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1) A statistic that measures how the returns of two risky assets move together is:

A) Variance

B) Standard deviation

C) Covariance

D) Correlation

E) Both Covariance and Correlation

2) Other things equal, diversification is most effective when

A) securities returns are uncorrelated.

B) securities returns are positively correlated.

C) securities returns are high.

D) securities returns are negatively correlated.

3) You are considering a project with the following data:

Internal rate of return 8.7%

Profitability index .98

Net present value -$393

Payback period 2.44 years

Required return 9.5%

Which one of the following is correct given this information?

A) The discount rate used in computing the net present value must have been less than 8.7%.

B) The discounted payback period will have to be less than 2.44 years.

C) The discount rate used to compute the profitability index was equal to internal rate of return.

D) This project should be accepted based on the profitability index.

E) This project should be rejected based on the internal rate of return.

4) Beta measures:

A) The ability to diversify risk

B) How an asset covaries with the market

C) The actual return on an asset

D) The standard of the assets returns

5) When computing the weighted average cost of capital, which of these are adjusted for taxes?

A) Cost of equity

B) Cost of preferred stock

C) Both the cost of equity and the cost of preferred stock

D) The costs of debt and preferred stock

E) Cost of debt

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