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LSUS FIN 701 - M4 Exam Questions with Latest Update
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What are the standard ways of measuring risk? - Answer-1. Standard deviation 2. Beta (from CAPM) What is standard deviation? - Answer-A measure of how the individual returns on the stock deviate from the expected value or mean. What is beta (in relation to CAPM)? - Answer-Measure of how muc...

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  • August 23, 2024
  • 6
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers

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  • lsus fin 701 m4 exam questions with latest updat
  • what are the standard ways of measuring risk a

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LSUS FIN 701 - M4 Exam Questions with
Latest Update
What are the standard ways of measuring risk? - Answer-1. Standard deviation
2. Beta (from CAPM)

What is standard deviation? - Answer-A measure of how the individual returns on the
stock deviate from the expected value or mean.

What is beta (in relation to CAPM)? - Answer-Measure of how much the individual
returns on the "move with" the overall markets

Market risk is often referred to? - Answer-Beta

True/False
Total risk is measured by standard deviation? - Answer-True

Total risk is? - Answer-1. Non systematic risk
2. systematic risk

True/False
Cash flows are used to measure returns - Answer-True

Expected cash flow is? - Answer-The weighted average of possible cash flow outcomes
such that the weights are probabilities of the occurrence of the various states of
economy

Variance and standard deviation measure? - Answer-the volatility of returns

What does CV mean? - Answer-Coefficient of variance (CV) is a way to compare the
relative risk and return between different investments

lower CV indicates - Answer-less dispersion around the mean or a preferred investment
for a risk averse investment

high CV indicates - Answer-high variability relative to the size of the mean or a more
riskier investment

Systemic risk = - Answer-Beta

Total Return = _____ + _____ - Answer-Expected return + unexpected return

True/False

, Efficient markets are a result of investors trading of the unexpected portion of
announcements - Answer-True

Economic market issues are considered? - Answer-Systematic risk

Issues or risk from a single firm, single industry or single geographic area is
considered ? - Answer-Unsystematic risk

What is market equilibrium? - Answer-All assets and portfolios must have the same
reward to risk ratio

Usually considered risk free... - Answer-US Treasury Bill

Value of a firm is driven by? - Answer-The size predictability of expected cash flows

Payback Period - Answer-The number of years needed to recover the initial cash outlay
of capital budgeting

Decision rule for payback period - Answer-If payback period is shorter than the firm's
guidelines for payback, then accept the investment

When complaining two projects, accept the project with the shorter payback period

Pros of Payback Period - Answer--easy to understand
-very simply put on how long to make money back

-useful for firms that have capital constraints, it is biased towards liquidity

cons of payback period - Answer--TVM is not considered. Cash flows received in
several years are treated the same as cash flows received earlier

-does not consist cash flows beyond the payback period

-requires an arbitrary cutoff point

-biased against long-term projects, such as R&D and the projects

Payback periods is most useful to firms for? - Answer-Small projects

Payback period helpful in determining viability of investment projects in what industry? -
Answer-The healthcare industry bc of rapid changing technology

What is NPV? - Answer-Is equal to the present value of all future cash flows less the
investments initial outlay

If NPV is positive - Answer-Accept the project

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