25 MCQ If a persons required return does not change when risk increases

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1) If a person’s required return does not change when risk increases, that person is said

to be

a. risk-indifferent.

b. risk-aware.

c. risk-averse.

d. risk-seeking.

2) The ________ of an asset is the change in value plus any cash distributions expressed

as a percentage of the initial price or amount invested.

a. return

b. risk

c. probability

d. value

3) Prime-grade commercial paper will most likely have a higher annual return than

a. a common stock.

b. a Treasury bill.

c. a preferred stock.

d. an investment-grade bond.

4) The ________ of an event occurring is the percentage chance of a given outcome.

a. reliability

b. standard deviation

c. probability

d. dispersion

5) Since for a given increase in risk, most managers require an increase in return, they


a. risk-free.

b. risk-indifferent.

c. risk-seeking.

d. risk-averse.

6) The ________ the coefficient of variation, the ________ the risk.

a. more stable; higher

b. lower; higher

c. lower; lower

d. higher; lower

7) A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for

a given level of return.

a. efficient

b. continuous

c. coefficient

d. risk-indifferent

8) Perfectly ________ correlated series move exactly together and have a correlation coefficient of ________, while perfectly ________ correlated series move exactly in opposite

directions and have a correlation coefficient of ________.

a. negatively; +1; positively; -1

b. negatively; -1; positively; +1

c. positively; -1; negatively; +1

d. positively; +1; negatively; -1

9) Combining negatively correlated assets having the same expected return results in a

portfolio with ________ level of expected return and ________ level of risk.

a. the same; a lower

b. the same; a higher

c. a higher; a lower

d. a lower; a higher

10) Combining two assets having perfectly negatively correlated returns will result in the

creation of a portfolio with an overall risk that

a. decreases to a level below that of either asset.

b. increases to a level above that of either asset.

c. remains unchanged.

d. stabilizes to a level between the asset with the higher risk and the asset with the

lower risk.

11) Risk that affects all firms is called

a. nondiversifiable risk.

b. total risk.

c. diversifiable risk.

d. management risk.

12) A beta coefficient of +1 represents an asset that

a. is unaffected by market movement.

b. has the same response as the market portfolio.

c. is less responsive than the market portfolio.

d. is more responsive than the market portfolio.

13) The higher an asset’s beta,

a. the lower the expected return will be in an up market.

b. the more responsive it is to changing market returns.

c. the higher the expected return will be in a down market.

d. the less responsive it is to changing market returns.

14) An increase in the Treasury Bill rate ________ the required rate of return of a common


a. has no effect on

b. decreases

c. increases

d. cannot be determined by

15) Nico wants to invest all of his money in just two assets: the risk free asset and the

market portfolio. What is Nico’s portfolio beta if he invests a quarter of his money in

the market portfolio and the rest in the risk free asset?

a. 1.00

b. 0.25

c. 0.00

d. 0.75

16) In the capital asset pricing model, the beta coefficient is a measure of ________ risk

and an index of the degree of movement of an asset’s return in response to a change

in ________.

a. diversifiable; the prime rate

b. nondiversifiable; the market return

c. nondiversifiable; the Treasury bill rate

d. diversifiable; the bond index rate

17) As risk aversion increases

a. a firm’s beta will decrease.

b. investors’ required rate of return will increase.

c. investors’ required rate of return will decrease.

d. a firm’s beta will increase.

18) The ________ rate of interest is typically the required rate of return on a three-month

U.S. Treasury bill.

a. nominal

b. premium

c. risk-free

d. real

19) A yield curve that reflects relatively similar borrowing costs for both short-term and

long-term loans is called

a. flat yield curve.

b. normal yield curve.

c. inverted yield curve.

d. none of the above.

20) The theory suggesting that for any given issuer, long-term interest rates tends to be

higher than short-term rates is called

a. expectation hypothesis.

b. market segmentation theory.

c. liquidity preference theory.

d. none of the above.

21) At any time, the slope of the yield curve is affected by

a. liquidity preferences.

b. the comparative equilibrium of supply and demand in the short-term and long-term

market segments.

c. inflationary expectations.

d. all of the above.

22) A ________ is a restrictive provision on a bond which provides for the systematic retirement

of the bonds prior to their maturity.

a. conversion feature

b. subordination clause

c. sinking-fund requirement

d. redemption clause

23) Violation of any standard or restrictive provision by the borrower gives the lender the

right to do all of the following EXCEPT

a. seize the loan collateral.

b. demand immediate repayment.

c. increase the interest rate.

d. alter the terms of the initial agreement, for example accelerate the maturity date.

24) To compensate for the uncertainty of future interest rates and the fact that the longer

the term of a loan the higher the probability that the borrower will default, the lender


a. charges a higher interest rate on long-term loans.

b. reserves the right to change the terms of the loan at any time.

c. reserves the right to demand immediate payment at any time.

d. includes excessively restrictive debt provisions.

25) Bonds are

a. a series of short-term debt instruments.

b. long-term debt instruments.

c. a form of equity financing that pays interest.

d. a hybrid form of financing used to raise large sums of money from a diverse group of


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