CORPORATE FINANCE - FINAL EXAM
QUESTIONS & ACTUAL ANSWERS
Which one of the following best defines the variance of an investment's annual returns over a number
of years?
A. The average squared difference between the arithmetic and the geometric average annual returns.
B. The squared summation of the differences between the actual returns and the average geometric
return.
C. The average difference between the annual returns and the average return for the period.
D. The difference between the arithmetic average and the geometric average return for the period.
E. The average squared difference between the actual returns and the arithmetic average return. ANS -
The average squared difference between the actual returns and the arithmetic average return.
Standard deviation is a measure of which one of the following?
A. average rate of return
B. volatility
C. probability
D. risk premium
E. real returns ANS -volatility
Which one of the following is defined by its mean and its standard deviation?
A. arithmetic nominal return
B. geometric real return
C. normal distribution
D. variance
E. risk premium ANS -normal distribution
,The average compound return earned per year over a multi-year period is called the _____ average
return.
A. arithmetic
B. standard
C. variant
D. geometric
E. real ANS -geometric
5. Which of the following statements is correct in relation to a stock investment?
I. The capital gains yield can be positive, negative, or zero.
II. The dividend yield can be positive, negative, or zero.
III. The total return can be positive, negative, or zero.
IV. Neither the dividend yield nor the total return can be negative. ANS -I and III only
The real rate of return on a stock is approximately equal to the nominal rate of return:
A. multiplied by (1 + inflation rate).
B. plus the inflation rate.
C. minus the inflation rate.
D. divided by (1 + inflation rate).
E. divided by (1- inflation rate). ANS -minus the inflation rate.
7. Which one of the following statements is correct?
A. The greater the volatility of returns, the greater the risk premium.
B. The lower the volatility of returns, the greater the risk premium.
C. The lower the average return, the greater the risk premium.
D. The risk premium is unrelated to the average rate of return.
, E. The risk premium is not affected by the volatility of returns. ANS -A. The greater the volatility of
returns, the greater the risk premium.
If the variability of the returns on large-company stocks were to increase over the long-term, you would
expect which of the following to occur as a result?
I. decrease in the average rate of return
II. increase in the risk premium
III. increase in the 68 percent probability range of the frequency distribution of returns
IV. decrease in the standard deviation ANS -II and III only
Estimates of the rate of return on a security based on a historical arithmetic average will probably tend
to _____ the expected return for the long-term while estimates using the historical geometric average
will probably tend to _____ the expected return for the short-term. ANS -overestimate; underestimate
Which two of the following are the most likely reasons why a stock price might not react at all on the
day that new information related to the stock issuer is released?
I. insiders knew the information prior to the announcement
II. investors need time to digest the information prior to reacting
III. the information has no bearing on the value of the firm
IV. the information was anticipated ANS -III and IV only
Which one of the following measures the amount of systematic risk present in a particular risky asset
relative to the systematic risk present in an average risky asset?
A. beta
B. reward-to-risk ratio
C. risk ratio
D. standard deviation
E. price-earnings ratio ANS -beta
QUESTIONS & ACTUAL ANSWERS
Which one of the following best defines the variance of an investment's annual returns over a number
of years?
A. The average squared difference between the arithmetic and the geometric average annual returns.
B. The squared summation of the differences between the actual returns and the average geometric
return.
C. The average difference between the annual returns and the average return for the period.
D. The difference between the arithmetic average and the geometric average return for the period.
E. The average squared difference between the actual returns and the arithmetic average return. ANS -
The average squared difference between the actual returns and the arithmetic average return.
Standard deviation is a measure of which one of the following?
A. average rate of return
B. volatility
C. probability
D. risk premium
E. real returns ANS -volatility
Which one of the following is defined by its mean and its standard deviation?
A. arithmetic nominal return
B. geometric real return
C. normal distribution
D. variance
E. risk premium ANS -normal distribution
,The average compound return earned per year over a multi-year period is called the _____ average
return.
A. arithmetic
B. standard
C. variant
D. geometric
E. real ANS -geometric
5. Which of the following statements is correct in relation to a stock investment?
I. The capital gains yield can be positive, negative, or zero.
II. The dividend yield can be positive, negative, or zero.
III. The total return can be positive, negative, or zero.
IV. Neither the dividend yield nor the total return can be negative. ANS -I and III only
The real rate of return on a stock is approximately equal to the nominal rate of return:
A. multiplied by (1 + inflation rate).
B. plus the inflation rate.
C. minus the inflation rate.
D. divided by (1 + inflation rate).
E. divided by (1- inflation rate). ANS -minus the inflation rate.
7. Which one of the following statements is correct?
A. The greater the volatility of returns, the greater the risk premium.
B. The lower the volatility of returns, the greater the risk premium.
C. The lower the average return, the greater the risk premium.
D. The risk premium is unrelated to the average rate of return.
, E. The risk premium is not affected by the volatility of returns. ANS -A. The greater the volatility of
returns, the greater the risk premium.
If the variability of the returns on large-company stocks were to increase over the long-term, you would
expect which of the following to occur as a result?
I. decrease in the average rate of return
II. increase in the risk premium
III. increase in the 68 percent probability range of the frequency distribution of returns
IV. decrease in the standard deviation ANS -II and III only
Estimates of the rate of return on a security based on a historical arithmetic average will probably tend
to _____ the expected return for the long-term while estimates using the historical geometric average
will probably tend to _____ the expected return for the short-term. ANS -overestimate; underestimate
Which two of the following are the most likely reasons why a stock price might not react at all on the
day that new information related to the stock issuer is released?
I. insiders knew the information prior to the announcement
II. investors need time to digest the information prior to reacting
III. the information has no bearing on the value of the firm
IV. the information was anticipated ANS -III and IV only
Which one of the following measures the amount of systematic risk present in a particular risky asset
relative to the systematic risk present in an average risky asset?
A. beta
B. reward-to-risk ratio
C. risk ratio
D. standard deviation
E. price-earnings ratio ANS -beta
