Q&A Hero

Q: The efficient portfolios: I) have only unique risk II) provide highest returns for a given level of risk III) provide the least risk for a given level of returns IV) have no risk at all A. I only B. II and III only C. IV only D. II only

Q: Investments B and C both have the same standard deviation of 20%. If the expected return on B is 15% and that of C is 18%, then the investors would A. Prefer B to C B. Prefer C to B C. Reject both B and C D. None of the above

Q: A group of six investors wants to open a new bank in the community of Edmond, Oklahoma. They have submitted their application to the Comptroller of the Currency. What type of bank would they be if their application is approved? A) A state, member bank B) A state, insured bank C) A national bank D) A national bank without FDIC insurance E) None of the above

Q: A group of six investors wants to open a new bank. In their application to the Comptroller of the Currency, they discuss that there are six banks already in the community and that the largest of these has just acquired one of the smaller banks. These six banks do a moderate amount of advertising in the community. There is also one credit union that has one office and a savings bank that has two branches on the east side of town. Growth in the community is to the west. Which decision factor for seeking a new charter are the investors discussing? A) The level of economic activity in the community B) The growth of economic activity in the community C) The need for a new financial firm D) The strength and character of the local competition E) None of the above

Q: Investments A and B both offer an expected rate of return of 12%. If the standard deviation of A is 20% and that of B is 30%, then investors would: A. Prefer A to B B. Prefer B to A C. Prefer a portfolio of A and B D. Cannot answer without knowing investor's risk preferences

Q: Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. What is the standard deviation of the portfolio with 50% of the funds invested in FC and 50% in MC? A. 10.6% B. 14.4% C. 9.3% D. None of the above

Q: A group of six investors want to open a new bank. In their application to the Comptroller of the Currency, they discuss that the population per banking office is up to 6,000. In addition, growth in the community is to the west of town and there is only one bank serving that part of the community and a new housing subdivision has just started in this part of town that should include 350 new homes. Which decision factor for seeking a new charter are the investors discussing? A) The level of economic activity in the community B) The growth of economic activity in the community C) The need for a new financial firm D) The strength and character of the local competition E) None of the above

Q: Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. What is the variance of the portfolio with 50% of the funds invested in FC and 50% in MC (approximately)? A. 85.75 B. 111.50 C. 55.75 D. None of the above

Q: A group of six investors wants to open a new bank. In their application to the Comptroller of the Currency, they discuss that new housing starts in the area are up 19% from a year ago with an additional 25 families moving into the community every month. School enrollment has also increased 14% from the previous year. Which decision factor for seeking a new charter are the investors discussing? A) The level of economic activity in the community B) The growth of economic activity in the community C) The need for a new financial firm D) The strength and character of the local competition E) None of the above

Q: Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. If FC and MC are combined in a portfolio with 50% of the funds invested in each, calculate the expected return on the portfolio. A. 12% B. 10% C. 11% D. None of the above.

Q: A group of six investors wants to open a new bank. In their application to the Comptroller of the Currency, they discuss that the community they want to do business in has a median income of $55,000, that there are approximately 75,000 homes in the community and that there is approximately $5.6 million in sales generated in the community on any given day. Which decision factor for seeking a new charter are the investors discussing? A) The level of economic activity in the community B) The growth of economic activity in the community C) The need for a new financial firm D) The strength and character of the local competition E) None of the above

Q: Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the correlation coefficient between the return of FC and MC. A. 0.0 B. -0.655 C. +0.655 D. None of the above

Q: The Boyer Bank wants to add a new ATM machine in a busy mall. They know the new machine will cost $60,000 with another $30,000 to install it and the necessary security measures in the mall. They expect to save $.27 per transaction and generate 100,000 per year. They expect the new machine to last 8 years. What is the expected rate of return or internal rate or return of this project? (Round your answer to the nearest .1%) A) 25% B) 3.3% C) 30% D) 12% E) 2.4%

Q: Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the standard deviation (S.D.) of return for FC and MC. A. FC: 10% MC: 12% B. FC: 18.7% MC: 9.8% C. FC: 13.2% MC: 6.9% D. None of the above

Q: The Boyer Bank wants to add a new ATM machine in a busy mall. They know the new machine will cost $60,000 with another $30,000 to install it and the necessary security measures in the mall. They expect to save $.27 per transaction and generate 100,000 per year. They expect the new machine to last 8 years. If they need to earn a 12% return what is the NPV of this project? (Round your answer to the nearest $1000) A) $126,000 B) $44,000 C) $134,000 D) $27,000 E) $117,000

