Business

Which of the following conclusions would be true if you earn a higher rate of return on

your investments?

a. The greater the present value would be for any lump sum you would receive in the

future.

b. The lower the present value would be for any lump sum you would receive in the

future.

c. Your rate of return would not have any effect on the present value of any sum to be

received in the future.

d. The greater the present value would be for any annuity you would receive in the

future.

2) At what rate must $500 be compounded annually for it to grow to $1,079.46 in 10

years?

a. 6 percent

b. 7 percent

c. 8 percent

d. 5 percent

3) What is the present value of $12,500 to be received 10 years from today? Assume a

discount rate of 8% compounded annually and round to the nearest $10.

a. $17,010

b. $9,210

c. $11,574

d. $5,790

4) The appropriate measure for risk according to the capital asset pricing model is:

a. the standard deviation of a firm’s cash flows

b. alpha

c. the standard deviation of a firm’s stock returns

d. beta

5) How much money must you pay into an account at the end of each of 20 years in

order to have $100,000 at the end of the 20th year? Assume that the account pays

6% per year, and round to the nearest $1.

a. $2,195

b. $1,840

c. $2,028

d. $2,718

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Introduction to Financial Management

6) You have the choice of two equally risk annuities, each paying $5,000 per year for

8 years. One is an annuity due and the other is an ordinary annuity. If you are going

to be receiving the annuity payments, which annuity would you choose to maximize

your wealth?

a. The annuity due

b. Either one because they have the same present value.

c. The ordinary annuity

d. Since we don’t know the interest rate, we can’t find the value of the annuities and

hence we cannot tell which one is better.

7) If you put $1,000 in a savings account that yields 8% compounded semi-annually,

how much money will you have in the account in 20 years (round to nearest $10)?

a. $4,660

b. $4,801

c. $2,190

d. $1,480

8) You want $20,000 in 5 years to take your spouse on a second honeymoon. Your

investment account earns 7% compounded semiannually. How much money must you

put in the investment account today? (round to the nearest $1)

a. $14,178

b. $15,985

c. $13,349

d. $12,367

9) You invest $1,000 at a variable rate of interest. Initially the rate is 4% compounded

annually for the first year, and the rate increases one-half of one percent annually for

five years (year two’s rate is 4.5%, year three’s rate is 5.0%, etc.). How much will you

have in the account after five years?

a. $1,462

b. $1,359

c. $1,276

d. $1,338

10) Assume that you have $165,000 invested in a stock that is returning 11.50%,

$85,000 invested in a stock that is returning 22.75%, and $235,000 invested in a

stock that is returning 10.25%. What is the expected return of your portfolio?

a. 14.8%

b. 12.9%

c. 18.3%

d. 15.6%

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Introduction to Financial Management

11) Which of the following statements is most correct concerning diversification and risk?

a. Risk-averse investors often select portfolios that include only companies from the

same industry group because the familiarity reduces the risk.

b. Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from

the same industry.

c. Only wealthy investors can diversify their portfolios because a portfolio must contain

at least 50 stocks to gain the benefits of diversification.

d. Proper diversification generally results in the elimination of risk.

12) The yield to maturity on a bond ________.

a. is fixed in the indenture

b. is lower for higher risk bonds

c. is the required rate of return on the bond

d. is generally below the coupon interest rate

13) You are considering buying some stock in Continental Grain. Which of the following

are examples of non-diversifiable risks?

I.  Risk resulting from a general decline in the stock market.

II.  Risk resulting from a possible increase in income taxes.

III.  Risk resulting from an explosion in a grain elevator owned by Continental.

IV.  Risk resulting from a pending lawsuit against Continental.

a. III and IV

b. II, III, and IV

c. I and II

d. I only

14) Of the following, which differs in meaning from the other three?

a. Systematic Risk

b. Market Risk

c. Asset-unique Risk

d. Undiversifiable Risk

Unit 2 Examination

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Introduction to Financial Management

15) You must add one of two investments to an already well- diversified portfolio.

Security A  Security B

Expected Return = 12%  Expected Return = 12%

Standard Deviation of  Standard Deviation of

Returns = 20.9%  Returns = 10.1%

Beta = .8  Beta = 2

If you are a risk-averse investor, which one is the better choice?

a. Security A

b. Security B

c. Either security would be acceptable.

d. Cannot be determined with information given.