McqMate
These multiple-choice questions (MCQs) are designed to enhance your knowledge and understanding in the following areas: Master of Business Administration (MBA) .
Chapters
| 1. |
As diversification increases, the total variance of a portfolio approaches ____________. |
| A. | 0 |
| B. | 1 |
| C. | The variance of the market portfolio |
| D. | Infinity |
| Answer» C. The variance of the market portfolio | |
| 2. |
The Security Risk Evaluation book published by Merrill Lynch uses the __________ as a proxy for the market portfolio. |
| A. | Dow Jones Industrial Average |
| B. | Dow Jones Transportation Average |
| C. | S&P 500 Index |
| D. | Wilshire 5000 |
| Answer» C. S&P 500 Index | |
| 3. |
The market portfolio has a beta of |
| A. | 0. |
| B. | 1. |
| C. | -1. |
| D. | 0.5. |
| Answer» B. 1. | |
| 4. |
If a firm's beta was calculated as 0.6 in a regression equation, Merrill Lynch would state the adjusted beta at a number |
| A. | Less than 0.6 but greater than zero. |
| B. | Between 0.6 and 1.0. |
| C. | Between 1.0 and 1.6. |
| D. | Greater than 1.6. |
| Answer» B. Between 0.6 and 1.0. | |
| 5. |
Rosenberg and Guy found that __________helped to predict a firm's beta. |
| A. | the firm's financial characteristics |
| B. | the firm's industry group |
| C. | firm size |
| D. | A, B andC all helped to predict betas. |
| Answer» D. A, B andC all helped to predict betas. | |
| 6. |
A stock has an expected return of 15 percent. The market risk premium is 10 percent and the risk-free rate is 4 percent. What is the stock's beta? (C) |
| A. | 0.50 |
| B. | 0.75 |
| C. | 1.1 |
| D. | 1.8 |
| Answer» C. 1.1 | |
| 7. |
What is the beta of a portfolio that is invested 25 percent in the market portfolio, 25 percent in an asset with twice as much systematic risk as the market portfolio and the rest in a risk-free asset? |
| A. | 0.25 |
| B. | 0.50 |
| C. | 0.75 |
| D. | 1.00 |
| Answer» C. 0.75 | |
| 8. |
Which statement is not true regarding the market portfolio? |
| A. | It includes all publicly traded financial assets. |
| B. | It lies on the efficient frontier. |
| C. | All securities in the market portfolio are held in proportion to their market values. |
| D. | It is the tangency point between the capital market line and the indifference curve. |
| Answer» D. It is the tangency point between the capital market line and the indifference curve. | |
| 9. |
Which statement is not true regarding the Capital Market Line (CML)? |
| A. | The CML is the line from the risk-free rate through the market portfolio. |
| B. | CML is the best attainable capital allocation line. |
| C. | The CML is also called the security market line. |
| D. | The CML always has a positive slope. |
| Answer» C. The CML is also called the security market line. | |
| 10. |
The market risk, beta, of a security is equal to |
| A. | the covariance between the security's return and the market return divided by the variance of the market's returns. |
| B. | the covariance between the security and market returns divided by the standard deviation of the market's returns. |
| C. | the variance of the security's returns divided by the covariance between the security and market returns. |
| D. | the variance of the security's returns divided by the variance of the market's returns. |
| Answer» A. the covariance between the security's return and the market return divided by the variance of the market's returns. | |
| 11. |
The Security Market Line (SML) is |
| A. | the line that describes the expected return-beta relationship for well-diversified portfolios only. |
| B. | also called the Capital Allocation Line. |
| C. | the line that is tangent to the efficient frontier of all risky assets. |
| D. | the line that represents the expected return-beta relationship. |
| Answer» D. the line that represents the expected return-beta relationship. | |
| 12. |
According to the Capital Asset Pricing Model (CAPM), over priced securities |
| A. | have positive betas. |
| B. | have zero alphas. |
| C. | have negative betas. |
| D. | have positive alphas. |
| Answer» C. have negative betas. | |
| 13. |
In a well diversified portfolio |
| A. | market risk is negligible. |
| B. | systematic risk is negligible. |
| C. | unsystematic risk is negligible. |
| D. | nondiversifiable risk is negligible. |
| Answer» C. unsystematic risk is negligible. | |
| 14. |
Empirical results regarding betas estimated from historical data indicate that |