Q: Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the covariance between the returns of FC and MC. A. 60 B. 80 C. 40 D. None of the above

Q: The Chahad Bank wants to open a new branch in a distance city with very different economic conditions. Currently, the bank has an expected return of 15% with a standard deviation of 7%. The new branch is expected to have a return of 20% with a standard deviation of 10%. The correlation between the bank and the new branch is -.3. The new branch is expected to be 10% of the banks revenues. What is the standard deviation of this bank if they add the new branch? (Round your answer to the nearest .1%) A) 36.9% B) 6.1% C) 50.3% D) 7.1% E) 6.7%

Q: The Chahad Bank wants to open a new branch in a distance city with very different economic conditions. Currently, the bank has an expected return of 15% with a standard deviation of 7%. The new branch is expected to have a return of 20% with a standard deviation of 10%. The correlation between the bank and the new branch is -.3. The new branch is expected to be 10% of the banks revenues. What is the expected return of the bank if they add the new branch? A) 35% B) 19.5% C) 17.5% D) 15.5% E) None of the above

Q: Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the variances of return for FC and MC. A. FC: 100 MC: 256 B. FC: 350 MC: 96 C. FC: 175 MC: 48 D. None of the above

Q: Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the mean of returns for each company. A. FC: 12%, MC: 6% B. FC: 10%, MC: 12% C. FC: 20%, MC: 32% D. None of the above

Q: Chester National Bank is considering adding a new branch bank. They know that it will cost $2.5 million to build the branch and they believe that it will generate $214,526 per year for the next 25 years. Chester National Bank requires a return of 10% on all new projects it undertakes. What is this projects expected rate of return or internal rate of return? (Round to the nearest whole percent) A) 10% B) 7% C) 12% D) 2% E) 25%

Q: Chester National Bank is considering adding a new branch bank. They know that it will cost $2.5 million to build the branch and they believe that it will generate $214,526 per year for the next 25 years. Chester National Bank requires a return of 10% on all new projects it undertakes. What is this projects net present value? (Round to the nearest $100) A) -$552,700 B) -$3,052,700 C) $1,947,300 D) $2,863,200 E) $5,363,200

Q: Normal and lognormal distributions are completely specified by: I) mean II) standard deviation III) third moment A. I only B. I and II only C. II only D. III only

Q: The distribution of returns, measured over long intervals, like annual returns, can be approximated by A. Normal distribution B. Binomial distribution C. Lognormal distribution D. none of the above

Q: In the short-term newly-chartered banks fail at a (n) __________ rate than established banks. A) lower B) same C) higher D) extremely higher E) unknown

Q: The distribution of returns, measured over a short interval of time, like daily returns, can be approximated by: A. Normal distribution B. Lognormal distribution C. Binomial distribution D. none of the above

Q: In what merger region of the country do the most newly-chartered banks occur? A) Northeast B) Southeast C) Midwest D) Southwest E) West

Q: Portfolio Theory was first developed by: A. Merton Miller B. Richard Brealey C. Franco Modigliani D. Harry Markowitz

Q: Murphy National Bank is thinking about adding a new branch in a very different market area. They estimate that the new office will have an expected return of 16% with a standard deviation of 8%. Currently they have an expected return of 12% with a standard deviation of 4%. The correlation between the new branch and the bank is estimated to be .20. The bank estimates that the new branch will represent 15 percent of the revenues of the bank. What is the bank's expected risk (measured by the standard deviation) with the new branch? Round to the nearest .1 percent. A) 14.6 percent B) 3.8 percent C) 4.6 percent D) 7.4 percent

Q: Murphy National Bank is thinking about adding a new branch in a very different market area. They estimate that the new office will have an expected return of 16% with a standard deviation of 8%. Currently they have an expected return of 12% with a standard deviation of 4%. The correlation between the new branch and the bank is estimated to be .20. The bank estimates that the new branch will represent 15 percent of the revenues of the bank. What is the expected return of the bank with the new branch? A) 12.6 percent B) 15.4 percent C) 4.6 percent D) 7.4 percent

Q: Student: ___________________________________________________________________________

