FINC 340- QUIZ (20 points) A-TRUE/FALSE- PLEASE ANSWER ANY 7 OF THE FOLLOWING

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FINC 340- QUIZ (20 points)
A-TRUE/FALSE- PLEASE ANSWER ANY 7 OF THE FOLLOWING (7 points-1 point each)

1) Investors can be confidently predict future returns on an investment by studying its past
performance. FALSE
2) Meaningful measures of an investment's return must consider both income and capital gains.
TRUE
3) An investment that has earned a high rate of return over the last 5 years will not necessarily
continue to perform well in the future.
TRUE
4) An investor who requires a 7% rate of return should be willing to pay $934.58 now to receive
$1,000 at the end of one year.
TRUE, if the 7% is compounded annually.
5) An efficient portfolio maximizes the rate of return without consideration of risk.
FALSE
6) Every shareholder is a part owner of the firm and, as such, has a direct claim on a portion of
the firm's assets.
FALSE
7) There is a stronger tendency for the stock market to increase in value rather than decrease in
value over time.
TRUE
8) For most stocks the returns from dividend income far exceed the return from capital gains.
FALSE, company may not pay dividends each year or quarter.
9) A market correction is defined as a stock market decline of 10% or more.
TRUE
10) Over the long term, the capital gain on most stocks will exceed the dividend income.
TRUE
(8 points-1 point each)
1) The extraordinary run up in stock prices during the late 1990s primarily affected
A) energy stocks.
B) retail stocks.
C) pharmaceutical stocks.
D) technology stocks.
B-MULTIPLE/CHOICE- PLEASE ANSWER ANY 8 OF THE FOLLOWING

2) Inflation tends to have a particularly negative impact on the price of
A) real estate.
B) bonds.
C) gold.
D) crude oil.

1

3) Which of the following internal characteristics should cause investors to expect the highest
rate of return?
A) a steady record of past dividends
B) interest and principal guaranteed by the U.S. government
C) a record of excellent management and consistent dividend payments
D) poor management and excessive use of debt financing
4) Assume the Plum Corporation has two different issues of common stock. One issue carries
voting rights, and the other issue does not. In this situation, Plum is said to have issued
A) buy-back stock.
B) treasury stock.
C) OTC stock.
D) classified stock.
5) When calculating the present value of either a future single sum or a future annuity, the
applicable interest rate is usually called the
A) yield to maturity.
B) compound interest rate.
C) internal rate of return.
D) discount rate.
6) Melissa owns the following portfolio of stocks. What is the return on her portfolio?

A) 8.0%
B) 9.0%
C) 9.8%
D) 10.9%
7) The statement "A portfolio is less than the sum of its parts." means:
A) it is less expensive to buy a group of assets than to buy those assets individually.
B) portfolio returns will always be lower than the returns on individual stocks.
C) a diversified group of assets will be less volatile than the individual assets within the group.
D) for reasons that are not well understood, the value of a portfolio is less than the sum of the
values of its components.
8) In the real world, most of the assets available to investors
A) tend to be somewhat positively correlated.
B) tend to be somewhat negatively correlated.
C) tend to be uncorrelated.
D) tend to be either perfectly positively or perfectly negatively correlated.

2

9) Which one of the following conditions can be effectively eliminated through portfolio
diversification?
A) a general price increase nationwide
B) an interest rate reduction by the Federal Reserve
C) increased government regulation of auto emissions
D) change in the political party that controls Congress
10) Beta can be defined as the slope of the line that explains the relationship between
A) the return on a security and the return on the market.
B) the returns on a security and various points in time.
C) the return on stocks and the returns on bonds.
D) the risk free rate of return versus the market rate of return.

C-QUESTIONS/ANSWERS- PLEASE ANSWER ANY 2 OF THE FOLLOWING (5 points-2.5

point each)
1) Zachary has purchased an investment that he expects to produce income of $3,000 at the end
of the first year and $4,000 at the end of the second year. If he requires an 8% rate of return
compounded annually, what is the maximum amount that he can pay and still earn the required
rate of return?

2) Explain the relationship between correlation, diversification, and risk reduction. Provide an
example to substantiate your answer.
Diversification can minimize a firm-specific risk that makes the portfolios returns unclear. Correlation
describes the degree to which returns on investments move together. As beta increases than the correlation
creates more diversification. I made an investment decision to add stock G to my portfolio; afterwards I
saw the expected return of my portfolio increase by 1%. With the addition of stock G I was able to reduce
the risk of the portfolio. A low correlation of the expected return for stock G helped lower my risk and
increase my return.

3) Explain how the time value of money concept is used in stock valuation. Please answer
briefly
The Gordon Growth Model is used to value stocks based on the NPV of the future dividends payments.

    • 8 years ago
    FINC 340- QUIZ (20 points) A-TRUE/FALSE- PLEASE ANSWER ANY 7 OF THE FOLLOWINGFINC 340- QUIZ (20 points) A-TRUE/FALSE- PLEASE ANSWER ANY 7 OF THE FOLLOWING
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