(8) Which can be true for diversified portfolios with more than one asset. A. Th
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Question
(8) Which can be true for diversified portfolios with more than one asset.
A.
The correlation coefficient between the returns on two assets will always have a value between 0 and +1.
B.
If the correlation is negative: returns tend to have opposite signs.
C.
If the correlation is positive: the return on one asset is positive and the return on the other asset tends to be negative.
D.
For a correlation of +1, the returns on the assets are not correlated.
(9) Bonds sell at a discount off the par value when market rates for similar bonds are:
A.
Less than the bond’s coupon rate.
B.
Greater than the bond’s coupon rate.
C.
Equal to the bond’s coupon rate.
D.
Market rates are irrelevant in determining a bond’s price.
(10)
The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments
A.
exceed the price of the bond.
B.
equal to zero.
C.
equal to the price of the bond.
D.
less than the price of the bond.
(11) Inverted yield curves are observed when
A.
the economy is growing.
B.
the economy is stagnant.
C.
the economy is in recession.
D.
None of the above.
(12) Owners of preferred stock
A.
have limited voting rights.
B.
are guaranteed dividend payments.
C.
are given priority treatment over common stock with respect to dividends payments and the claims against the firm’s assets in the event of bankruptcy or liquidation.
D.
All of the above statements are true.
(13) The constant-growth dividend model will provide invalid solutions when
A.
the growth rate of the stock exceeds the required rate of return for the stock.
B.
the growth rate of the stock is less than the required rate of return for the stock.
C.
the growth rate of the stock equals the required rate of return for the stock.
D.
None of the above.
(14) The internal rate of return is:
A.
the discount rate that makes the NPV (Net Present Value) greater than zero.
B.
the discount rate that makes the NPV equal to zero.
C.
the discount rate that makes the NPV less than zero.
D.
both a and c.
(15) Sparky’s
Sparky’s sells auto parts. Provided below is selected financial information from the company’s 2012 annual report:
Sparky’s Selected Financial Statement data
Fiscal year end
2012
2011
(amounts in thousands of dollars)
Net sales
$125,410
$106,380
Cost of Goods Sold
-104,090
-89,359
Gross Profit
$21,320
$17,021
Inventory
$31,353
$30,850
Using Sparky’s financial information what is the company’s inventory turnover ratio for 2012?
A.
0.69
B.
1.00
C.
3.35
D.
4.03
A.
The correlation coefficient between the returns on two assets will always have a value between 0 and +1.
B.
If the correlation is negative: returns tend to have opposite signs.
C.
If the correlation is positive: the return on one asset is positive and the return on the other asset tends to be negative.
D.
For a correlation of +1, the returns on the assets are not correlated.
Explanation / Answer
Answer :
8. Which can be true for diversified portfolios with more than one asset.
Answer to this is B. because When two or more investments move inversely to each other they have negative correlation. Two assets that were perfectly negatively correlated would eliminate risk of the combined assets.
9. Bonds sell at a discount off the par value when market rates for similar bonds are:
Answer to this is A. because where the market price of bond is less than its face value (par value), the bond is selling at a discount. Conversely, if the market price of bond is greater than its face value, the bond is selling at a premium.
10. The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments :
Answer to this is : C. because discounted bonds are paid off at maturity with full value.
11. Inverted yield curves are observed when :
Answer to this is C. because Historically, an inverted yield curve has been viewed as an indicator of a pending economic recession.
12. Owners of preferred stock :
Answer to this is : D. as the owners of preffered stock are outsiders stakeholders.
13. The constant-growth dividend model will provide invalid solutions when
Answer to this is : A. or C. both as
•The constant-growth dividend model yields invalid solutions when the dividend growth rate equals or exceeds the discount rate (g R)
If g = R, the denominator is zero and the value of the stock is infinite – which cannot occur.
If g > R, the denominator of the fraction is negative and the stock price is negative – which cannot occur.
14. The internal rate of return is:
Answer to this is B. as Internal rate of return (IRR) is a metric used in capital budgetingmeasuring the profitability of potential investments. Internal rate ofreturn is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.
15. Sparky's Inventory turnover ratio for 2012 :
Cost of Goods sold 104,090
--------------------------- = --------------- = 3.35 (rounded off)
Average inventory 31,353
Hence , answer to this is C.
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