1. (TCO 8) The historical returns on large-company stocks, as reported by Ibbotson and Sinquefield, are based on: the largest 20 percent of the stocks traded on the NYSE. the stocks of the largest 10 percent of the publicly traded firms in the U.S. all of the stocks listed on the NYSE. the stocks of the 500 companies included in the S&P 500 index. 2. (TCO 8) Which of the following is true regarding the efficient market hypothesis? It argues that efficient markets are not volatile throughout a trading day. It suggests that an efficient market can only consider historical information when determining current security prices. It proves that market inefficiencies do not exist in either the short-run or the long-run. It implies that all investments in an efficient market have a net present value of zero. 3. (TCO 8) Which of the following factors will affect the expected rate of return on a security? Select all that apply: multiple states of the economy probability of occurrence for any one economic state market rate of return given a particular economic state security beta 4. (TCO 8) Assume a project that has the following returns for years 1 to 5: 15%, 4%, -13%, 34%, and 17%. What is the approximate expected return of this investment? 11% 17% 16.60% 10% 5. (TCO 8) Assume you are considering investing in two stocks, A & B. Stock A has an expected return of 16% and Stock B has an expected return of 9.5%. Your goal is to create a two-security portfolio that will have an expected return of 12%. If you have $250,000 to invest today, approximately how much would you invest in Stock B? $96,000 $150,000 $175,000 More than $200,000 6. (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows: The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. What is the standard deviation of Stock I and II respectively? 12 and 20% 12.5 and 23% 1.25 and 2.326% Cannot be determined with the information given 7. (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows: The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. Which statement is true? Select all that apply: Stock I has more overall risk than Stock II Stock II has less systematic risk than Stock I Stock I has a higher risk premium than Stock II None of the above are correct statements 8. (TCO 8) Which statements are true regarding risk? Select all that apply: The expected return is usually not the same as the actual return A key to assessing risk is determining how much risk an investment adds to a portfolio Some risks cannot be decreased or mitigated by the financial manager. The higher the risk, the higher the return investors require for the investment 9. (TCO 8) Are all risks diversifiable? Why or why not?
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