1. What is the future value of $1,000 invested for 3 years at 5%
compounded annually?
A. $1,150.00
B. $1,157.63 ✅ ANSWER
C. $1,105.00
D. $1,000.00
Explanation: FV = 1000 × (1 + 0.05)^3 = $1,157.63
2. What is the present value of $2,000 received 4 years from now at a
discount rate of 6%?
A. $1,585.96 ✅ ANSWER
B. $1,600.00
C. $1,800.00
D. $1,920.00
Explanation: PV = 2000 / (1 + 0.06)^4 = $1,585.96
3. Which formula represents compound interest?
A. FV = PV × r × t
B. FV = PV / (1 + r)^t
C. FV = PV × (1 + r)^t ✅ ANSWER
D. FV = PV - r × t
Explanation: Compound interest grows exponentially, not linearly.
4. If interest is compounded semi-annually, how often is it compounded per
year?
A. 1
B. 2 ✅ ANSWER
, C. 4
D. 12
Explanation: Semi-annual = twice per year.
5. What is the effective annual rate (EAR) for 10% compounded quarterly?
A. 10.00%
B. 10.38% ✅ ANSWER
C. 10.25%
D. 11.00%
Explanation: EAR = (1 + 0.10/4)^4 − 1 = 10.38%
Risk and Return
6. Which investment is less risky?
A. One with a higher standard deviation
B. One with a lower beta
C. One with a higher return
D. One with higher volatility
Answer: B ✅ ANSWER
Explanation: Lower beta = less market risk.
7. What does beta measure?
A. Company size
B. Interest rate
C. Market risk ✅ ANSWER
D. Company debt
Explanation: Beta measures volatility relative to the market.
8. A portfolio has a beta of 1.2. If the market goes up 10%, what is the
expected return?
A. 12% ✅ ANSWER
B. 10%
C. 8%
D. 14%
,Explanation: Portfolio return = beta × market return = 1.2 × 10%
9. What is the risk-free rate if the expected return is 8%, market return is
10%, and beta is 1?
A. 6%
B. 7%
C. 8%
D. 6% ✅ ANSWER
Explanation: 8% = 6% + 1(10% − 6%)
10.What does diversification do to a portfolio’s risk?
A. Increases
B. Decreases ✅ ANSWER
C. Eliminates all risk
D. Has no effect
Explanation: Diversification reduces unsystematic risk.
Financial Statement Analysis
11.Which ratio indicates a firm’s ability to pay short-term liabilities?
A. Return on Assets
B. Current Ratio ✅ ANSWER
C. Debt-to-Equity
D. Net Profit Margin
Explanation: Current ratio = current assets / current liabilities.
12.If a company’s ROE is 15%, what does it mean?
A. 15% of assets are profitable
B. 15% of debt is returned
C. 15% of equity generates net income ✅ ANSWER
D. 15% of revenue is taxed
Explanation: ROE = net income / shareholder equity.
13.What does a high debt-to-equity ratio imply?
A. Strong liquidity
, B. High profitability
C. High leverage ✅ ANSWER
D. Strong asset management
Explanation: High D/E = high reliance on debt financing.
14.Which financial statement shows profitability over a period?
A. Balance Sheet
B. Statement of Retained Earnings
C. Cash Flow Statement
D. Income Statement ✅ ANSWER
Explanation: Income statement shows revenues and expenses.
15.What does the quick ratio exclude?
A. Cash
B. Inventory ✅ ANSWER
C. Accounts receivable
D. Accounts payable
Explanation: Quick ratio = (Current Assets − Inventory) / Current Liabilities.
Capital Budgeting
16.Which method considers time value of money?
A. Payback period
B. Accounting rate of return
C. Net present value ✅ ANSWER
D. Gross margin
Explanation: NPV discounts future cash flows.
17.What is IRR?
A. Interest Rate Requirement
B. Internal Rate of Return ✅ ANSWER
C. Internal Return Rate
D. Investor Return Rate
Explanation: IRR is the rate that makes NPV = 0.
compounded annually?
