# ACCOUNTING

12.   One year ago, you purchased a stock at a price of \$32.15. The stock pays quarterly dividends of \$.20 per share. Today, the stock is selling for \$33.09 per share. What’s your capital gain on this investment?

A. \$1.14

B. \$.94

C. \$1.04

D. \$.74

13.   With regard to the efficient markets hypothesis (EMH), which of the following answers illustrates market inefficiencies?

A. Delayed reactions, overreactions, and corrections

B. Insider trading, corruption, and government bailouts

C. An immediate price fall after bad news is announced

D. An immediate price jump after good news is announced

14.   The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B. Stock A has a beta of 0.82 and stock B has a beta of 1.29. This information implies that

A. stock A is riskier than stock B, and both stocks are fairly priced.

B. either stock A is overpriced, stock B is underpriced, or both.

C. either stock A is underpriced, stock B is overpriced, or both.

D. stock A is less risky than stock B, and both stocks are fairly priced.

15.   Suppose you estimate a boom will occur only 45 percent of the time and that the expected return on the portfolio in such an environment is 40 percent. You also estimate that a recession will occur 55 percent of the time and that the expected return in such an environment is 5 percent. What’s the expected return of the portfolio?

A. 20.75 percent

B. 5 percent

C. 40 percent

D. 22.5 percent

16.   How can the expected return of a portfolio be calculated?

A. Take a weighted average by taking the expected return of each asset and multiplying by their proportion in the portfolio. Add the results.

B. Square the expected returns before multiplying by the portfolio weights. Add each of the results, and then take the square root of the sum.

C. If the portfolio has two assets, multiply the expected returns by 50 percent, and then add the results. If the portfolio has three assets, multiply the expected returns by 1/3, and so on. Then multiply the result. The proportions of each asset do not affect the answer.

D. Expected return can be calculated only with Excel.

17.   How do you calculate risk premium?

A. The risk-free rate minus the expected return

B. Expected return plus the risk-free rate

C. Expected return divided by the risk-free rate

D. Expected return minus the risk-free rate

18.   The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent. The risk-free rate of return is 3.7 percent. What’s the expected market risk premium?

A. 7.90 percent

B. 7.02 percent

C. 11.22 percent

D. 10.63 percent

19.   The term “unsystematic risk” is synonymous with which of the following?

A. Undiversifiable risk

B. Systematic risk

C. Beta risk

D. Diversifiable risk

20.   The intercept point of the security market line is the rate of return that corresponds to

A. a return of zero.

B. the market rate.

C. the risk-free rate.