THINK BIG! : Corporate finance MCQ

50 MCQs – Corporate Finance (Risk & Return) | CMA Part 2

1. Shareholders’ Wealth Maximization

The primary financial objective of a firm under modern finance theory is to: A. Maximize accounting profit
B. Maximize EPS
C. Maximize shareholders’ wealth
D. Minimize cost
✅ Answer: C

2. Market Capitalization

Market capitalization is calculated as: A. Book value of equity
B. Shares outstanding × Market price per share
C. Net income × P/E ratio
D. Total assets – liabilities
✅ Answer: B

3. Holding Period Return (HPR)

Holding period return for a stock includes: A. Dividend only
B. Capital gain only
C. Dividend + Capital gain
D. Interest income
✅ Answer: C

4. HPR Formula

HPR for common stock is best defined as: A. (Ending price − Beginning price) ÷ Beginning price
B. (Dividend + Price change) ÷ Beginning price
C. Dividend ÷ Market price
D. Price change ÷ Ending price
✅ Answer: B

5. Expected Return

Expected return is calculated using: A. Arithmetic mean of past returns
B. Weighted average of possible returns
C. Geometric mean
D. Median return
✅ Answer: B

6. Risk Measurement

Total risk of a security is most commonly measured by: A. Beta
B. Variance
C. Standard deviation
D. Covariance
✅ Answer: C

7. Coefficient of Variation

Coefficient of variation (CV) measures: A. Absolute risk
B. Systematic risk
C. Risk per unit of return
D. Market risk
✅ Answer: C

8. Risk Comparison

Between two investments, the one with the higher coefficient of variation is: A. Less risky
B. Risk-free
C. More risky
D. Better investment
✅ Answer: C

9. Risk-Free Asset

In CAPM, the risk-free rate is generally represented by: A. Corporate bonds
B. Equity shares
C. Treasury bills
D. Treasury bonds
✅ Answer: C

10. Default Risk

Default risk refers to: A. Market price fluctuation
B. Interest rate change
C. Failure to meet contractual payments
D. Inflation risk
✅ Answer: C

11. Financial Risk

Financial risk primarily arises due to: A. Business operations
B. Use of debt financing
C. Market volatility
D. Inflation
✅ Answer: B

12. Business Risk

Business risk is associated with: A. Capital structure
B. Operating leverage
C. Interest rates
D. Exchange rates
✅ Answer: B

13. Risk Attitudes

A risk-averse investor prefers: A. Higher risk for same return
B. Lower risk for same return
C. Riskier investments
D. Gambling investments
✅ Answer: B

14. Risk-Seeking Investor

A risk-seeking investor: A. Avoids uncertainty
B. Requires high certainty equivalent
C. Accepts more risk for same return
D. Invests only in T-bills
✅ Answer: C

15. Risk-Indifferent Investor

Risk-indifferent investors are concerned only with: A. Risk
B. Return
C. Variance
D. Beta
✅ Answer: B

16. Certainty Equivalent

Certainty equivalent represents: A. Risk premium
B. Guaranteed return equivalent to risky return
C. Expected return
D. Market return
✅ Answer: B

17. Portfolio Return

Portfolio expected return is: A. Average of individual returns
B. Weighted average of individual returns
C. Product of returns
D. Highest individual return
✅ Answer: B

18. Portfolio Risk

Portfolio risk depends on: A. Individual security risk only
B. Correlation among securities
C. Market return
D. Risk-free rate
✅ Answer: B

19. Covariance

Covariance measures: A. Individual risk
B. Degree to which two assets move together
C. Market risk
D. Beta
✅ Answer: B

20. Correlation Coefficient

Correlation coefficient ranges between: A. 0 to 1
B. –1 to +1
C. –∞ to +∞
D. 0 to +∞
✅ Answer: B

21. Diversification

Diversification reduces: A. Systematic risk
B. Unsystematic risk
C. Market risk
D. Inflation risk
✅ Answer: B

22. Fully Diversified Portfolio

In a well-diversified portfolio, remaining risk is: A. Total risk
B. Unsystematic risk
C. Systematic risk
D. Zero risk
✅ Answer: C

23. Systematic Risk

Systematic risk is also known as: A. Diversifiable risk
B. Firm-specific risk
C. Market risk
D. Operational risk
✅ Answer: C

