Question 1. Tom O'Brien has a 2-stock portfolio with a total value of $100,000. $37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is his portfolio's beta?

1.17

1.23

1.29

1.35

Question 2. Maxwell Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate of return?

9.41%

9.65%

9.90%

10.15%

Question 3. Moerdyk Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?

11.36%

11.65%

11.95%

12.25%

Question4. Quigley Inc.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM)?

8.56%

9.01%

9.46%

9.93%

Question 5. A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?
If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.

The bond is selling below its par value.

The bond is selling at a discount.

If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.

Question 6.Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.

True

False

Question 7.Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.

True

False

Question 8.Which of the following statements is CORRECT?

All else equal, senior debt generally has a lower yield to maturity than subordinated debt.

An indenture is a bond that is less risky than a mortgage bond.

The expected return on a corporate bond will generally exceed the bond's yield to maturity.

If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.

Question 9.Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Variance; correlation coefficient.

Standard deviation; correlation coefficient.

Beta; variance.

Coefficient of variation; beta.

Question 10. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

The company's bonds are downgraded.

Market interest rates rise sharply.

Market interest rates decline sharply.

The company's financial situation deteriorates significantly.