1. Consider the returns of the MSCI index of developed markets equity in column C of the Excel file that goes with this quiz. Given the returns over the 1988‐2013 period, what has been the arithmetic mean annual return of these markets?

1. 4.8%
2. 6.0%
3. 7.3%
4. 8.5%
5. 9.7%

 

2. Consider the returns of the MSCI index of emerging markets equity in column D of the Excel file that goes with this quiz. Given the returns over the 1988‐2013 period, what has been the arithmetic mean annual return of these markets?

1. 11.8%
2. 14.2%
3. 17.6%
4. 20.1%
5. 23.3%

 

3. Consider the returns of the MSCI index of developed markets equity in column C of the Excel file that goes with this quiz. Given the returns over the 1988‐2013 period, what has been the geometric mean annual return of these markets?

1. 5.5%
2. 7.9%
3. 9.2%
4. 11.4%
5. 12.8%

 

4. Consider the returns of the MSCI index of emerging markets equity in column D of the Excel file that goes with this quiz. Given the returns over the 1988‐2013 period, what has been the geometric mean annual return of these markets?

1. 12.1%
2. 14.7%
3. 18.9%
4. 19.4%
5. 21.8%

 

5. Consider the returns of the MSCI index of developed markets equity in column C of the Excel file that goes with this quiz. Given the returns over the 1988‐2013 period, what has been the standard deviation of annual returns of these markets?

1. 18.0%
2. 19.4%
3. 20.9%
4. 22.1%
5. 24.2%

 

6. Consider the returns of the MSCI index of emerging markets equity in column D of the Excel file that goes with this quiz. Given the returns over the 1988‐2013 period, what has been the standard deviation of annual returns of these markets?

1. 29.9%
2. 34.7%
3. 37.5%
4. 40.1%
5. 44.6%

 

7. Consider the returns of the MSCI index of developed markets equity in column C of the Excel file that goes with this If you had invested $100 in these markets at the very beginning of 1988, how much money would you have at the end of 2013?

1. $315
2. $509
3. $640
4. $729
5. $923

 

8. Consider the returns of the MSCI index of emerging markets equity in column D of the Excel file that goes with this quiz. If you had invested $100 in these markets at the very beginning of 1988, how much money would you have at the end of 2013?

1. $1,014
2. $1,187
3. $1,411
4. $1,674
5. $1,956

 

9. Consider the returns of both the MSCI index of developed and emerging markets equity in columns C and D of the Excel file that goes with this quiz. Given the returns over the 1988‐2013 period, what has been the correlation between developed and emerging markets?

1. 0.23
2. 0.44
3. 0.67
4. 0.79
5. 0.9

 

10. Which one of the statements below is false?

1. The standard deviation of returns cannot be a negative number.
2. The geometric mean return can be a negative number.
3. The arithmetic mean return can be a negative number.
4. The correlation between two assets can only be a positive number.
5. The beta of an asset can be higher than 2.

 

11. Which one of the statements below is true?

1. When two assets with a correlation lower than 1 are combined into a portfolio, the volatility of the portfolio is higher than the weighted‐average volatility of the two assets.
2. When two assets with a correlation lower than 1 are combined into a portfolio, the volatility of the portfolio is equal to the weighted‐average volatility of the two asset
3. When two assets with a correlation lower than 1 are combined into a portfolio, the volatility of the portfolio is lower than the weighted‐average volatility of the two assets.
4. The correlation between two assets can be higher than 1.5.
5. The correlation between two assets can be lower than 1.5.

 

12. Of the five options below, select the one that incorrectly completes the following sentence: “Diversification can help investors…

1. to reduce risk.
2. to increase returns.
3. to reduce risk and increase returns at the same time.
4. to increase risk‐adjusted returns.
5. to always be fully exposed to the best performing asset.

 

(The following information and Exhibit 1 apply to questions 1 through 4) Consider the two companies below, A and B, which are identical in terms of revenue and costs, and hence identical in terms of EBIT (earnings before interest and taxes). They are also identical in terms of the corporate tax rate they face, which is 35%. Company A has no debt. Company B, on the other hand, has $400 million of debt, on which it pays an annual interest rate of 6%.

 

Exhibit 1 (In Millions of $)

	Company A	Company B
Revenue	$500.0	$500.0
Costs	$250.0	$250.0
EBIT	$250.0	$250.0
Interest
Earnings before Taxes
Corporate Tax	(35%)
Net Income

 

13. What is company A’s net income?

1. $87.3 million.
2. $95.9 million.
3. $112.7 million.
4. $137.4 million.
5. $162.5 million.

 

14. What is company B’s net income?

1. $127.6 million.
2. $146.9 million.
3. $165.8 million.
4. $137.4 million.
5. $162.5 million.

 

15. What is the tax shield that company B obtains because of its debt?

1. $4.3 million.
2. $6.1 million.
3. $8.4 million.
4. $9.8 million.
5. $12.1 million.

 

16. Assuming that the required return on company B’s debt is currently equal to its interest rate of 6%, what is this company’s after‐tax cost of debt?

1. 3.9%
2. 5.1%
3. 7.2%
4. 9.5%
5. 11.0%

 

(The following information applies to questions 5 through 10) Consider Rhye, a mid‐size pharmaceutical company. Rhye’s equity has a book value of $2.8 billion and a market value of $19.4 billion. Rhye’s debt, on the other hand, has a book value of $500 million and a market value of $600 million; the debt’s annual interest rate and yield to maturity are 6% and 5%, respectively. Currently, Rhye has a beta of 1.2 and faces a corporate tax rate of 35%. Also currently, the yield to maturity on 10‐year U.S. Treasury Notes is 2.5%. The market risk premium remains around its historical average of 5.5%.

 

17. What is Rhye’s required return on debt, or cost of debt?

1. 3%
2. 4%
3. 5%
4. 6%
5. 7%

 

18. What is Rhye’s after‐tax required return on debt, or after‐tax cost of debt?

1. 3.25%
2. 4.50%
3. 5.75%
4. 6.25%
5. 7.50%

 

19. What is Rhye’s required return on equity, or cost of equity?

1. 4.1%
2. 5.4%
3. 6.8%
4. 8.0%
5. 9.1%

 

20. What is Rhye’s debt ratio, or the proportion of debt relative to the company’s total capital, the latter defined as the sum of debt and equity?

1. 3%
2. 5%
3. 7%
4. 9%
5. 11%

 

21. What is Rhye’s equity ratio, or the proportion of equity relative to the company’s capital, the latter defined as the sum of debt and equity?

1. 100%
2. 97%
3. 90%
4. 87%
5. 81%

 

22. What is Rhye’s weighted‐average cost of capital?

1. 4.1%
2. 6.6%
3. 8.9%
4. 10.2%

 

23. Which one of the statements below is true?

1. Betas are always estimated using five years of data.
2. Betas are always estimated using ten years of data.
3. Risk‐free rates are always estimated as the yield on 10‐year Treasury Notes.
4. Risk‐free rates are always estimated as the yield on 30‐year Treasury Bonds.
5. The inputs of the CAPM can be estimated in a wide variety of ways.

 

24. Which one of the statements below is false? The weighted‐average cost of capital…

1. is a hurdle rate.
2. is the minimum required return on a company’s investment projects.
3. is directly related to the riskiness of a company.
4. is always based on weights of 50% debt and 50% equity.
5. can be equal to the cost of equity.