Module 2: Multiple Choice Questions
Last updated: 17/09/2025 11:34
The questions are based on or inspired by the following references:
- Berk & DeMarzo, Corporate Finance, 5th ed. (2020)
- Brealey & Myers, Principles of Corporate Finance, 13th ed. (2020)
💡 You can also press Ctrl + P (or Cmd + P on Mac) to print or save your responses as a .pdf file.
⚠️ These exercises are powered by AI-assisted technologies and may contain occasional formatting or logic errors. Please report any issues you encounter so I can improve the experience.
📘 Part 1 (until Midterm)
| Module | Chapter | Slides | T/F | MCQ | Numeric | Long |
|---|---|---|---|---|---|---|
| 2 | ch10 | 🎞️ | ✅ | ❓ | 🔢 | 📝 |
Mark T (True) or F (False) in each of the following sentences.
✅ Correct: C. This statement correctly captures the historical risk-return tradeoff, where higher risk (volatility) is associated with higher expected return over long horizons.
✅ Correct: C. The primary reason standard deviation is often preferred for interpretation is that its units (e.g., %) are the same as the return itself, unlike variance, which is in squared units.
✅ Correct: B. Changes in the interest rate affect the cost of capital and valuations for nearly all companies in the market, making it a systematic risk.
✅ Correct: D. This is the precise definition of beta: it quantifies how much of a stock’s risk is due to broad market factors that cannot be diversified away.
✅ Correct: C. The total realized return is the sum of income received from dividends (dividend yield) and the appreciation in the asset’s price (capital gain rate).
✅ Correct: C. This is the core principle of diversification. Positive and negative events affecting individual companies (unsystematic risk) tend to cancel each other out in a large portfolio, leaving only the systematic risk that affects all firms.
✅ Correct: C. For an investor who already holds a diversified portfolio, the relevant risk of a new stock is its contribution to the portfolio’s risk (its systematic risk), not its total risk. Standard deviation includes diversifiable risk, which is irrelevant in this context.
✅ Correct: E. A beta of less than 1 indicates that the stock is, on average, less sensitive to market movements. A beta of 0.7 suggests that for every 1% move in the market, the stock tends to move 0.7% in the same direction.
✅ Correct: D. A wider confidence interval is caused by a larger standard error, which in turn is caused by higher historical volatility or fewer data points. This indicates that our estimate of the average return is less precise, reflecting greater uncertainty about the true underlying expected return.
✅ Correct: B. The fundamental logic is that the market does not reward investors for bearing a risk that they can eliminate on their own. Since unsystematic risk can be diversified away, there is no premium associated with it.
✅ Correct: B. CAPM assumes investors can borrow and lend unlimited amounts at the risk-free rate.
✅ Correct: C. E(R)=3%+1.2×(9−3)%=10.2%.
✅ Correct: D. Systematic risk cannot be eliminated by diversification.
✅ Correct: A. σp=√[(0.5²×0.1²)+(0.5²×0.2²)]=0.1118=11.18%.
✅ Correct: E. The slope of the SML is (Rm−Rf).
✅ Correct: C. Efficient frontier is the set of optimal portfolios at each risk level.
✅ Correct: A. E(Rp)=0.25×10%+0.75×14%=13%.
✅ Correct: D. Sharpe ratio = (Rp−Rf)/σp.
✅ Correct: D. Sharpe=(12−4)/16=0.5.
✅ Correct: C. The Security Market Line shows expected return vs beta.
✅ Correct: C. Beta measures the stock’s systematic risk relative to the market.
✅ Correct: B. Var = (0.3²×0.12²) + (0.7²×0.18²) + 2×0.3×0.7×0.12×0.18×0.5 = 0.0245.
✅ Correct: B. The theoretical market portfolio includes all risky assets weighted by market value.
✅ Correct: D. E(Rp) = 0.25×10% + 0.75×14% = 13%.
✅ Correct: C. Diversifiable risk can be eliminated by holding a sufficiently diversified portfolio.
✅ Correct: C. CAPM return = 4% + 1.1×(10−4)% = 10.6%. Given 11% ≈ 10.6%, it’s fairly priced.
✅ Correct: A. Negative correlation enhances diversification by reducing total variance.
✅ Correct: A. Expected return is the weighted average = 12%.
✅ Correct: C. Efficient portfolios maximize expected return for a given level of risk.
✅ Correct: D. E(R) = 2% + 0.8×(9−2)% = 8.6%.
✅ Correct: B. Standard deviation reflects total return volatility.
✅ Correct: E. E(Rp) = 0.6×15% + 0.4×9% = 13.2%.
✅ Correct: B. Sharpe ratio = (Rp−Rf)/σp.
✅ Correct: B. Perfect negative correlation allows construction of a risk-free portfolio.
✅ Correct: C. E(R) = 5% + 1.2×(14−5)% = 16.8% ≈ 16%.
✅ Correct: E. The SML slope = (Rm−Rf).