| A. | betas are constant over time. |
| B. | betas of all securities are always greater than one. |
| C. | betas are always near zero. |
| D. | betas appear to regress toward one over time. |
| Answer» D. betas appear to regress toward one over time. | |
| 15. |
What is the expected return of a zero-beta security? |
| A. | The market rate of return. |
| B. | Zero rate of return. |
| C. | A negative rate of return. |
| D. | The risk-free rate. |
| Answer» D. The risk-free rate. | |
| 16. |
Standard deviation and beta both measure risk, but they are different in that |
| A. | beta measures both systematic and unsystematic risk. |
| B. | beta measures only systematic risk while standard deviation is a measure of total risk. |
| C. | beta measures only unsystematic risk while standard deviation is a measure of total risk. |
| D. | beta measures both systematic and unsystematic risk while standard deviation measures only systematic risk. |
| Answer» B. beta measures only systematic risk while standard deviation is a measure of total risk. | |
| 17. |
If investors do not know their investment horizons for certain |
| A. | the CAPM is no longer valid. |
| B. | the CAPM underlying assumptions are not violated. |
| C. | the implications of the CAPM are not violated as long as investors' liquidity needs are not pric |
| Answer» C. the implications of the CAPM are not violated as long as investors' liquidity needs are not pric | |
| 18. |
One of the assumptions of the CAPM is that investors exhibit myopic behavior. What does this mean? |
| A. | They plan for one identical holding period. |
| B. | They are price-takers who can't affect market prices through their trades. |
| C. | They are mean-variance optimizers. |
| D. | They have the same economic view of the world. |
| Answer» A. They plan for one identical holding period. | |
| 19. |
Passive management is a process of holding a well diversified portfolio for |
| A. | Short term with buy and hold approach |
| B. | Long term with buy and hold approach |
| C. | Short term with buy and sell approach |
| D. | Long term with buy and sell approach |
| Answer» B. Long term with buy and hold approach | |
| 20. |
Aggressive portfolio consists of bonds: stock in the ratio of |
| A. | 60:40 |
| B. | 70:30 |
| C. | 40:60 |
| D. | 50:50 |
| Answer» C. 40:60 | |
| 21. |
Expected value is the: |
| A. | Inverse of the standard deviation |
| B. | Correlation between security’s risk and return |
| C. | Weighted average of all possible outcomes |
| D. | Same as the discrete probability distribution |
| Answer» C. Weighted average of all possible outcomes | |
| 22. |
Which of the following statement(s) is/are true? I. A unique characteristic line is plotted for each security to determine the beta. II. For a characteristic line, the X-axis represents betas for different securities. III. The slope of the characteristic line is the difference between the market returns andrisk-free returns. |
| A. | Only (I) above |
| B. | Only (II) above |
| C. | Only (III) above |
| D. | Both (I) and (II) above |
| Answer» A. Only (I) above | |
| 23. |
Which of the following statements is true? |
| A. | A stock with a beta of 2 will always have a higher return than that a stock with a beta of 1 |
| B. | Testing CAPM is done ex-post while CAPM measures required rate of returns |
| C. | The beta of a portfolio is the beta of the individual stocks multiplied by the standard deviation of each stock |
| D. | Generally speaking stocks with higher betas tend to have lower total risk |
| Answer» B. Testing CAPM is done ex-post while CAPM measures required rate of returns | |
| 24. |
Which of the following statements is false about the Security Market Lines (SML)? |
| A. | SML represents normal trade-off between return and risk |
| B. | The vertical distance of the security‘s plot on the graph from the SML is called the security‘s alpha |
| C. | SML is same as the characteristic line for any security |
| D. | Ex-post SMLs are used to evaluate the performance of portfolio managers |
| Answer» C. SML is same as the characteristic line for any security | |
| 25. |
According to the Capital Asset Pricing Model (CAPM), the expected return of a well- diversified portfolio with abeta of 1.0 and positive ex-ante alpha (a) is |
| A. | The risk-free rate, rf |
| B. | ß (rœ r)mf |
| C. | Between rand rmf |
| D. | r+ a |
| Answer» D. r+ a | |
| 26. |
