Objective type question on bond valuation
1. Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds will have the largest percentage increase in price?
A. A 10-year bond with a 10% coupon.
B. A 10-year zero coupon bond.
C. An 8-year bond with a 9% coupon.
D. A 1-year bond with a 15% coupon.
E. A 3-year bond with a 10% coupon.
2. Which of the following has the greatest interest rate price risk?
A. A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.
B. A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
C. All 10-year bonds have the same price risk since they have the same maturity.
D. A 10-year $100 annuity.
E. A 10-year, $1,000 face value, zero coupon bond.
3. Which of the following statements is CORRECT?
A. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events.
B. Portfolio diversification reduces the variability of returns on an individual stock.
C. When company-specific risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.
D. A stock with a beta of -1.0 has zero market risk if held in a 1-stock portfolio.
E. The SML relates its required return to a firm's market risk. The slope and intercept of this line cannot be controlled by the financial manager.
4. You observe the following information regarding Company X and Company Y:
• Company X has a higher expected return than Company Y.
• Company X has a lower standard deviation of returns than Company Y.
• Company X has a higher beta than Company Y.
Given this information, which of the following statements is CORRECT?
A. Company X has a lower coefficient of variation than Company Y.
B. Company X has more company-specific risk than Company Y.
C. Company X's stock is a better buy than Company Y's stock.
D. Company X has less market risk than Company Y.
E. Company X's returns will be negative when Y's returns are positive.
5. Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)
A. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
B. If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
C. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
D. The effect of a change in the market risk premium depends on the level of the risk-free rate.
E. The effect of a change in the market risk premium depends on the slope of the yield curve.
6. A highly risk-averse investor is considering adding one additional stock to a 4-stock portfolio. Two stocks are under consideration. Both have an expected return, , of 15%. However, the distribution of possible returns associated with Stock A has a standard deviation of 12%, while Stock B's standard deviation is 8%. Both stocks are equally highly correlated with the market, with r equal to 0.75 for both stocks. Which stock should this risk-averse investor add to his/her portfolio?
A. Stock A.
B. Stock B.
C. Either A or B.
D. Neither A nor B.
E. Add A, since its beta is lower.
7. Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)
A. When held in isolation, Stock A has more risk than Stock B.
B. Stock B would be a more desirable addition to a portfolio than Stock A.
C. Stock A would be a more desirable addition to a portfolio than Stock B.
D. In equilibrium, the expected return on Stock A will be greater than that on Stock B.
E. In equilibrium, the expected return on Stock B will be greater than that on Stock A