Question 1
Asset A
Asset B
Robert is indifferent between the two assets
Information is not sufficient.
Corporate Finance Quiz 2: 1 December 2024 (September 2024 term)
The IIT Madras BS Corporate Finance (Corporate Finance) Quiz 2 paper sat on 1 Dec 2024, in the September 2024 term: 25 questions for 25 marks in 120 minutes. Every question is below with its answer. Take it as a timed mock test to be marked, or read it through first.
- 25
- 25
- 120 min
- 25
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Correct answer
Asset A
Question 2
What would be the fair price of a bet that pays 2 with a 25% probability, pays 4 with a 50% probability and pays 8 with a 25% probability?
4
4.5
5
5.5
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Correct answer
4.5
Question 3
Suppose a 1-year government bond is offering a 10% rate of return. Ankit has Rs 10,000, which he can invest in government bonds or lend to his friend Suresh. He believes that Suresh will pay back the promised amount with an 80% probability and will pay back nothing with a 20% probability. What is the default premium that Ankit should ask from Suresh?
37.50%
27.50%
17.50%
10.00%
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Correct answer
27.50%
Question 4
Axis Bank has assets of 1000 units, liabilities of 750 units and capital of 250 units. What is the leverage ratio for Axis Bank?
4
3
0.33
0.25
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Correct answer
4
Question 5
There are two assets: a risk-free asset that offers a 5% rate of return and a risky asset that has an expected rate of return of 15% and a standard deviation of 10%. What is the slope of the budget line of a portfolio consisting of these two assets?
1.5
1
-1
-1.5
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Correct answer
1
Question 6
An asset A has a correlation of 0.2 with the market and a standard deviation of 20%. If the market return has a standard deviation of 5%, what is the beta of asset A?
-0.2
0.2
0.8
3.2
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Correct answer
0.8
Question 7
Short selling refers to
Buying stock at a low price and selling them at a higher price.
Selling stocks you own for immediate profit.
Selling stocks, you don’t own in the hope of buying them back at a lower price.
Selling the stocks which are trading at minimum price.
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Correct answer
Selling stocks, you don’t own in the hope of buying them back at a lower price.
Question 8
You create a portfolio of 16 identical assets that have an expected return of 20% and a standard deviation of 20%. These 16 assets are uncorrelated with each other. What is the standard deviation of your portfolio?
20%
10%
5%
1.25%
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Correct answer
5%
Question 9
Which of the following statements is incorrect?
The minimum variance set is a subset of the feasible set.
The minimum variance set is the left boundary of a feasible set.
Risk-averse investors always choose the global minimum variance portfolio as their optimal portfolio.
The efficient frontier is a subset of the minimum variance set.
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Correct answer
Risk-averse investors always choose the global minimum variance portfolio as their optimal portfolio.
Question 10
If the utility function of an individual is a strictly concave function, the individual is
Risk neutral
Risk averse
Risk lover
He does not care about the risk.
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Correct answer
Risk averse
Question 11
A borrower is called solvent if
His capital exceeds his assets.
His liabilities exceed his assets.
His assets exceed his liabilities.
His liabilities exceed his capital.
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Correct answer
His assets exceed his liabilities.
Question 12
A garment outlet can be worth 60 thousand in two years with a 25% probability or 150 thousand in two years with a 75% probability, depending on product demand. The appropriate cost of capital is 10% per year. What is the present value of the outlet? (up to two decimal points)
100.00 thousand
105.37 thousand
115.91 thousand
127.50 thousand
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Correct answer
105.37 thousand
Question 13
Which of the following statements is correct?
Equity owners are paid off first, and then, the debt is paid off.
Equity owner bears less risk in comparison to debt creditors.
Equity ownership is an example of limited liability.
Equity financing does not provide ownership rights.
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Correct answer
Equity ownership is an example of limited liability.
Question 14
At the optimal consumption point
The slope of the budget line is more than the marginal rate of substitution.
The consumer does not consume his whole income.
The budget line is tangent to the indifference curve.
The marginal utility of the goods is the same.
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Correct answer
The budget line is tangent to the indifference curve.
Question 15
6%
12%
18%
24%
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Correct answer
18%
Question 16
0.048
0.078
0.120
0.250
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Correct answer
0.048
Question 17
You purchase a farm located near a river for 100 thousand units. You believe that there is a 20% chance of flooding in the river in the next year. If there is a flood, the produce in the farm gets destroyed, and the total payoff is 40 thousand units in the next year; otherwise, the farm generates a payoff of 150 thousand units in the next year. The appropriate cost of capital is 20% per year. Suppose you finance your purchase with a loan of 80 thousand units and the remaining amount as equity.
Based on the above data, answer the given subquestions.
What would be the appropriate promised rate of return that the creditor of the loan would demand?
20%
27.5%
32.5%
37.5%
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Correct answer
37.5%
Question 18
You purchase a farm located near a river for 100 thousand units. You believe that there is a 20% chance of flooding in the river in the next year. If there is a flood, the produce in the farm gets destroyed, and the total payoff is 40 thousand units in the next year; otherwise, the farm generates a payoff of 150 thousand units in the next year. The appropriate cost of capital is 20% per year. Suppose you finance your purchase with a loan of 80 thousand units and the remaining amount as equity.
Based on the above data, answer the given subquestions.
What is the expected payoff for the equity owner in the next year?
20 thousand
25 thousand
32 thousand
40 thousand
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Correct answer
32 thousand
Question 19
Based on the above data, answer the given subquestions.
What is Monica’s expected utility?
740
27.2
26.0
14.0
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Correct answer
26.0
Question 20
Based on the above data, answer the given subquestions.
If Monica pays p for an insurance policy that would pay her 800 units if she suffered a severe injury, then she would be sure to have an income of 900-p regardless of whether she is injured. What would be the largest price that Monica would be willing to pay for such insurance?
16 units
100 units
160 units
224 units
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Correct answer
224 units
Question 21
Based on the above data, answer the given subquestions.
A portfolio is formed with 40% of wealth invested in Asset 1 and 60% of wealth invested in Asset 2. What would be the expected rate of return of the portfolio?
0.12
0.14
0.16
0.18
Show answer
Correct answer
0.16
Question 22
Based on the above data, answer the given subquestions.
What would be the standard deviation of the rate of return of the portfolio?
0.20
0.22
0.24
0.27
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Correct answer
0.22
Question 23
Based on the above data, answer the given subquestions.
Suppose you would like to construct a portfolio with an expected rate of return of 15%. What weights would you put on Asset 1 and Asset 2, respectively?
40%, 60%
50%, 50%
60%, 40%
70%, 30%
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Correct answer
50%, 50%
Question 24
Based on the above data, answer the given subquestions.
What are the weights of Asset 1 and Asset 2 in the minimum variance portfolio?
77.78%, 22.22%
22.22%, 77.78%
55.56%, 44.44%
44.44%, 55.56%
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Correct answer
77.78%, 22.22%
Question 25
Based on the above data, answer the given subquestions.
What is the expected rate of return of the minimum variance portfolio?
12.22%
14.44%
15.56%
17.78%
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Correct answer
12.22%