Which of the following assumptions is common between the pricing models of CAPM and APT? |
| A. | A single period investment horizon |
| B. | The investors can freely borrow and lend at risk-free rate |
| C. | The investors select portfolios based on expected mean and variance of return |
| D. | Investors have homogeneous expectations and are expected-utility-of-wealth maximizers. |
| Answer» D. Investors have homogeneous expectations and are expected-utility-of-wealth maximizers. | |
| 27. |
Which of the following statements is/are true with respect Capital Market Line (CML)? I. It is the line passing from risk-free rate through market portfolio. II. The slope of CML is called market price of risk. III. CML fails to express equilibrium pricing relationship between expected return and standard deviation for all efficient portfolios lying along the line. |
| A. | Only (I) above |
| B. | Only (II) above |
| C. | Only (III) above |
| D. | Both (I) and (II) above |
| Answer» D. Both (I) and (II) above | |
| 28. |
Which of the statements is/are false regarding Arbitrage Pricing Theory (APT)? I. APT assumes that return on any asset can be expressed as a linear function of a set of market factors or indexes. II. The arbitrage price line indicates relation between unsystematic risk and the expected return of an asset. III. While deriving the APT model, APT assumes that the error term can be reduced to zero through appropriate diversification. |
| A. | Only (I) above |
| B. | Only (II) above |
| C. | Only (III) above |
| D. | Both (I) and (II) above |
| Answer» B. Only (II) above | |
| 29. |
If the risk free rate of return (Rf) is 7%, expected return on the market [E(Rm)] is 15%, and the return on stock X is 16%, the beta for the stock X using CAPM is |
| A. | 0.85 |
| B. | 1.00 |
| C. | 1.14 |
| D. | 1.26 |
| Answer» C. 1.14 | |
| 30. |
At the prevailing environment, the Capital Market Line (CML) equation for a portfolio is given as E(ri),% = 8 + 0.36 ?i The ex-ante SML equation for the same portfolio i is E(ri),% = 8 + 5.50 ?i Therefore, the variance of market portfolio is approximately |
| A. | 30(%)2 |
| B. | 64(%)2 |
| C. | 126(%)2 |
| D. | 233(%)2 |
| Answer» D. 233(%)2 | |
| 31. |
A company's __________ provide the most accurate information to its management and shareholders about its operations. |
| A. | advertisements |
| B. | financial statements |
| C. | products |
| D. | vision statement |
| Answer» B. financial statements | |
| 32. |
A ________ provides an account of the total revenue generated by a firm during a period (usually a financial year, or a quarter) |
| A. | Accounting analysis statement |
| B. | financial re-engineering statement |
| C. | promotional expenses statement |
| D. | profit& loss statement |
| Answer» D. profit& loss statement | |
| 33. |
The balance sheet of a company is a snapshot of the ______ of the firm at a point in time. |
| A. | the sources and applications of funds of the company. |
| B. | expenditure structure |
| C. | profit structure |
| D. | income structure |
| Answer» A. the sources and applications of funds of the company. | |
| 34. |
Which of the following accounting statements form the backbone of financial analysis of a company? |
| A. | The income statement (profit & loss), |
| B. | The balance sheet |
| C. | Statement of cash flows |
| D. | All of the above |
| Answer» D. All of the above | |
| 35. |
_______ measures the percentage of net income not paid to the shareholders in the form of dividends. |
| A. | Withholding ratio |
| B. | Retention ratio |
| C. | Preservation ratio |
| D. | Maintenance ratio |
| Answer» B. Retention ratio | |
| 36. |
Which of the following statements is false with respect to different features of an efficient market? |
| A. | Information arbitrage efficiency is said to exist, if the participants do not have any scope to reap abnormal profits using information that is of common knowledge |
| B. | Fundamental valuation efficiency is said to exist, if the price of an asset is neither undervalued nor overvalued |
| C. | Full insurance efficiency is said to exist, if participants can adopt hedging as an effective tool against possible risk in future |
| D. | Allocation efficiency is said to exist, if the market channelizes resources into projects where the marginal efficiency of capital adjusted for risk differences is lowest. |
| Answer» D. Allocation efficiency is said to exist, if the market channelizes resources into projects where the marginal efficiency of capital adjusted for risk differences is lowest. | |
