Question

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1) Regarding stock market indices or indexes, which of the following is a correct statement?

a. The Dow Jones Industrial Average (DJIA), consisting of 50 small-company stocks, is the best index for reflecting price movements of the overall stock market.

b. The Nasdaq Composite includes stocks of smaller and newer companies compared to the NYSE, with a few notable exceptions (e.g. AAPL & MSFT); plus, it shows the rise and fall of the “tech bubble.”

c. The denominator in the DJIA calculation is currently 30 because to find the average price of 30 stocks, you sum up the values and divide by the number of figures.

d. Investors who hold DJIA stocks for at least 20 years should regularly experience major portfolio losses.

e. None of the above answers is a correct statement.

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2) Which of the following groups of investments is listed in the correct order, starting with the most risk-free and ending with the most-risky?

a. T-Notes & Bonds, Junk Bonds, Investment-Grade L/T Corporate Bonds, Small-Co. Stocks, Large-Co. Stocks, and T-Bills.

b. T-Bills, Investment Grade L/T Corporate Bonds, Large-Co. Stocks, T-Notes & Bonds, Junk Bonds, and Small-Co. Stocks.

c. Junk bonds, Investment Grade L/T Corporate Bonds, T-Notes & Bonds, T-Bills, Large-Co. Stocks, and Small-Co. Stocks.

d. T-Bills, T-Notes & Bonds, Investment Grade L/T Corporate Bonds, Large-Co. Stocks, Small-Co. Stocks

e. None of the above.

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3) As an executive manager, you must choose between two alternative investments that have estimated cash flows shown below. The WACC of your company is 10%. Year A B ` 0 -$250,000 -$250,000 1 140,000 5,000 2 140,000 15,000 3 140,000 400,000 Which of the following statements is true?

a. Project A has a faster payback.

b. Project B has a lower net present value.

c. Project A has a higher profitability index.

d. All of the above statements are true.

e. None of the above statements is true.

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4) Which of the following is a true statement?

a. Of these companies: Sunglasses, Tanning Lotion, and Umbrellas the wisest choice in a two-stock portfolio is Tanning Lotion and Sunglasses because these complement each other in terms of diversification.

b. Adding 30 different stocks to an existing portfolio of 200 different stocks should reduce diversifiable risk to the same degree as adding 30 different stocks to an existing portfolio of only two different stocks.

c. Investors who hold certain moral values (Christians) usually have the option to invest in screened mutual funds, which, for a small fee, remove objectionable stocks from the fund investments.

d. For a typical American’s retirement fund, investing in a couple of hand-picked stocks should provide easier and better diversification than investing in an S&P500 index mutual fund.

e. None of the above is a true statement.

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4) If capital markets are efficient, then

a. it is possible to regularly achieve returns significantly higher than those of the average market, as many thousands of celebrated investors have consistently done for decades.

b. prices will adjust accurately and quickly to reflect new information, often before most individual investors can take any action on the new information.

c. historical information can always be used to predict future prices.

d. All of the above statements are true.

e. None of the above statements is true.

Answer 1

1) Regarding stock market indices or indexes, which of the following is a correct statement?

e. None of the above answers is a correct statement. Provided options are all incorrect

2) Which of the following groups of investments is listed in the correct order, starting with the most risk-free and ending with the most-risky?

d. T-Bills, T-Notes & Bonds, Investment Grade L/T Corporate Bonds, Large-Co. Stocks, Small-Co. Stocks

3) As an executive manager, you must choose between two alternative investments that have estimated cash flows shown below. The WACC of your company is 10%. Year A B ` 0 -$250,000 -$250,000 1 140,000 5,000 2 140,000 15,000 3 140,000 400,000 Which of the following statements is true?

d. All of the above statements are true.

As Project A cash inflows is $140000 per annum which is receiving in initial years it will result in higher NPV, Lower Payback and Higher PI

4) Which of the following is a true statement?

b. Adding 30 different stocks to an existing portfolio of 200 different stocks should reduce diversifiable risk to the same degree as adding 30 different stocks to an existing portfolio of only two different stocks.

when the stocks in a portfolio crosses 30 then standard deviation of such portfolio will flatten over increase in further stock and will not result in much reduction of standard deviation

4) If capital markets are efficient, then

b. prices will adjust accurately and quickly to reflect new information, often before most individual investors can take any action on the new information.

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