24. Unsystematic Risk

Unsystematic risk can be reduced by: A. Hedging
B. Diversification
C. CAPM
D. Inflation
✅ Answer: B

25. Beta

Beta measures: A. Total risk
B. Firm-specific risk
C. Market risk sensitivity
D. Interest rate risk
✅ Answer: C

26. Beta = 1

A stock with beta = 1 has: A. No risk
B. Less risk than market
C. Same risk as market
D. Higher risk than market
✅ Answer: C

27. Security Market Line (SML)

SML represents the relationship between: A. Risk and price
B. Expected return and beta
C. Return and variance
D. Risk-free rate and inflation
✅ Answer: B

28. CAPM Formula

CAPM states: A. E(Ri)=Rf + β(Rm − Rf)
B. E(Ri)=Rm + β(Rf − Rm)
C. E(Ri)=Rf − β(Rm)
D. E(Ri)=Rm − β
✅ Answer: A

29. Market Portfolio

The market portfolio consists of: A. Only stocks
B. Only bonds
C. All risky assets
D. Risk-free assets
✅ Answer: C

30. T-Bills

Treasury bills are: A. Long-term
B. Risk-free
C. Corporate securities
D. Inflation indexed
✅ Answer: B

31. T-Bonds

Treasury bonds differ from T-bills mainly in: A. Credit risk
B. Maturity
C. Liquidity
D. Default risk
✅ Answer: B

32. Private Company Bonds

Bonds of private companies generally have: A. No risk
B. Lower return
C. Higher default risk
D. Risk-free status
✅ Answer: C

33. Equity vs Debt Risk

Compared to bonds, equity shares are: A. Less risky
B. Risk-free
C. More risky
D. Fixed return
✅ Answer: C

34. Portfolio Standard Deviation

Portfolio standard deviation depends on: A. Individual SD only
B. Covariance & correlation
C. Market return
D. Risk-free rate
✅ Answer: B

35. Negative Correlation

Perfect negative correlation helps: A. Increase risk
B. Eliminate risk
C. Increase return
D. Increase beta
✅ Answer: B

36. Market Risk Premium

Market risk premium equals: A. Rm − Rf
B. Rf − Rm
C. Ri − Rf
D. β × Rm
✅ Answer: A

37. Alpha

Alpha represents: A. Total risk
B. Excess return over expected
C. Market risk
D. Correlation
✅ Answer: B

38. CAPM Assumption

CAPM assumes: A. Multiple risk factors
B. Single risk factor (market)
C. Arbitrage pricing
D. Behavioral bias
✅ Answer: B

39. APT

Arbitrage Pricing Theory assumes: A. One risk factor
B. Multiple macroeconomic factors
C. Risk-free portfolio
D. Perfect certainty
✅ Answer: B

40. Advantage of APT

APT is preferred over CAPM because: A. It is simpler
B. It allows multiple risk factors
C. No arbitrage assumption
D. Uses beta only
✅ Answer: B

41. Fama-French Model

Fama-French Three Factor Model includes: A. Market, size, value
B. Market, inflation, GDP
C. Interest rate, beta, size
D. Beta only
✅ Answer: A

42. SMB Factor

SMB in Fama-French refers to: A. Small minus big
B. Systematic market beta
C. Stock market bonds
D. Small market beta
✅ Answer: A

43. HML Factor

HML represents: A. High minus low book-to-market
B. High market leverage
C. High market liquidity
D. High momentum loss
✅ Answer: A

44. Efficient Portfolio

An efficient portfolio: A. Has minimum risk for given return
B. Has maximum risk
C. Has no risk
D. Has lowest return
✅ Answer: A

45. Efficient Frontier

Efficient frontier represents: A. All possible portfolios
B. Risk-free portfolios
C. Best risk-return combinations
D. Market portfolio
✅ Answer: C

46. Investor Choice

Rational investors prefer portfolios on: A. Capital market line
B. Security market line
C. Efficient frontier
D. Random walk
✅ Answer: C

47. Capital Market Line

CML relates: A. Return and beta
B. Return and total risk
C. Risk-free rate and beta
D. Market risk and inflation
✅ Answer: B

48. Zero Beta Asset

An asset with beta zero: A. Moves opposite to market
B. Has no expected return
C. Has risk-free return
D. Is market portfolio
✅ Answer: C

49. Market Risk Cannot Be

Market risk cannot be eliminated through: A. Hedging
B. Diversification
C. Portfolio formation
D. Asset allocation
✅ Answer: B

50. CMA Exam Focus

CMA Part 2 places maximum emphasis on: A. Memorization
B. Conceptual + application-based questions
C. Only theory
D. Only calculations
✅ Answer: B

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Perfect 👍
Below are CMA Part 2–style NUMERICAL PROBLEMS on Risk & Return, with step-by-step solutions (exactly how CMA expects).

