FIN 402 FINAL EXAM

True/False
1.The balance sheet shows what assets the firm controls at a point in time and how it financed the assets.
2.Free cash flow = Cash flow from operations – Capital expenditures + Disposition of property and equipment.
3.The income statement indicates the flow of sales, expenses, and earnings during a period of time.
4.Financial ratios are used in stock and bond valuation models.
5.A good portfolio is a collection of individually good assets.
6.If the covariance of two stocks is positive, these stocks tend to move together over time.
7.Increasing the correlation among assets in a portfolio results in an increase in the standard deviation of the portfolio.
8.In a three asset portfolio the standard deviation of the portfolio is one third of the square root of the sum of the individual standard deviations.
9.Combining assets that are not perfectly correlated does affect both the expected return of the portfolio as well as the risk of the portfolio.
10.Bond rating agencies include the analysis of financial ratios in arriving at corporate bond ratings.

Multiple choice

11. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk is A. unique risk. B. beta. C. standard deviation of returns. D. variance of returns. E. skewness.

12. According to the Capital Asset Pricing Model (CAPM) a well diversified portfolio’s rate of return is a function of A. beta risk. B. unsystematic risk. C. unique risk. D. reinvestment risk. E. interest rate risk

13. The premise of behavioral finance is that

A. conventional financial theory ignores how real people make decisions and that people make a difference.
B. conventional financial theory considers how emotional people make decisions but the market is driven by rational utility maximizing investors.
C. conventional financial theory should ignore how the average person makes decisions because the market is driven by investors that are much more sophisticated than the average person.
D. conventional financial theory considers how emotional people make decisions but the market is driven by rational utility maximizing investors, and conventional financial theory should ignore how the average person makes decisions because the market is driven by investors that are much more sophisticated than the average person
E. None of these is correct.

14. The efficient market hypothesis ____________.
A. implies that security prices properly reflect information available to investors
B. has little empirical validity
C. implies that active traders will find it difficult to outperform a buy-and-hold strategy
D. has little empirical validity and implies that active traders will find it difficult to outperform a buy-and-hold strategy
E. implies that security prices properly reflect information available to investors and implies that active traders will find it difficult to outperform a buy-and-hold

15. The CAPM is not testable unless
A. the exact composition of the true market portfolio is known and used in the tests.
B. all individual assets are included in the market proxy.
C. the market proxy and the true market portfolio are highly negatively correlated.
D. the exact composition of the true market portfolio is known and used in the tests and all individual assets are included in the market proxy.
E. all individual assets are included in the market proxy, and the market proxy and the true market portfolio are highly negatively correlated.

16. The duration of a bond is a function of the bond’s
A. coupon rate.
B. yield to maturity.
C. time to maturity.
D. All of these are correct.
E. None of these is correct.

17. Treasury STRIPS are A. securities issued by the Treasury with very long maturities. B. extremely risky securities. C. created by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow. D. created by pooling mortgage payments made to the Treasury. E. created both by selling each coupon or principal payment from a whole Treasury bond as a separate cash flow and by pooling mortgage payments made to the Treasury