True/False (2.42 points each) 1. It takes longer than eight years to retire a $24,000 loan at 8% if the annual payment is $3,000. ( )

2. An annuity of $100 for ten years is currently less valuable if interest rates are 10% instead of 12%. ( )

3. If a person buys a stock for $10 and sells it after ten years for $20, the annual compound return is 10%. ( )

4. Higher rates of interest are associated with greater present values. ( )

5. The standard deviation measures an asset's expected return. ( )

6. Unsystemic risk is the tendency for stock prices to move together. ( )

7. Systemic risk is reduced through diversification. ( )

8. A beta of 2.0 indicates the return on the asset is more volatile than the market. ( )

9. The numerical value of a stock's beta tends to be stable over time. ( )

10. An aggressive investor will tend to prefer stocks with high betas during rising markets. ( )

11. The return on a portfolio considers both the individual asset's return and its weight in the portfolio. ( )

12. If a firm pays 10% compounded semi-annually, the true rate of interest is greater than 10%. ( )

13. The larger the standard deviation of an investment's return, the larger is the investment's risk. ( )

14. A beta coefficient is an index of an asset's unsystemic risk. ( )

15. A portfolio consisting of securities that are highly correlated is well diversified. ( )

16. The expected return on an investment includes both the expected of income plus expected price appreciation. ( )

17. The capital asset pricing model specifies the required return adjusted for systemic risk. ( )

18. The risk premium in the capital asset pricing model rises with the expected return on the market. ( )

19. Beta coefficients are computed with estimated data concerning the asset's expected return. ( )

Multiple Choice (2.42 points each)

20. Interest tables illustrate that

1. a dollar received today is worth more than a dollar to be received tomorrow

2. the present value of an annuity of $100 at 15% is worth more than an annuity of $100 at 12%

3. "discounting the future at a high rate" places emphasis on the present

a. 1 and 2 b. 1 and 3 c. 2 and 3 d. 1, 2, and 3

21. Which is the largest if interest rates are 10%?

a. present value of $100 after five years

b. present value of $100 annuity for five years

c. future value of $100 annuity for five years

d. future value of $100 after five years

22. Which is smallest if interest rates are 10%?

a. present value of $100 annuity for five years

b. future value of $100 annuity for five years

c. present value of $100 after five years

d. $100 received right now

23. The present value of an annuity due

a. is less than the present value of an ordinary annuity

b. is greater than the present value of an ordinary annuity

c. is less than the cost of the annuity

d. is greater than the cost of the annuity

24. A diversified portfolio

a. increases systemic risk

b. reduces systemic risk

c. increases unsystemic risk

d. reduces unsystemic risk

25. The risk associated with dispersion around an expected value (e.g., expected return) is measured by

a. beta coefficient

b. range (i.e., high-low values)

c. standard deviation

d. debt to total assets (i.e., the debt ratio)

26. Systemic risk

1. is the tendency for a stock's return and the return on the market to move together

2. is reduced by constructing a diversified portfolio

3. depends on the firm's business and financial risk

4. is measured by beta coefficients

a. 1 and 2 b. 2 and 3 c. 1 and 4 d. 2 and 4

27. A beta coefficient for a risky stock is

a. < 1.0

b. = 1.0

c. > 1.0

d. -ve (< 0)

28. A beta coefficient of 1.2 implies

1. the stock is more risky than the market

2. the stock's return is 1.2 times the return on the market

3. the stock is less risky than the market

4. the market's return is 1.2 times the return on the stock

a. 1 and 2 b. 1 and 4 c. 2 and 3 d. 3 and 4

29. An investor may reduce risk by selecting a. high beta stocks b. stocks with poorly correlated returns c. a cross-section of firms in the same industry d. stocks traded on organized exchanges 30. To measure risk, the capital asset pricing model uses a. beta b. an asset's standard deviation c. the volatility of an asset's cash flows d. the term during which the asset is held

31. Which of the following will reduce the required return on an investment?

a. an increase in beta and a reduction in the Treasury bill rate

b. an increase in the Treasury bill rate and a decrease in beta

c. a decrease in the Treasury bill rate and a decrease in beta

d. an increase in the Treasury bill rate and an increase in beta

32. For a security to help diversify a portfolio, the asset

a. must generate a greater return than the average return on the portfolio

b. should not be sensitive to changes in security prices

c. should have a return that is negatively correlated with the return on other securities in the portfolio

d. must be a debt instrument if the portfolio consists primarily of stocks

33. Components of the capital asset pricing model include

a. a stock's market price

b. the standard deviation of a stock's return

c. the rate on a risk-free security

d. the investor's need for income versus capital gains