Q: Which of the following is true concerning branch offices? A) The number of full service offices in the U.S. have shrunk in recent years. B) An ideal location for a new branch bank is one with below average population density C) Branch offices are generally cheaper to establish than chartering a whole new banking corporation D) The decision about whether to establish a new branch is a cash management problem E) All of the above are true

Q: What has been the average annual real rate of interest on Treasury bills over the past 107 years (from 1900 to 2006)? A. Less than 1% B. Between 1% and 2% C. Between 2% and 3% D. Greater than 3%

Q: Suppose Third State Bank wants to add a new branch office. They have determined that the cost of construction on the new facility will be $1.5 million with another $500,000 in organizational costs. Third State Bank has estimated that they will generate $319,522 in net revenues. If the Third State Bank requires a 17% return on its money, what is this projects net present value? A) $201,805 B)-$201,805 C) $1,798,195 D) -$1,798,195

Q: Long-term U.S. government bonds have: A. Interest rate risk B. Default risk C. Market risk D. None of the above

Q: Suppose Third State Bank wants to add a new branch office. They have determined that the cost of construction on the new facility will be $1.5 million with another $500,000 in organizational costs. Third State Bank has estimated that they will generate $319,522 in net revenues. If the new branch is expected to last 20 years, what is the expected rate or return on this investment? (Round to the nearest whole percent) A) 6 percent B) 21 percent C) 15 percent D) 32 percent

Q: Which of the following portfolios have the least risk? A. A portfolio of Treasury bills B. A portfolio of long-term United States Government bonds C. Portfolio of U.S. common stocks of small firms D. None of the above

Q: Suppose Second National Bank is considering adding 5 new ATM machines. Each machine costs $25,000 and installation costs are $15,000 per machine. Second National Bank expects the new machines to save $.33 per transaction and expects 250,000 transactions per year on the new machines. They expect the new machines to last for 15 years. If Second National Bank needs to earn 14 percent interest on this investment, what is the net present value of this investment? A) $506,729 B) $306,729 C) $272,269 D) 381,729

Q: Explain why international stock may have high standard deviation but low betas.

Q: In the U.S, what is the average population per branch office? A) 4000 B) 8000 C) 10,000 D) 15,000 E) None of the above

Q: Briefly explain the concept of value additivity.

Q: In the above problem, the proposed new branch will _______ overall risk exposure and produce a(an) ______ effect. Fill in the appropriate answers. A) increases; economies of scale B) increases; economies of scope C) reduces; convergence D) reduces; geographic diversification

Q: How can individual investors diversify?

Q: The Clearwater National Bank is thinking about building a new branch. This new branch is anticipated to generate 5 percent of the business of the bank after it is opened. The bank expects the return for this branch will be 15 percent with a standard deviation of 5 percent. Currently the bank has a 10 percent rate of return with a standard deviation of 5 percent. The correlation between the bank and the new branch is expected to be -0.3. What is this bank's expected risk (measured by the standard deviation) after adding this branch? A) 21.91 percent B) 12.84 percent C) 4.68 percent D) 3.58 percent

Q: What is the beta of a portfolio with a large number of randomly selected stocks?

Q: The Clearwater National Bank is thinking about building a new branch. This new branch is anticipated to generate 5 percent of the business of the bank after it is opened. The bank expects the return for this branch will be 15 percent with a standard deviation of 5 percent. Currently the bank has a 10 percent rate of return with a standard deviation of 5 percent. The correlation between the bank and the new branch is expected to be -0.3. What is this bank's total expected return after adding this branch? A) 15 percent B) 10 percent C) 15.25 percent D) 10.25 percent

Q: Briefly explain how individual securities affect portfolio risk.

Q: A bank is thinking about building a new branch. They think this new branch will generate 20 percent of the business of the bank after it is opened. The bank expects the return for this branch will be 15 percent with a standard deviation of 5 percent. Currently the bank has a 12 percent rate of return with a standard deviation of 4 percent. The correlation between the branch and the bank is expected to be .25. What is this bank's expected standard deviation after adding this branch? A) 12.84 percent B) 3.35 percent C) 4.36 percent D) 3.58 percent

Q: Briefly explain the difference between beta as a measure of risk and variance as a measure of risk.

Q: A bank is thinking about building a new branch. They think this new branch will generate 20 percent of the business of the bank after it is opened. The bank expects the return for this branch will be 15 percent with a standard deviation of 5 percent. Currently the bank has a 12 percent rate of return with a standard deviation of 4 percent. The correlation between the bank and the new branch is expected to be .25. What is this bank's total expected return after adding this branch? A) 15 percent B) 12.6 percent C) 12 percent D) 14.4 percent

Q: Discuss the importance of "beta" as a measure of risk.

