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Principles of Finance

Multiple Choice

Principles of FinanceMultiple Choice
1 .
The total dollar return equals _______________.
  1. the EPS of a stock
  2. capital gains income plus dividend income
  3. the price paid for a share of stock minus the selling price of the stock
  4. the price paid for a share of stock divided by the selling price of the stock
2 .
The dividend yield is calculated by _______________.
  1. dividing the price of the stock by the EPS
  2. subtracting any capital loss from the capital gain
  3. dividing the annual dividend by the initial stock price
  4. dividing the annual dividend by the net income for the year
3 .
Which of the following is the best example of firm-specific risk?
  1. A global pandemic causes major disruptions in the economy.
  2. The Federal Reserve increases the money supply dramatically, leading to massive inflation.
  3. AAA Pharmaceuticals withdraws a medication as it studies whether strokes five people suffered after taking the medication were related to the medication.
  4. As an arctic blast descends on North America, most of the United States is blanketed in snow or ice.
4 .
Investors diversify their portfolio in order to _______________.
  1. reduce risk
  2. increase risk
  3. increase return
  4. increase the standard deviation
5 .
Which of the following would be the best example of systematic risk?
  1. An error in the company’s computer system miscalculates the amount of inventory that Monique’s Boutique is holding.
  2. BlueJay Air has a reduction in new reservations following a crash of one of its jets.
  3. The spokesperson for Serena’s Sports Shoes is involved in an ethical scandal.
  4. Interest rates rise after the Federal Reserve announces it will slow down the rate of growth of the money supply.
6 .
As the number of stocks in a portfolio increases, _______________.
  1. firm-specific risk increases
  2. systematic risk becomes zero
  3. systematic risk decreases and returns increase
  4. firm-specific risk is reduced but systematic risk remains
7 .
Beta is a measure of _______________.
  1. systematic risk
  2. firm-specific risk
  3. a firm’s profitability
  4. a stock’s dividend yield
8 .
Which of the following would be the best estimate of the risk-free rate?
  1. The rate of inflation
  2. The average return on the S&P 500
  3. The average return on Amazon’s stock
  4. The average return on US Treasury bills
9 .
The Sharpe ratio can be considered a measure of _______________.
  1. the reward of an investment in relation to the risk
  2. the systematic risk of a stock
  3. the total return of a stock investment
  4. the historical return of an individual security
10 .
A positive Jensen’s alpha indicates that a portfolio has _______________.
  1. a negative beta
  2. an abnormal return
  3. more total risk than the average portfolio
  4. more systematic risk than the average portfolio
11 .
If an equally weighted portfolio contains 10 stocks, then _______________.
  1. the stocks in the portfolio will each have a weight of 0.10
  2. the return of the portfolio must be multiplied by 10 to get the annualized return
  3. the standard deviation of the portfolio will be one-tenth the standard deviation of one of the stocks
  4. the standard deviation of the portfolio will be 10 times the standard deviation of one of the stocks
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