FIN 370 SANNING EXAM 1 QUESTIONS WITH CORRECT ANSWERS

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True or False Questions Correct Answer Question 1 T/F: Forms of business - conceptual Correct Answer Proprietorship (owned by one individual, easy to form, few regulations, no corp. taxation, diff... icult to fund, unlimited liability, lifetime limited) Partnership (two or more entities, similar to proprietorship, can be limited (LLC)) Corporations (legal entity created under state laws, separate and distinct from owners/managers) S Corps (don’t pay income taxes) Question 2 T/F: Adv/Disadv of Corporation's- conceptual Correct Answer Advantages: Unlimited live Easy transferability of ownership interest (stock transfers) Limited Liability (losses limited to original investment) Disadvantages: Double Taxation (the earnings of the corporation are taxed at the corporate level, and then earnings paid out as dividends are taxed again as income to the stockholders) Setting up a corporation involves preparing a charter, writing a set of bylaws, and filing the many required state and federal reports, which is more complex and time-consuming than creating a proprietorship or a partnership. Optimal Portfolio Correct Answer Found at the tangency point b/ween efficient set of portfolios and one of the investor's indifference curves This tangency point marks the highest level of satisfaction the investor can attain The standard deviation of stock returns of Park Corporation is 55%. The standard deviation of the market return is 15%. If the correlation between Park and the market is 0.40, what is Park's beta? Correct Answer (std of stock returns/std mkt return)*correlation (.55/.15)*.40 = 1.5 The method of estimating beta that regresses the stock's return against the market's return is called the: Correct Answer The Market Model Most analysts use _____ of past data to estimate beta. Correct Answer 1-3 years Tests of the CAPM show all of the following EXCEPT: The relationship between risk and return appears to be linear. When bonds are introduced into the analysis, they do not plot on the SML. The slope usually is smaller than that predicted by the CAPM. There is a significant positive relationship between realized returns and beta. [Show More]

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