✅ Correct: C. σp = √[(0.5²×0.15²)+(0.5²×0.25²)] = 17.7%.
✅ Correct: C. CAPM assumes only systematic risk is priced.
✅ Correct: A. With perfect correlation, portfolio return is just the weighted average, between 8% and 12%.
✅ Correct: C. Positive alpha means actual return > CAPM prediction → undervalued.
✅ Correct: D. Systematic risk is market-wide risk that diversification cannot eliminate.
✅ Correct: C. σp = √(0.25×0.01+0.25×0.04+2×0.25×0.1×0.2×0.5)=13.23%≈13.2%.
✅ Correct: B. Only efficient portfolios (risk-free + market) lie on CML.
✅ Correct: D. E(R)=4%+1.5×(12−4)%=16%.
✅ Correct: C. Firm-specific lawsuit risk can be diversified away.
✅ Correct: C. 0.4×12%+0.6×8%=9.6%.
✅ Correct: A. CAPM rewards only systematic risk, not total risk.
✅ Correct: E. CAPM = 3%+0.9×(12−3)%=11%. Fairly priced.
✅ Correct: B. Diversification reduces firm-specific (unsystematic) risk.
✅ Correct: C. β = ρ×σi/σm = 0.7×30/20 = 1.05.
✅ Correct: C. The tangency portfolio has the highest Sharpe and lies on the efficient frontier.
✅ Correct: D. 3%+1.1×(10−3)%=10.7%.
✅ Correct: B. Systematic risk cannot be diversified away.
✅ Correct: E. β=ρ×σi/σm=0.8×25/18=1.11.
✅ Correct: C. Treynor = (Rp−Rf)/β.
✅ Correct: D. (9−3)/18=0.33.
✅ Correct: B. Unsystematic risk is firm-specific and can be diversified away.
✅ Correct: A. 4%+0.7×(12−4)%=9.6%.
✅ Correct: D. The SML differs from the CML.
✅ Correct: B. 0.7×14%+0.3×6%=11.6%.
✅ Correct: E. CML shows efficient portfolios mixing risk-free and market portfolio.
✅ Correct: C. 2%+0.8×(10−2)%=8.4%.
✅ Correct: B. Systematic (market) risk remains even after diversification.
✅ Correct: D. 0.5×12%+0.5×8%=10%.
✅ Correct: A. The market portfolio excludes risk-free assets.
✅ Correct: B. β=ρ×σi/σm=0.9×20/15=1.2.
✅ Correct: E. Alpha shows abnormal performance compared to CAPM.
✅ Correct: C. 0.3×10%+0.7×15%=13.5%.
✅ Correct: B. Sharpe ratio = (Rp−Rf)/σp.
✅ Correct: C. 4%+1.0×(13−4)%=13%.
✅ Correct: B. Beta is not total volatility; it measures relative systematic risk.
✅ Correct: C. 5%+1.3×(11−5)%=13%.
✅ Correct: D. Diversification removes unsystematic (firm-specific) risk.
✅ Correct: B. 0.6×10%+0.4×16%=12.4%.
✅ Correct: C. SML = expected return vs beta, slope=Rm−Rf.
✅ Correct: A. β=ρ×σi/σm=0.75×28/20=1.05.
✅ Correct: E. CAPM assumes systematic risk cannot be diversified away.
✅ Correct: B. 0.8×9%+0.2×15%=10.2%.
✅ Correct: D. Efficient frontier shows best risk-return combinations.
✅ Correct: A. 5%+0.5×(15−5)%=10%.
✅ Correct: C. The risk-free rate is the baseline for all investments in CAPM.
✅ Correct: D. 3%+1.4×(11−3)%=14.2%.
✅ Correct: B. The efficient frontier represents optimal risk-return trade-offs.
✅ Correct: A. 0.4×8%+0.6×12%=10.4%.
✅ Correct: C. The SML applies to all assets, not just risk-free.
✅ Correct: D. β=ρ×σi/σm=0.6×22/18≈0.73.
✅ Correct: B. Treynor=(Rp−Rf)/β.
✅ Correct: E. 2%+1.5×(9−2)%=12.5%.
✅ Correct: C. Diversification reduces unsystematic (firm-specific) risk.
✅ Correct: A. 0.25×20%+0.75×8%=11%.
✅ Correct: D. Diversifiable risk is firm-specific like product recalls.
✅ Correct: C. 4%+0.8×(10−4)%=8.8%.
✅ Correct: A. Sharpe ratio uses total risk, suitable for any portfolio.
✅ Correct: E. Sharpe=(11−3)/15=0.53.
✅ Correct: B. CAPM assumes homogeneous expectations.
✅ Correct: D. 5%+1.2×(13−5)%=14.6%.
✅ Correct: C. Systematic risk remains after diversification.
✅ Correct: A. √(0.25×400+0.25×100)=√125=11.18%.
✅ Correct: E. The CML connects the risk-free rate with the market portfolio.
✅ Correct: B. 2%+0.9×6%=7.4%.
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