FIN301 Second Midterm Exam Part I
Chapters 6–8 • T/F solutions • 33 total • counted 30 are balanced 15 True / 15 False

FIN301 Second Midterm Exam Part I

This version fixes both issues: it now has 33 total questions, and the counted 30 questions are exactly balanced at 15 True and 15 False.
Total questions
33
Counted for grade
30
Counted balance
15 True / 15 False
All 33
17 True / 16 False
Total: 33 T/F Counted for grade: 30 Questions 31–33: Not Counted Counted balance: 15 True / 15 False
How this page works instant key + self-check
Each question shows the correct answer immediately, plus a short why and common trap. Questions 31–33 are now in their own final section so they are easy to find.

Chapter 6 — T/F Solutions

Expected return, standard deviation, diversification, correlation, systematic risk, and beta.
Questions: 11 True: 8 False: 3
1
Expected return is calculated using probabilities and potential returns.
Chapter 6
Correct answer: True
Why: Expected return is a probability-weighted average of possible returns.
Common trap: Do not confuse expected return with one realized return.
2
Higher standard deviation indicates higher risk.
Chapter 6
Correct answer: True
Why: Standard deviation measures the spread of possible returns around the expected return.
Common trap: Do not treat standard deviation as the same thing as beta.
3
You can diversify risk by holding only one stock.
Chapter 6
Correct answer: False
Why: One stock still leaves you exposed to firm-specific risk.
Common trap: Owning one famous stock is not the same as diversification.
4
Diversification helps reduce risk in a portfolio.
Chapter 6
Correct answer: True
Why: Combining assets that do not move exactly together can reduce firm-specific risk.
Common trap: Diversification does not remove all risk.
5
If two stocks are perfectly correlated (+1), diversification is very effective.
Chapter 6
Correct answer: False
Why: Perfect positive correlation gives the weakest diversification benefit.
Common trap: Not every two-stock portfolio gives good diversification.
6
Negative correlation between two stocks provides the best diversification benefit.
Chapter 6
Correct answer: True
Why: Lower correlation gives stronger diversification, and negative correlation helps the most.
Common trap: Do not average standard deviations directly and call that portfolio risk.
7
Systematic risk can be eliminated through diversification.
Chapter 6
Correct answer: False
Why: Diversification mainly removes unsystematic risk, not market-wide systematic risk.
Common trap: Do not call all risk diversifiable.
8
A beta greater than 1 implies more market sensitivity.
Chapter 6
Correct answer: True
Why: A beta above 1 means the stock tends to move more than the market.
Common trap: Beta is about market sensitivity, not total stand-alone volatility.
9
Diversification reduces unsystematic risk but not systematic risk.
Chapter 6
Correct answer: True
Why: Firm-specific shocks can be diversified away, but market-wide shocks remain.
Common trap: Do not mix up unsystematic and systematic risk.
10
If you hold 20+ well-chosen stocks, most diversification benefits are realized.
Chapter 6
Correct answer: True
Why: A reasonably broad portfolio can eliminate most firm-specific risk.
Common trap: More stocks do not help much if they all move together the same way.
11
Beta measures sensitivity to market movements, not total stand-alone volatility.
Chapter 6
Correct answer: True
Why: Beta focuses on market-related risk, while standard deviation measures total risk by itself.
Common trap: A very volatile stock does not always have a very high beta.