A. $1,150.00
B. $1,157.63 ✅ ANSWER
C. $1,105.00
D. $1,000.00
Explanation: FV = 1000 × (1 + 0.05)^3 = $1,157.63
2. What is the present value of $2,000 received 4 years from now at a
discount rate of 6%?
A. $1,585.96 ✅ ANSWER
B. $1,600.00
C. $1,800.00
D. $1,920.00
Explanation: PV = 2000 / (1 + 0.06)^4 = $1,585.96
3. Which formula represents compound interest?
A. FV = PV × r × t
B. FV = PV / (1 + r)^t
C. FV = PV × (1 + r)^t ✅ ANSWER
D. FV = PV - r × t
Explanation: Compound interest grows exponentially, not linearly.
4. If interest is compounded semi-annually, how often is it compounded per
year?
A. 1
B. 2 ✅ ANSWER
, C. 4
D. 12
Explanation: Semi-annual = twice per year.
5. What is the effective annual rate (EAR) for 10% compounded quarterly?
A. 10.00%
B. 10.38% ✅ ANSWER
C. 10.25%
D. 11.00%
Explanation: EAR = (1 + 0.10/4)^4 − 1 = 10.38%
Risk and Return
6. Which investment is less risky?
A. One with a higher standard deviation
B. One with a lower beta
C. One with a higher return
D. One with higher volatility
Answer: B ✅ ANSWER
Explanation: Lower beta = less market risk.
7. What does beta measure?
A. Company size
B. Interest rate
C. Market risk ✅ ANSWER
D. Company debt
Explanation: Beta measures volatility relative to the market.
8. A portfolio has a beta of 1.2. If the market goes up 10%, what is the
expected return?
A. 12% ✅ ANSWER
B. 10%
C. 8%
D. 14%
,Explanation: Portfolio return = beta × market return = 1.2 × 10%
9. What is the risk-free rate if the expected return is 8%, market return is
10%, and beta is 1?
A. 6%
B. 7%
C. 8%
D. 6% ✅ ANSWER
Explanation: 8% = 6% + 1(10% − 6%)
10.What does diversification do to a portfolio’s risk?
A. Increases
B. Decreases ✅ ANSWER
C. Eliminates all risk
D. Has no effect
Explanation: Diversification reduces unsystematic risk.
Financial Statement Analysis
11.Which ratio indicates a firm’s ability to pay short-term liabilities?
A. Return on Assets
B. Current Ratio ✅ ANSWER
C. Debt-to-Equity
D. Net Profit Margin
Explanation: Current ratio = current assets / current liabilities.
12.If a company’s ROE is 15%, what does it mean?
A. 15% of assets are profitable
B. 15% of debt is returned
C. 15% of equity generates net income ✅ ANSWER
D. 15% of revenue is taxed
Explanation: ROE = net income / shareholder equity.
13.What does a high debt-to-equity ratio imply?
A. Strong liquidity
, B. High profitability
C. High leverage ✅ ANSWER
D. Strong asset management
Explanation: High D/E = high reliance on debt financing.
14.Which financial statement shows profitability over a period?
A. Balance Sheet
B. Statement of Retained Earnings
C. Cash Flow Statement
D. Income Statement ✅ ANSWER
Explanation: Income statement shows revenues and expenses.
15.What does the quick ratio exclude?
A. Cash
B. Inventory ✅ ANSWER
C. Accounts receivable
D. Accounts payable
Explanation: Quick ratio = (Current Assets − Inventory) / Current Liabilities.
Capital Budgeting
16.Which method considers time value of money?
A. Payback period
B. Accounting rate of return
C. Net present value ✅ ANSWER
D. Gross margin
Explanation: NPV discounts future cash flows.
17.What is IRR?
A. Interest Rate Requirement
B. Internal Rate of Return ✅ ANSWER
C. Internal Return Rate
D. Investor Return Rate
Explanation: IRR is the rate that makes NPV = 0.
