Finance Fundamentals ~ MBA Sabjets Practice Questions ~CB Methods and Fixed Income Securities 1 The the variance of tums, everything else rem expesaions ad the he isk a Langer, preset, lower ange, smaller, higher © Larger, greater higher Smaller greater, lower ing constant, th 2. Modern Portfolio theory as described by Markowitz most concened wit the elimination of systematic risk the effect of diversifiation on portfolio risk the idemifcation of unsystemati sk. ‘tive portfolio management oenbanceretums ‘one of the above per@r USE THE FOLLOWING INFORMATION FOR THE NEXT TWO PROBLEMS ‘You have concluded that neat year the following relationships are posible: Economic Status Probability Rate of Reum [Sx K_ Wear toon 1S es Ste Ezonony ‘ ante StoogEconomy 38 me Bae x 3. Whaisyourepced mt of eu (ER formu? é ge Khe Y Ge fe a comm S = 6-24 «. 6.25% Se a 15% 4. Compute the standart deviation of thee of eu fr the one opr Parr basse tow 65% 5. portfolio manage considering ang another scr os onto. The cme aions ofthe aeatives sca and ton Wich coy males ie ele ose to fhe too po ep e028 é (ae eden Conny © hapa 6. Which on ofthe flowing portato ane Me tin omer a desrtedby Markowitz? ye gens sina Rok-cviewe cnvelers & mien Deminance Pe eo Ce a Cnty pra W cnt eon he fe or at fre X cama nh it or atria cate nh fie er tes (Only portfolio Z cant lie onthe ecient fomtir. ‘Cannot ll fom he information piven. mee par e@) NexeSe 0 6 Between 1980 and 1990, the sana deviation of the returns for the NIKKEI an the DIA indexes were 0.08 ae (0.06, respectively, and the sovarance of these index retums was 0.0008, What was the corelationcoeliie Iucwoen the wo market ndeators? a SIs bas Q 1s 1622 e108 Which statement abou portfolio diversitieatio is comest? Proper diversification can reduce or eiminate systematic risk 1, Theriskreducing benefits of diversification donot occur meaningfll nt atleast $0-60 individual 545" scutes have been purchased Because diversification reduces a porto’ ttl ish it necessarily reduces the portfoi's expected return. pial as oe securities ae ed topo tal risk wold be expected deena deci yest te [None ofthe above statment are comes. Which ft allowing ater aoa say mt ine (SL) adapta ma ge (CML FRU, ‘the SMLisasaight ine, but the CML isa euve AM fb, the SML involves the concept iskfree ase, bul the CML does not }> the SME uses beta, but the CML uss standard deviation as the risk measure Teh So CL ed ison ime ne iy ps Oke Fe ih ote atoning sens) (a) teen te ton 1 po am se ie on tet ani rt ie C1" 7 Les skavrse investors lives mre in the risks security and less in the optimal risky ponotio he more res invexors 1 More riskaverseimvestrs wlliaves ess in the optimal risky pontlio and more inthe iste scuity thin es skeaverse investor. Investors choos th portfolio that maximizes their expected ity. ange bande g Qe andar deviation and beta both measure risk, but they ae diferent in tha Teta measures both systematic and unsstematic risk. bea measures enly systematic sk wil standard deviation is « measure of ttl isk beta measures only unsystematic rik while standard deviation i a measure ol risk, ‘beta measures both systematic and unsstematc rik while standard deviation measures only systematic ih et measures total isk wil standard deviation measures only nonystemsic sk markt risk, eta, of security sequal t9 the covariance between the Security's retumn andthe market return divided by the variance of the market's the covariance beowcen the security and market ets divided by the stand deviation ofthe markets the variance ofthe security’ tums divide bythe covariance between the curity and market returns. the variance ofthe secur’ ets divided bythe variance ofthe markets Fetus one ofthe above sen 2 Gp rer@e ‘hes msn he eg nat of ena 0.6 an 012, pel. Acatng te apa a i Se See sa ae mh i Bae gh Rye 08 ElRa)= IZ Be oy os Perot m4) na Rake Kz 106 +12( 0 Sf ae14. Ina well diversified portotio. ‘markt ris ineligible bist skis negligible @ __nsystematc risk is negligible. “&.