1. (TCO 8) Which one of the following is a correct definition of an Ibbotson and Sinquefield investment category as used to report historical returns in your textbook?

U.S. Treasury bills: 1 year debt securities issued by the U.S. Department of the Treasury

Small company stocks: Stocks of the smallest 20 percent of the firms listed on the NYSE

Large company stocks: Stocks of the largest 10 percent of the firms listed on the NYSE

Long term U.S. government bonds: Bonds issued by the U.S. government with a 30 year maturity

2. (TCO 8) Based on the efficient market hypothesis, all informed investors will earn:

excess profits over the long term.

excess profits but only on short term investments.

a return equal to the value they paid for an investment.

a return that cannot be accurately predicted because investments are subject to the random movements of the markets.

3. (TCO 8) Which of the following statements is false regarding systematic risk? Select all that apply:

is always diversifiable

is the total risk associated with surprise events

affects only a specific project or firm

4. (TCO 8) Assume a project that has the following returns for years 1 to 5: 15%, 4%, 13%, 34%, and 17%. What is the approximate expected return of this investment?

11%

17%

16.60%

5. (TCO 8) Assume you are considering investing in two stocks, A & B. Stock A has an expected return of 16% and Stock B has an expected return of 9.5%. Your goal is to create a two security portfolio that will have an expected return of 12%. If you have $250,000 to invest today, approximately how much would you invest in Stock B?

$150,000

$175,000

More than $200,000

6. (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows:

The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. What is the beta of Stock I and II respectively?

0.6 and 1.2

1.2 and 0.6

1.2 and 0.4

Cannot be determined with the information given

7. (TCO 8) For this exercise, use the information provided for Problem 30 of Chapter 11 (page 375 of your textbook). Assume that the probability of the state of the economy has changed as follows:

The probability of a recession has increased to 30% and the probability for a normal state of economy is now 40%. The market risk premium has increased by 1% as well. Which statement is true? Select all that apply:

Stock II has more risk than Stock I

Stock II has less systematic risk than Stock I

Stock I has a lower risk premium than Stock II

8. (TCO 8) Which statements are true regarding risk? Select all that apply:

The expected return is usually not the same as the actual return

A key to assessing risk is determining how much risk an investment adds to a portfolio

Some risks cannot be decreased or mitigated by the financial manager.