Q: Which of the following is one of the common services provided by banks on the internet today? A) Applying for a loan B) Opening an account C) Making payments (especially recurring utility bills) D) All of the above E) None of the above

Q: Briefly explain what "beta" of a stock means.

Q: Computer terminals which allow customers to make cash withdrawals, check deposit balances and make deposits without dealing with a teller are known as: A) ATMs B) POS terminals C) ACHs D) In-store branches E) ALMs

Q: Briefly explain how "beta" of a stock is estimated.

Q: A so-called PIN gives a bank customer access to his or her account through a(n): A) ACH B) Bank-by-mail service C) ATM D) Electronic calculator E) None of the above

Q: In the formula for calculating the variance of N-stock portfolio, how many covariance and variance terms are there?

Q: Computer facilities in retail shops and stores that permit a customer to instantly pay for goods and services electronically by deducting the cost of each purchase directly from his or her deposit account are known as: A) ATMs B) P0S terminals C) ACHs D) In-store branches. E) ALMs

Q: Briefly explain how diversification reduces risk.

Q: Typically much less costly to build and maintain, costing as little as one-fourth the expense incurred in constructing and operating as a stand-alone branch, and experiencing more traffic flow than conventional branches are: A) ATMs B) P0S terminals C) ACHs D) In-Store branches E) ALMs

Q: Briefly explain the term "variance" of the returns.

Q: The most desirable sites for full-service bank branch offices usually have which of the following characteristics? A) Heavy traffic volume B) Large numbers of retail shops and stores C) Above-average age populations D) All of the above. E) None of the above.

Q: Define the term risk premium.

Q: The FDIC Improvement Act of 1991 requires a bank closing one of its branches to give its customers a minimum notice of: A) 90 days B) 60 days C) 30 days D) 10 days E) None of the above

Q: A stock with a covariance with the market higher than the variance of the market will always high a beta above 1.0.

Q: Key factors that organizers of a proposed new bank use in evaluating their investment opportunity include which of the following? A) Expected return on bank stock. B) Risk to the shareholders. C) Demonstrated public need. D) Track record of existing banks that serve the same or a similar area. E) All of the above.

Q: According to the textbook, the disadvantages of a federal charter include which of the following: A) Closer supervision of banking activities. B) Stricter standards for capital. C) More stringent limits on the offering of new services. D) All of the above. E) B and C only.

Q: High standard deviation always translates into high beta.

Q: Higher the standard deviation of a stock higher is its beta.

Q: One of the benefits of applying for a federal (national) bank charter over a state charter is: A) It brings added prestige B) It results in the automatic receipt of federal deposit insurance C) There is better technical support in the event of problems D) A and C above. E) All of the above.

Q: A portfolio with a beta of one offers an expected return equal to the market risk premium.

Q: Which factor(s) does OCC assess during the application process for a national bank charter? A) Market demand B) Probably customer base C) Competition and economic conditions D) Risks inherent in the services to be offered to the public E) All of the above

Q: The average beta of all stocks in the market is zero.

Q: A charter of incorporation to start a new U.S. bank can be issued by: A) The Office of the Comptroller of the Currency. B) The state banking commissions of each state. C) The Federal Deposit Insurance Corporation (FDIC). D) All of the above. E) A and B, only.

Q: Beta of a well-diversified portfolio is equal to the value weighted average beta of the securities included in the portfolio.

Q: The risk that cannot be eliminated by diversification is called market risk.

Q: Most new U.S. banks are chartered in: A) Small communities where there is very little existing competition. B) Relatively large urban areas where organizers can earn higher expected rates of return on their investment. C) Rural areas where they will be more convenient for customers. D) All of the above. E) A and C, only.

Q: Most new banks: A) Become profitable in the first 3 years of their operation B) Have pro-competitive effects on the markets they enter C) Survive rather than fail D) All of the above are correct E) None of the above are correct.

Q: The risk that cannot be eliminated by diversification is called unique risk.

Q: The existence of branch banking in a given state: A) Encourages more new banks to be chartered B) Discourages some new banks from being chartered C) Results in more bank failures than normal D) Results in lower operating cost per unit of service E) None of the above.