Exam #2 Review True/False

A credit default swap is an example of a short option. When you take a short position, you believe that price of an asset will increase.

False

As the financial crisis of 2008 approached, credit rating agencies often assigned a rating of AAA to Mortgage Backed Securities (MBS)

True

Historically, the U.S. stock market has always declined when a U.S. President is facing impeachment proceedings

False

Beta measures the systematic risk of an individual asset relative to the systematic risk of the average investment

True

As we increase the number of assets in a portfolio, we reduce the firm specific risk in the portfolio

True

The market portfolio risk premium is smaller for larger firms than smaller firms

False

Project A and Project B are mutually exclusive. Project A has an expected NPV of $2.00, while project B has an expected NPV of $2.25. Our correct decision is to accept both projects.

False

The security market line shows the required return of an investment as a function of its beta

True

Due to WeWork's IPO issues, it is likely that SoftBank will walk away from the company and not offer any more financing or credit lines.

False

The part of a stock's volatility that is caused by macroeconomic events is considered diversifiable risk.

False

The capital gain for a stock can be positive or negative

True

A project with a shorter payback period will always have a larger NPV than a project with a longer payback period

False

According to our security market line, stock prices would likely increase if the Federal Reserve Bank reduces interest rates.

True

Coco-cola and Twitter operate in two different areas of the economy. We can say that the correlation in their stock returns is likely negative.

False

The interest rate used in the NPV calculation for a capital budgeting project only represents the required return for shareholders in the firm.

False

The IRR rule is better to use than the NPV rule because the NPV rule can be biased based on the scale of the project.

False

A weakness of the finite stock pricing model is that we assume a future selling price.

True

A strength of the payback rule is that it always gives us the same result as the NPV rule

False

In the last 10 years, the typical auto dealer now makes more profit on the financing of each car than the sales price

True

Peloton recently had its IPO. Due to its rapid growth in sales revenue, the price per share of the stock has gone up since the IPO launch

False