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Multiple choice questions

Try the multiple choice questions below to test your knowledge of Chapter 5. Once you have completed the test, click on 'Submit Answers for Grading' to get your results.

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This activity contains 22 questions.

Question 1.
The firm of Sun and Moon purchased a share of Acme.com common stock exactly one year ago for $45. During the past year the common stock paid an annual dividend of $2.40. The firm sold the security today for $85. What is the rate of return the firm has earned?


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Question 2.
A set of possible values that a random variable can assume and their associated probabilities of occurrence are referred to as __________.


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Question 3.
A statistical measure of the variability of a distribution around its mean is referred to as __________.


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Question 4.
The ratio of the standard deviation of a distribution to the mean of that distribution is referred to as __________.


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Question 5.
The weighted average of possible returns, with the weights being the probabilities of occurrence is referred to as __________.


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Question 6.

Clive Rodney Megabucks offers your friend, Melanie, an interesting gamble involving giving her the choice of the contents in one of two sealed, identical-looking boxes. One box has $20,000 in cash and the second has nothing inside. There is an equal probability that the chosen box contains cash versus nothing. Melanie states that she would not call off the gamble if you offered her a certain $10,999 instead of her choice of box. However, she would be indifferent if $11,000 was offered in place of the risky gamble; and she would definitely take $11,001 to call off the gamble. We would describe Melanie as __________ in this instance.

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Question 7.

Clive Rodney Megabucks offers your friend, Yunyoung, an interesting gamble involving giving her the choice of the contents in one of two sealed, identical-looking boxes. One box has $20,000 in cash and the second has nothing inside. There is an equal probability that the chosen box contains cash versus nothing. Yunyoung states that she would not call off the gamble if you offered her a certain $4,999 instead of her choice of box. However, she would be indifferent if $5,000 was offered in place of the risky gamble; and she would definitely take $5,001 to call off the gamble. We would describe Yunyoung as __________ in this instance.

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Question 8.
Which of the following statements regarding covariance is correct?


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Question 9.
Which of the following portfolio statistics statements is correct?


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Question 10.
Total portfolio risk is __________.


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Question 11.
__________ is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification.


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Question 12.
__________ is the variability of return on stocks or portfolios associated with changes in return on the market as a whole.


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Question 13.
Which of the following indexes would be most the appropriate proxy to measure the return of the market portfolio in the CAPM?


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Question 14.
The __________ describes the linear relationship between expected rates of return for individual securities (or portfolios) and __________.


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Question 15.
The __________ describes the relationship between an individual security's returns and returns on the market portfolio. The slope of this line is __________.


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Question 16.
Which of the following items describes an index measure of systematic risk?


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Question 17.
Which of the following items is a model that describes the relationship between risk and expected return (in this model the expected return is equal to the risk-free return plus a premium based on the systematic risk of the security)?


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Question 18.
What is the beta for an average risk security? What is the beta for a Treasury bill?


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Question 19.

Assume that a firm's common stock can be valued using the constant dividend growth model. As an analyst you expect that the return on the market will be 15% and the risk-free rate is 7%. You have estimated that the dividend next period will be $1.50, the firm will grow at a constant 6%, and the firm beta is 0.50. The common stock is currently selling for $30.00 in the market place. Which of the following statements is correct?

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Question 20.
Which form of market efficiency states that current security prices fully reflect all information, both public and private?


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Question 21.
Which form of market efficiency states that current prices fully reflect the historical sequence of prices?


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Question 22.
Which form of market efficiency states that current prices fully reflect all publicly available information?


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