market risk
		financial risk
		liquidity risk
		exchange rate risk

Question 25

1. The ____ the variance of returns, everything else remaining constant, the ____ the dispersion of expectations and the ____ the risk.

   		Larger, greater, lower
   		Larger, smaller, higher
   		Larger, greater, higher
   		Smaller, greater, lower
   		Smaller, greater, greater

Question 26

1. Suppose you bought a GM corporate bond on January 25, 2001 for $750 and sold it on January 25, 2004 for $650.00.

   What was your annual holding period return?

   		0.8667
   		0.1333
   		0.0333
   		0.9534
   		0.0466

Question 27

1. In an event study the objective is to

   		determine whether it is possible to predict stock prices.
   		determine how fast stock prices adjust to news.
   		examine the cross-sectional distributions of returns.
   		conduct a time series analysis of returns.
   		determine normal P/E ratios.

Question 28

1. According to contrary opinion technicians, the ratio of mutual funds cash to total assets ____ near troughs in the market cycle and ____ near peaks.

   		levels out, spikes
   		remains low, remains high
   		is published near, is not published
   		increases, decreases
   		decreases, increases

Question 29

The January anomaly refers to the phenomenon where stock prices

		decline in December.
		decline in January.
		rise in January.
		decline in December and rise in January.
		rise in December and decline in January.

Question 30

1. An advantage of technical analysis over fundamental analysis is that technical analysis

   		has an increased amount of data that allows the analyst to process the information.
   		can more thoroughly investigate accounting information.
   		adjusts for differences in GAAP accounting procedures across the industry.
   		can capture non-quantifiable variables such as psychological factors.
   		can capture variables such as macroeconomic factors.