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Question 26

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Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

Select one:

a. Forecast assumption principle

b. Base assumption principle

c. Fallacy principle

d. Erosion principle

e. Stand-alone principle

Question 27

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Which one of the following refers to a method of increasing the rate at which an asset is depreciated?

Select one:

a. Noncash expense

b. Straight-line depreciation

c. Depreciation tax shield

d. Accelerated cost recovery system

e. Market-based depreciation

Question 28

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Over the past four years, a stock produced returns of 23 percent, -39 percent, 4 percent, and 16 percent, respectively. Based on these four years, what range of returns would you expect to see 99 percent of the time?

Select one:

a. -82.39 percent to 84.39 percent

b. -82.39 percent to 86.41 percent

c. -82.39 percent to 88.56 percent

d. -78.46 percent to 86.41 percent

e. -78.46 percent to 84.39 percent

Question 29

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The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk.

Select one:

a. lower; lower

b. lower; higher

c. higher; lower

d. higher; higher

e. You cannot determine anything about the expected rate of return from the standard deviation.

Question 30

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The standard deviation measures the _____ of a security's returns over time.

Select one:

a. average value

b. frequency

c. volatility

d. mean

e. arithmetic average

Answer 1

26.
Correct answer is Option E (Stand alone principle).

Stand-alone principle refers to the assumption that a project will be evaluated based on its incremental cash flows. Stand-alone principle states that a company should decide whether or not to do a project based on the profitability of similar projects with the same risk.

27.
Correct answer is Option D (Accelerated cost recovery system).
Accelerated cost recovery system refers to a method of increasing the rate at which an asset is depreciated.

28.
Calculate average return = (23% + 16% + 4% - 39%) / 4 = 1%

Calculate standard deviation = Square root of (((0.23 - 0.01)^2 + (-0.39 -0.01)^2 + (0.04 - 0.01)^2 + (0.16 - 0.01)^2) / (4 - 1))
= 0.27796 or 27.796%

Range of return at 99% of the time:
(Mean - 3 * standard deviation) to (mean + 3* standard deviation)
= (1 - 3 * 27.796%) to (1 + 3 * 27.796%)
= -82.39% to 84.39%

So, correct answer is Option A ( -82.39% to 84.39%)

29.

Correct answer is Option A (lower,lower).
The lower the standard deviation of returns on a security, the lower the expected rate of return and the lower the risk.

30.
Correct answer is Option C (Volatility)
The standard deviation measures the volatility of a security's returns over time. Volatility is a statistical measure of the dispersion of the returns around the mean.