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BFIN 300 Quiz2 solutions

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BFIN 300 Quiz2 solutions
BFIN 300 Financial Management FA14 Quiz 2 Solutions
Conceptual/qualitative questions:
1. The capital gains yield plus the dividend yield on a security is called the total return.
2. Unsystematic risk can be effectively eliminated through portfolio diversification.
3. The excess return required from a risky asset over that required from a risk-free asset is called the risk premium.
4. The market risk premium is computed by subtracting the risk-free rate of return from the market rate of return. MRP = Return of the market – Risk-free rate.
5. The Zolo Co. just declared that it is increasing its annual dividend from $1.00 per share to $1.25 per share. If the stock price remains constant, then the dividend yield will increase. This is because the denominator in dividend yield remains unchanged, but the numerator increases.
6. A bond that makes no coupon payments and is initially priced at a deep discount is called a zero-coupon bond.
7. A symmetric, bell-shaped frequency distribution that is completely defined by its mean and standard deviation is the Normal distribution.
8. Which one of the following is a correct statement concerning risk premium? The greater the volatility of returns, the greater the risk premium.
9. Estimates using the arithmetic average will probably tend to overestimate values over the long-term while estimates using the geometric average will probably tend to underestimate values over the short-term.
10. The risk premium for an individual security is computed by multiplying the security's beta by the market risk premium. CAPM = RFR + Beta x (MRP)
11. Standard deviation measures total risk.
12. Which one of the following would indicate a portfolio is being effectively diversified? A decrease in the portfolio standard deviation
13. The intercept point of the security market line is the rate of return which corresponds to the risk free rate of return. (the y-intercept here, from the formula for the slope of a line)
14. The principal

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