1. Which of the following statements is CORRECT?
a.One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.
b.Sole proprietorships are subject to more regulations than corporations.
c.In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
d.Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.
e.Corporations of all types are subject to the corporate income tax.

2. You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction?
a.This is an example of an exchange of physical assets.
b.This is an example of a primary market transaction.
c.This is an example of a direct transfer of capital.
d.This is an example of a money market transaction.
e.This is an example of a derivatives market transaction

3. The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.
a.True
b.False

4. One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.
a.True
b.False

5. Which of the following statements is CORRECT?
a.One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
b.It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
c.One of the advantages of the corporate form of organization is that it avoids double taxation.
d.One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote."
e.Corporations of all types are subject to the corporate income tax.

Chapter 2

6. Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true, assuming the CAPM is correct.
a.In equilibrium, the expected return on Stock B will be greater than that on Stock A.
b.When held in isolation, Stock A has more risk than Stock B.
c.Stock B would be a more desirable addition to a portfolio than A.
d.In equilibrium, the expected return on Stock A will be greater than that on B.
e.Stock A would be a more desirable addition to a portfolio then Stock B.

7. Charlie and Lucinda each have $50,000 invested in stock portfolios. Charlie's has a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%. Lucinda's has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%. The correlation coefficient, r, between Charlie's and Lucinda's portfolios is zero. If Charlie and Lucinda marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?
a.The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.
b.The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
c.The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations, 25%.
d.The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations, 25%.
e.The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.

8. The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM - rRF, is positive. Which of the following statements is CORRECT?
a.Stock B's required rate of return is twice that of Stock A.
b.If Stock A's required return is 11%, then the market risk premium is 5%.
c.If Stock B's required return is 11%, then the market risk premium is 5%.
d.If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.
e.If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.

9. Assume that in recent years both expected inflation and the market risk premium (rM - rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?
a.The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas.
b.The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0.
c.Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.
d.The required returns on all stocks have fallen by the same amount.
e.The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas.

10. Sherrie Hymes holds a $200,000 portfolio consisting of the following stocks. The portfolio's beta is 0.875.

Stock    Investment    Beta
A      $50,000    0.50
B        50,000    0.80
C        50,000    1.00
D        50,000    1.20
Total    $200,000   

If Sherrie replaces Stock A with another stock, E, which has a beta of 1.50, what will the portfolio's new beta be?
a.1.07
b.1.13
c.1.18
d.1.24
e.1.30