Chapter 7 — T/F Solutions

Par value, coupon rate, zero-coupon bonds, semiannual bonds, YTM, and price-yield relation.
Questions: 10 True: 5 False: 5
12
Par value is the face value of a bond, typically $1,000.
Chapter 7
Correct answer: True
Why: Par value is the amount repaid at maturity for a standard corporate bond.
Common trap: Do not confuse par value with market price.
13
Coupon rate is based on the bond’s market price.
Chapter 7
Correct answer: False
Why: Coupon rate is based on par value, not the current market price.
Common trap: Current yield uses current price; coupon rate does not.
14
Zero coupon bonds pay interest every year.
Chapter 7
Correct answer: False
Why: Zero-coupon bonds make no periodic coupon payments.
Common trap: Do not add coupon cash flows to a zero-coupon bond.
15
Semiannual bonds make two payments per year.
Chapter 7
Correct answer: True
Why: Semiannual means interest is paid twice each year.
Common trap: In calculations, divide the annual rate by 2 and double the number of periods.
16
Bond prices fall when interest rates rise.
Chapter 7
Correct answer: True
Why: Bond prices and market yields move in opposite directions.
Common trap: Do not say price and yield move together.
17
Bond prices remain unchanged regardless of interest rates.
Chapter 7
Correct answer: False
Why: When required return changes, present value changes, so market price changes.
Common trap: Fixed coupon payments do not mean a fixed market price.
18
YTM includes both coupon income and capital gain/loss.
Chapter 7
Correct answer: True
Why: Yield to maturity reflects the full return if the bond is held to maturity.
Common trap: Do not treat current yield as the same thing as YTM.
19
AAA is the lowest rating by agencies like S&P.
Chapter 7
Correct answer: False
Why: AAA is one of the highest credit ratings.
Common trap: Do not confuse a high-quality rating with a low-quality bond.
20
Lower-rated bonds tend to offer lower returns.
Chapter 7
Correct answer: False
Why: Lower-rated bonds usually offer higher yields to compensate for higher default risk.
Common trap: Lower rating means higher required return, not lower.
21
A bond sells at a premium when coupon rate is above YTM.
Chapter 7
Correct answer: True
Why: If the coupon rate is above the required market yield, investors will pay more than par.
Common trap: Premium means price above par, not necessarily high default risk.

Chapter 8 — T/F Solutions

Dividend discount model, Gordon growth, required return, dividend yield, and growth.
Questions: 9 True: 2 False: 7
22
Stock value today is based on expected future cash flows discounted at the required return.
Chapter 8
Correct answer: True
Why: Stock valuation links current price to the present value of future cash flows to shareholders.
Common trap: Do not treat stock price as disconnected from future cash flows.
23
In the Gordon model, the next dividend is D1 = D0 / (1 + g).
Chapter 8
Correct answer: False
Why: The correct relationship is D1 = D0(1 + g), not D0 divided by (1 + g).
Common trap: Do not use D0 directly without converting it to D1 correctly.
24
For a constant-growth stock, P0 = D0 / (r − g).
Chapter 8
Correct answer: False
Why: The Gordon formula uses D1, not D0, so the correct formula is P0 = D1 / (r − g).
Common trap: Using D0 directly is a common mistake.
25
The constant-growth model works when the required return is less than the growth rate.
Chapter 8
Correct answer: False
Why: The model requires r > g. Otherwise the denominator becomes zero or negative.
Common trap: Always check that required return is above growth.
26
In the constant-growth model, expected return equals dividend yield plus capital gains yield.
Chapter 8
Correct answer: True
Why: Under Gordon growth, r = D1/P0 + g.
Common trap: Do not forget that expected return has two pieces, not just dividend yield.
27
A zero-growth stock cannot be valued like a perpetuity.
Chapter 8
Correct answer: False
Why: If dividends stay constant forever, the stock behaves like a perpetuity and can be valued using P = D/r.
Common trap: Do not think zero growth means the stock cannot be valued.
28
Preferred stock with a fixed dividend is usually valued with a positive-growth Gordon model.
Chapter 8
Correct answer: False
Why: A fixed preferred dividend is usually valued like a zero-growth perpetuity.
Common trap: Do not force a growth rate into a preferred-stock problem when none is given.
29
If required return rises and expected dividends stay the same, stock price usually rises.
Chapter 8
Correct answer: False
Why: A higher required return lowers present value, so stock price usually falls.
Common trap: Price and required return generally move in opposite directions.
30
Higher expected growth always lowers stock price, all else equal.
Chapter 8
Correct answer: False
Why: Higher expected growth usually increases stock value, as long as the model assumptions hold and r remains above g.
Common trap: Do not reverse the usual growth-price relation.

Not Counted — T/F Solutions

Three extra questions placed clearly at the end so they are easy to find.
Questions: 3 True: 2 False: 1
31
If P0 and D1 are known, the required return can be found by r = D1/P0 + g.
Not Counted
Not Counted
Correct answer: True
Why: This is the Gordon model rearranged to solve for required return.
Common trap: Use D1, not D0, in the required-return formula.
32
In dividend valuation, D0 refers to the dividend just paid.
Not Counted
Not Counted
Correct answer: True
Why: D0 is the most recent dividend already paid, while D1 is the next expected dividend.
Common trap: Do not label the next dividend as D0.
33
Current yield includes both coupon income and capital gain/loss from holding the bond to maturity.
Not Counted
Not Counted
Correct answer: False
Why: Current yield uses only annual coupon divided by current price, not price convergence to par.
Common trap: Do not use current yield as if it were YTM.