Multiple choice

1. How could you compensate an investor for taking on a significant amount of risk?          

a.     Increase the expected rate of return.

b.     Raise more debt capital.

c.     Offer stock at a higher price.

d.     Increase sales.

2.  If an investor had a choice of receiving $1,000 today, or $1,000 in five years, which would the average investor prefer?                                        

a.     $1,000 in five years because they are not good at saving money.

b.     $1,000 today because it will be worth more than $1,000 received in five years.

c.     $1,000 in five years because it will be worth more than $1,000 received today.

d.     Investors would be indifferent to when they would receive the $1,000.

e.     None of the above.

3. Why do investors prefer receiving cash sooner rather than later, according to finance theory?          

a.     Incremental profits are greater than accounting profits.

b.     Money received earlier can be reinvested and returns can be increased.

c.     Tax considerations are important when investing.

d.     Diversification leads to increased value.

4. Investors choose to invest in higher risk investments because these investments offer higher:     

a.     expected returns.

b.     inflation.

c.     actual returns.

d.     future consumption.