Problem Set on Financial Management

Pages: 9 (1313 words) Published: July 20, 2014

FN2 Module 1
Multiple Choice Questions

MULTIPLE CHOICE: Choose the one alternative that best completes the statement or answers the question.

a)Which of the following is least likely to increase market efficiency?

1)Governments relax restrictions on foreign investment
2)Corporations disseminate more information to investors
3)More new investors choose to invest in individual stocks on their own rather than invest in mutual funds 4)More stock transactions are conducted online than on the floor of an exchange

b)Which of the following would BEST achieve diversification?

1)Investing in 10 securities of companies in the same industry in Canada 2)Investing in 10 securities of companies in the same industry in Canada, the United States, and Mexico 3)Investing in 10 securities of companies in different industries in North America, Europe, and Asia 4)Investing in 10 securities of companies in different industries in Canada

c)Which of the following forms of market efficiency (if proven valid) would make government regulations prohibit trading on insider information unnecessary?


d)Which of the following is consistent with the strong form of market efficiency?

1)A naive buy-and-hold strategy yields much lower returns that an active trading strategy 2)Investors who follow insider’s trading patterns always make abnormal returns 3)Professional money managers achieve results no better than the market portfolio 4)Some mutual funds perform better than others.

e)Which of the following is the BEST example of ethical behaviour?

1)ABC Corp. promised a hefty compensation package to its external auditor 2)DEF Company hired its workers from developing countries to avoid paying high wages to the local people 3)Management at JKL Inc. borrowed heavily to fund risky expansion 4)MNO executives willingly cut their own pay when their firm suffered from economic downturns

f)Which of the following is consistent with the weak form of market efficiency?

1)For the past 5 years, Jean has bought penny stocks in December and then sold all of them in January of the following year, consistently earning at least 100% return 2)ABC Inc. has adopted an accounting policy to recognize revenues faster. After releasing surprisingly positive financial results purely due to this change, its share price rose sharply 3)A recent study concluded that money managers employing an active trading strategy consistently performed better than those using the buy-and-hold strategy 4)The strategy of buying high beta stocks before an expected bull market yields no better results that the market portfolio

g)The key variables in the owner wealth maximization process are?

1)Earnings per share and share price
2)Profits and risk
3)Earnings per share and risk
4)Cash flows and risk

h)Return and risk are the key determinants in share price. Increased risk, other things remaining the same, results in?

1)A higher share price
2)A lower share price
3)An unchanged share price
4)An undetermined share price

i)A firm would accept a project with a Net Present Value (NPV) of zero because?

1)The project would enhance the wealth of the firm’s owners 2)The project would maintain the wealth of the firm’s owners 3)The return on the project would be zero
4)The return on the project would be positive

j)Which of the following BEST describes diversification?

1)A well-diversified portfolio has a beta of 1
2)Combining 2 stocks whose correlation coefficient equals zero cannot achieve diversification 3)Diversification reduces the beta of a portfolio
4)Standard deviation is the best measure of risk of a well-diversifies portfolio

k)Which of the following BEST describes beta?

1)Beta is a sensitivity analysis of a project
2)Beta is the best measure of the risk of a well-diversified portfolio 3)Beta is the portion of risk that can be...
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