Names _______________________________________________________________________________

FIN 303 – Exam 1 Review Assignment

Multiple Choice – Choose the correct answer by highlighting the answer, bolding the answer, or putting
the letter of the correct answer at the end of the question.
Problems – Show your work. Type out your calculations as well as your answer.
1. A long-term investor who searches for protection against rising consumer prices would most likely
purchase a:
a. U.S. Treasury bond
b. Mortgage-backed security
c. U.S. Treasury inflation protection security
d. Equity shares in a financial institution
2. Which of the following bond ratings indicates that short-term obligations remain very safe but
payments over the longer term might not be sustainable in the event of a slowdown in the economy?
a. A
b. AA
c. B
d. BBB
3. Ellie would like to invest in a security that will provide a steady stream of cash flows to supplement
her retirement income. Which of the following is the least suitable investment for meeting Ellie's goal?
a. A mortgage backed security
b. A revenue bond
c. A technology stock
d. A utility stock
4. All of the following statements regarding major securities laws are correct EXCEPT:
a. The Dodd Frank Act established new government agencies to reduce volatility in financial
markets in response to the Great Recession
b. The Securities Act of 1933 established the Securities and Exchange Commission
c. The Investment Company Act of 1940 forms the backbone of financial regulation for mutual
funds and hedge funds
d. The Financial Services Modernization Act (Gramm-Leach-Bliley Act) removed barriers among
securities firms, financial institutions, and insurance companies
5. Andrea believes that the economic cycle is at its peak and that a severe downturn is likely in the near
future. She would like to invest in a stock that will remain relatively stable if the expected downturn
does take place. Which of the following is the most suitable investment to meet her goal?
a. A growth stock
b. A stock with a beta close to 1
c. A defensive stock
d. A stock with a beta higher than 1
6. Harold would like to purchase shares of a large, established company. He will most likely make his
purchase:
a. In the primary market
b. From an underwriter
c. In the secondary market
d. From the issuing corporation
Names _______________________________________________________________________________

7. Which of the following is not a determinant of whether a financial professional must register as an
investment advisor?
a. The financial professional provides advice about securities
b. The financial professional is compensated for providing advice relating to securities
c. The financial professional is in the business of providing advice about securities
d. The financial professional executes trades based on recommendations about securities
8. A stock market participant that buys shares of stock in a secondary market and holds shares as part
of its inventory is most likely a(n):
a. Stock exchange
b. Independent advisor
c. Broker-dealer
d. Self-regulatory organization
9. Standard deviation is?
a. A statistical measure of the variation of numbers or data around the mean of those numbers or
data
b. Used as a measure of risk for investors
c. Assumes the distribution is a normal distribution
d. All of the above
10. Which of the following is a systematic risk?
a. Country risk
b. Exchange rate risk
c. Executive risk
d. Business risk
11. Uncle Robbie, who lives in Kenner, Louisiana, bought a Treasury bond on the secondary market that
has 10 years until maturity and a 2% coupon payment, paid semi-annually. Which of the following
risks is he subject to?
a. Financial risk
b. Exchange rate risk
c. Default risk
d. Reinvestment rate risk
12. Which of the following correlations represents the strongest relationship between two variables?
a. -1.00
b. -0.50
c. +0.38
d. +0.78
13. Security Y has the following returns over five years: 3%, 6%, 0%, 6%, and 3%. What is the arithmetic
mean (average) return and the standard deviation (sample) for Security Y?
Names _______________________________________________________________________________

14. Stan invested in the Great Growth mutual fund 5 years ago. His returns were 60%, -20%, 10%, 0%
and 25%, respectively. What was the geometric average return over the five years?

15. Paul has $1 million saved for retirement. He expects to retire in 15 years. His retirement fund is
expected to earn a nominal rate of 9%, and the inflation rate is estimated at 3%. How much money
(in millions) should Paul have when he retires, in real dollars? (Hint: first find the inflation-adjusted
return or real rate, then find the FV of the $1 million).

16. Jocko was just told that the expected return for Echo stock was 20%, based on the CAPM. Assuming
that the market return and the risk-free rate are 12% and 4%, respectively, what is the beta for
Echo?

17. Portfolio X and Portfolio Z have identical levels of total risk and similar weighting schemes. The
correlations among the securities in X are much lower than those in Z. Which statement is most
accurate?
a. Portfolio X has a lower standard deviation
b. Portfolio X has a higher variance
c. Portfolio Z has greater diversification
d. Portfolio Z has much lower expected return
18. Which of the following is a graphical representation of expected return and beta?
a. ALA
b. CML
c. SML
d. Efficient frontier
19. XYZ common stock has a beta of 0.50, while ABC common stock has a beta of 2.0. The expected
return on the market is 12% and the risk-free rate is 4%. Based on the CAPM, and making use of the
information, the required return on XYZ common stock should be ____, and the required return on
ABC common stock should be____.

20. While standard deviation and beta are both measures of risk, there are differences between the two.
Which of the following is correct?
a. Beta measures all risk
b. Beta measures only systematic risk
c. Beta measures only unsystematic risk
d. Standard deviation and beta are different, but both measure total risk
Names _______________________________________________________________________________

21. Information reflected in security prices in a semi-strong form market most likely includes all the
following except:
a. Private information regarding the merger of industry leaders.
b. Dividend information contained in the board of director announcement.
c. Stock prices during the previous week.
d. Board of director election results one week after the election.
22. A rational investor would most likely:
a. Use emotional cues to rebalance portfolios
b. Take shortcuts when making asset allocation decisions
c. Completely and accurately process covariance data
d. Be influenced by the frame of an investment decision
23. Cheng Inc. is considering a capital budgeting project that has an expected return of 25% and a
standard deviation of 30%. What is the project’s coefficient of variation?

24. You plan to invest in Stock X, Stock Y, or some combination of the two. The expected return for X is
10% and σX = 5%. The expected return for Y is 12% and σY = 6%. The correlation coefficient, ρXY, is
0.75, and your portfolio is 75% stock X and 25% stock Y. Calculate rp and σp (expected return and
standard deviation) for the portfolio.

25. You are planning to purchase a new vehicle that costs $40,000. You will finance (borrow) 90% of the
cost. Determine the monthly payment on a 6-year, 4% annual rate (compounded monthly) loan.
Hint: convert the years to months and rate to monthly before entering your TVM inputs.
Names _______________________________________________________________________________

26. If a United States Savings bond can be purchased for $-38.50 (cash outflow), has a maturity value of
$100 (cash inflow), and the compounding annual rate of return on the bond is 4.15%, how long will
it take the bond to be worth $100 (how many years to maturity)?

27. Which of the following is the most accurate description of the difference between what behavioral
and rational investors value?

Option: Behavioral Rational

a Gains and losses Final wealth
b Gains Losses
c Losses Final wealth
d Final wealth Final wealth

a. Option a.
b. Option b.
c. Option c.
d. Option d.