| 37. |
If security prices exhibits semi-strong form of efficiency, one will not gain if he |
| A. | Depicts the prices in the form of charts to identify pattern which will beat the market. |
| B. | Buys stock of a company which has declared a bonus issue or has gone for a stock split |
| C. | Refers to insiders’ advice |
| D. | Both (a) and (b) above. |
| Answer» D. Both (a) and (b) above. | |
| 38. |
Particulars Falcon International Triumph International Average Return (%) 10 8 Average Volatility (%) 12 15 For the portfolio to yield lower risk than the individual stocks, the correlation coefficient of stocks should be |
| A. | Less than 1.25 |
| B. | Less than 0.85 |
| C. | Less than 0.80 |
| D. | More than 0.83 |
| Answer» C. Less than 0.80 | |
| 39. |
Which of the following statements is/are true with respect to feasible set of portfolio? I. Feasible set is also known as opportunity set. II. It represents all the portfolios that could be formed from group of N securities. III. Feasible set is also called efficient set |
| A. | Only (I) above |
| B. | Only (II) above |
| C. | Only (III) above |
| D. | Both (I) and (II) above |
| Answer» D. Both (I) and (II) above | |
| 40. |
Fund managers generally want which of following objectives to be optimal? I. Stability of principle. II. Income. III. Growth of income. IV. Capital appreciation. |
| A. | Both (I) and (II) above |
| B. | Both (I) and (III) above |
| C. | Both (II) and (III) above |
| D. | All (I), (II), (III) and (IV) above |
| Answer» D. All (I), (II), (III) and (IV) above | |
| 41. |
Which of the following is not one of the considerations in setting investment objectives? |
| A. | Risk versus safety of principal |
| B. | Maximize wealth versus minimize expenses |
| C. | Current income versus capital appreciation |
| D. | Short versus long-term orientation |
| Answer» B. Maximize wealth versus minimize expenses | |
| 42. |
One of the reasons a short-term trader has difficulty in beating the market is because of |
| A. | Risk |
| B. | Lack of information |
| C. | Large institutional investors |
| D. | Commissions |
| Answer» D. Commissions | |
| 43. |
The holding period to qualify for a long-term capital gains is |
| A. | At least 6 months |
| B. | At least 12 months |
| C. | At least 18 months |
| D. | At most 18 months |
| Answer» B. At least 12 months | |
| 44. |
Common stock dividends are now taxed at a maximum rate of |
| A. | 10 percent |
| B. | 15 percent |
| C. | 20 percent |
| D. | 30 percent |
| Answer» B. 15 percent | |
| 45. |
Higher bond prices generally signal expectations of |
| A. | Higher inflation |
| B. | Lower inflation |
| C. | Rising stock prices |
| D. | Higher risk premiums |
| Answer» B. Lower inflation | |
| 46. |
A stock that pays low or no cash dividends is |
| A. | EBay |
| B. | Duke Power |
| C. | AT&T |
| D. | All of the above |
| Answer» A. EBay | |
| 47. |
Deposits in an IRA are |
| A. | Allowed to grow tax free until withdrawal |
| B. | Deducted from current income tax due |
| C. | Deducted from current income to reduce income tax due |
| D. | A and C |
| Answer» D. A and C | |
| 48. |
An investment requires a total return that comprises |
| A. | A real rate of return and compensation for inflation |
| B. | A real rate of return, compensation for inflation, and a risk premium |
| C. | Compensation for inflation and a risk premium |
| D. | A real rate of return, compensation for inflation, a risk premium, and compensation for time and effort devoted to researching alternative investments |
| Answer» B. A real rate of return, compensation for inflation, and a risk premium | |
| 49. |
The investor of a high-yielding utility can expect |
| A. | Slow growth in earnings |
| B. | Slow growth in the stock price |
| C. | Slow growth in the stock price with a fast growth in earnings |
| D. | Both a and b |
| Answer» D. Both a and b | |
| 50. |
Because most investors are risk averse |
| A. | The riskier the investment, the more the investor will pay for it |
| B. | The riskier the investment, the less compensation the investor requires |
| C. | Only financial institutions invest in risky assets |
| D. | They will require a higher rate of return for a riskier investment |
| Answer» D. They will require a higher rate of return for a riskier investment | |
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