—ondiversifiable risk ineligible. © none the above, ‘Therearession Ws Company nd the S&P. hese resus o answer next three questions SUMMARY OUTPUT - Walt Disney Company (DIS) Regression Sais’ Makipe R018 RSaume 02677 Adjusted Souare assis StnddEmor 008269 Oseratons 6 ANOVA Ss eae Regeson Taser —o14soa ara Reda Sh aNest ste Teal 9 ostse 2 7 ae inert ~btwrss— 00r0rs 1001S = 700 Slope 1195955020838 aS L ace 2 y.boser 15, What the colton toe the Diney stock etmanditesasaar = SEM = 46 aga & o36 025516 © osinas 16. Which fhe allowing isan incorrect concision fm he represion oxi? a esqure indicts bx 26.78 percent ofthe vary Ditcy sack ets expe by changes nth ‘rake S&P S00) > © theese intercet coctciet rom regressions satisial signin athe Seren vel_X She sand evi ote dienes etc he agama exist of hs rs oe regression models 1083 (2 ro) 4. Gvenaonesnit crease inthe independent varbl, you woul expect sou 0.96 uni increase in the Alependent variable += © bathband dabove 17, The regression statistics indict that a the S percent ve, the slope coecent a. and the intorcept are both statistically significant I andthe intercept beh ack statistical significance Sst Spee, br he eet stscaly sii isnot statistically significant, but the intrcept is satsticaly significant. 18 Whichofthe lowing statements i fe? sad ition sd tah eae sk eta mens ny year esa ‘evan amenre fa rk b. ‘market risk is also referred to as the systematic risk or non-diversifiable risk —~ © Epowlo is conrad tb etn in oer por oer higher expe ret with te ame ‘Wkor lower ak wih ih sae expected eum © @ _inaveltiverstied porto mono the ik nye © Inavitan onc ofthe stove samen are fae20. 2, 2. 2, Which statement about proto diversification s trae? 42 prope diversification can sgutcatly edice or eliminate systematic risk Aiersifiation reduces the portfolio’ expected retum because diversiiatic reduces a pntolio's toa iss ©) _asmor secutiies are added to a portfolio, toa risks key to fall ata decreasing rate ~~ ‘&.—_thevsk reducing bonois of diversification donot occur meaningfully unilat east 10 Secures are included in the portlio > ‘© More hun one of te above statements are true An analyst developed the following data on tock X athe market Return the market ‘01200, Covariance (Re Rs) = 04288 Standard deviation ofthe stum on tock X (a3) Standard deviation ofthe market st (ca) 0.800 02000 (0) What sth beta coetiiet of tock X? Answer: OTA. (0) What percentage of stock X risk systema? Answer: _6 USE THE FOLLOWING INFORMATION FOR THE NEXT QU Retums onthe market and Agrow's stock during the Ws’ yea are shown Below: Return | Return [GF | Rook EY LL (ints Year| ageow | Maret G33 moi] 220 | aso [= 30 [ ar eae | ag A] get Be mou_| i320 | 100 | ard |g Fie 012360 | 200 [27] 16] w]e] qa | Cy, = 2 (=5G Rat BR a1 Vee “Thetis re att 7 pro, ad te exact male risk-enum 8 pace, You ar considering an ser ‘kp wine baa emp’ eal cout te Ago ee ol Sac as em rwepn ce rc ly sn eae Te fag cox a's ead BO flo 30 arp tse on fs cretringRIDOR ong tate Wi ing trys awe, Fn mara! x0 pos What is Agrow’s corporate Beta closest to? Answer: {7 Roe = SEL = yee 38 ier C.- alm ‘Which of the following statements is trae’? ‘an ane) 1. “Thecoreation between Agrw’s stock tum an the mare eens egaive. X Ti, The ecient of determination (Resquae estan 0.50, © Tinie be tiste © bother G — boshae fe pried, 8 What's the cost ofeach component ofcaptal structure? [SQ 8. What stb after-tax cost of debe? Amswer:_ 3-4 / Whats tbe fim’s costo equity based onthe marke information and your smputed beta? ewer 1B : k LoT + b4T(s08)218-2/ aarp eee jpughts Cok (0 jes Git =e Ea ces 56 1-8 / ae “bd teh © hee