Free Business Finance MCQs with Answers
975 Business Finance MCQs from Management Sciences, each with the correct answer and a written explanation of why it is correct. Free and unlimited, with no account needed.
Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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975 questions · page 37 of 49
- A. Long-termed
- B. Short-termed
- C. Riskier
- D. Smaller
Explanation: A tighter probability distribution has observations clustered more closely around the mean, so its standard deviation is smaller.
Correct answer: Smaller- A. Sharpe's alpha
- B. Standard alpha's
- C. Alpha's variance
- D. Variance
Explanation: Total risk combines market risk with diversifiable risk and is commonly measured by the variance of returns, while standard deviation is…
Correct answer: Variance- A. Coefficient of variation
- B. Coefficient of deviation
- C. Coefficient of standard
- D. Coefficient of return
Explanation: The coefficient of variation compares risk relative to expected return, making it useful when evaluating alternative investments with…
Correct answer: Coefficient of variation- A. Quoted rate
- B. Unquoted rate
- C. Steeper rate
- D. Portfolio rate
Explanation: The quoted or nominal rate combines the inflation-free real rate with an inflation premium, and may also include other risk premiums.
Correct answer: Quoted rate- A. Riskier finance
- B. Behavioral finance
- C. Premium finance
- D. Buying finance
Explanation: Behavioral finance studies how psychological factors influence the decisions of investors and managers.
Correct answer: Behavioral finance- A. Diversifiable risk
- B. Market risk
- C. Stock risk
- D. Portfolio risk
Explanation: War, recessions, inflation and interest-rate changes affect most or all firms and therefore represent market, or systematic, risk.
Correct answer: Market risk- A. Equal to original price
- B. Equal to sum of stocks
- C. Less than original price
- D. Greater than original price
Explanation: A positive minimum-risk portfolio result is interpreted here as showing that the security can be sold at a price greater than its original…
Correct answer: Greater than original price- A. No taxes
- B. No transaction costs
- C. Fixed quantities of assets
- D. All of above
Explanation: The standard CAPM assumptions include no taxes, no transaction costs and fixed quantities of assets, along with other ideal-market…
Correct answer: All of above- A. Non-linear
- B. Linear
- C. Fixed and aggregate
- D. Non-fixed and non-aggregate
Explanation: In the CAPM framework, expected return has a linear relationship with systematic risk, measured by beta.
Correct answer: Linear- A. Efficient money hypothesis
- B. Efficient market hypothesis
- C. Inefficient market hypothesis
- D. Inefficient money hypothesis
Explanation: The efficient market hypothesis holds that security prices reflect available information and tend to equal their intrinsic or fair values.
Correct answer: Efficient market hypothesis- A. Regression line
- B. Probability line
- C. Scattered points
- D. Weighted line
Explanation: The CAPM characteristic line is a regression line showing the relationship between a security’s return and the market return, with its…
Correct answer: Regression line- A. Standard betas
- B. Varied betas
- C. Historical betas
- D. Adjusted betas
Explanation: Adjusted betas move historical beta estimates toward 1.0 because empirical research suggests that extreme betas tend to become less…
Correct answer: Adjusted betas- A. Tax free pricing model
- B. Cost free pricing model
- C. Capital asset pricing model
- D. Stock pricing model
Explanation: A standard CAPM assumption is that assets are perfectly divisible and can be bought or sold freely in a liquid market.
Correct answer: Capital asset pricing model- A. Low market to book ratio
- B. High book to market ratio
- C. High market to book ratio
- D. Low book to market ratio
Explanation: Value stocks with a high book-to-market ratio have historically earned higher average returns than low book-to-market, or growth, stocks.
Correct answer: High book to market ratio735. According to capital asset pricing model assumptions, quantities of all assets are______________?
- A. Given and fixed
- B. Not given and fixed
- C. Not given and variable
- D. Given and variable
Explanation: CAPM assumes that the quantities or supplies of assets are given and fixed, so investors trade claims whose total supply is predetermined.
Correct answer: Given and fixed- A. Identical and fixed returns
- B. Risk free rate of interest
- C. Fixed rate of interest
- D. Risk free expected return
Explanation: The CAPM assumes investors can borrow or lend unlimited amounts at the risk-free rate.
Correct answer: Risk free rate of interest- A. Standard deviation
- B. Variance
- C. Aggregate risk
- D. Ineffective risk
Explanation: The capital market line measures total risk using standard deviation, which includes both systematic and unsystematic risk.
Correct answer: Standard deviation- A. Experienced
- B. Inexperienced
- C. Pessimistic
- D. Optimistic
Explanation: When market value exceeds book value, investors are pricing the stock above its accounting value and generally expressing confidence in…
Correct answer: Optimistic- A. More risky
- B. Less risky
- C. Pessimistic
- D. Optimistic
Explanation: A high book-to-market ratio usually identifies value or distressed stocks, whose weaker market valuation is associated with greater…
Correct answer: More risky- A. Attained frontier
- B. Efficient frontier
- C. Inefficient frontier
- D. Unattainable frontier
Explanation: The efficient frontier is the graph of portfolios offering the highest expected return for each level of risk, or the lowest risk for each…
Correct answer: Efficient frontier