NUMERICAL PROBLEMS – CORPORATE FINANCE (RISK & RETURN)

(CMA Part 2 Exam Focus)

1️⃣ Holding Period Return (HPR) – Common Stock

Problem:
A share was purchased for ₹120. During the year, a dividend of ₹6 was received and the share was sold for ₹138.
Calculate the Holding Period Return (HPR).

Solution:


HPR = \frac{Dividend + (Selling Price - Purchase Price)}{Purchase Price}


= \frac{6 + (138 - 120)}{120}
= \frac{24}{120}
= 0.20 = \mathbf{20\%}

✅ Answer: 20%

2️⃣ Expected Return (Probability Method)

Problem:
An investment has the following returns:

Return (%)	Probability
10%	0.3
15%	0.4
20%	0.3

Calculate the expected return.

Solution:


E(R) = \sum (R \times P)


= (10 \times 0.3) + (15 \times 0.4) + (20 \times 0.3)


= 3 + 6 + 6 = \mathbf{15\%}

✅ Answer: 15%

3️⃣ Standard Deviation of Returns

Using Problem 2 data, calculate standard deviation.

Step 1: Mean Return


\bar R = 15\%

Step 2: Variance


\sigma^2 = \sum P(R - \bar R)^2


= 0.3(10-15)^2 + 0.4(15-15)^2 + 0.3(20-15)^2


= 0.3(25) + 0 + 0.3(25)
= 15

Step 3: Standard Deviation


\sigma = \sqrt{15} = \mathbf{3.87\%}

✅ Answer: 3.87%

4️⃣ Coefficient of Variation (CV)

Problem:
Expected return = 12%
Standard deviation = 6%

Solution:


CV = \frac{\sigma}{E(R)} = \frac{6}{12} = \mathbf{0.50}

✅ Interpretation:
Lower CV = lower risk per unit of return

5️⃣ Comparing Two Investments Using CV

Investment	Return	SD
A	10%	4%
B	15%	9%

CV Calculation


CV_A = \frac{4}{10} = 0.40

CV_B = \frac{9}{15} = 0.60 

✅ Investment A is less risky

6️⃣ Portfolio Expected Return

Problem:
A portfolio consists of:

Asset	Weight	Return
X	60%	12%
Y	40%	8%

Solution:


E(R_p) = (0.6 \times 12) + (0.4 \times 8)


= 7.2 + 3.2 = \mathbf{10.4\%}

7️⃣ Portfolio Standard Deviation (2 Assets)

Problem:


\sigma_X = 10\%,\ \sigma_Y = 6\%

w_X = 0.5,\ w_Y = 0.5 
Correlation (ρ) = 0.3

Formula:


\sigma_p = \sqrt{w_X^2\sigma_X^2 + w_Y^2\sigma_Y^2 + 2w_Xw_Y\sigma_X\sigma_Y\rho}

Solution:


= \sqrt{(0.5^2)(10^2) + (0.5^2)(6^2) + 2(0.5)(0.5)(10)(6)(0.3)}


= \sqrt{25 + 9 + 9} = \sqrt{43}
= \mathbf{6.56\%}

8️⃣ CAPM – Required Rate of Return

Problem:
Risk-free rate = 5%
Market return = 13%
Beta = 1.2

Solution (CAPM):


E(R) = R_f + \beta (R_m - R_f)


= 5 + 1.2(13 - 5)
= 5 + 9.6 = \mathbf{14.6\%}

9️⃣ Security Over/Under Valued (SML Test)

Problem:
Required return (CAPM) = 12%
Expected return = 14%

Interpretation:

Expected > Required ⇒ Undervalued Security

✅ Buy recommendation

🔟 Certainty Equivalent Approach

Problem:
A risky project has expected return of 18%.
Certainty equivalent (CE) return is 14%.

Risk Premium:


Risk\ Premium = 18 - 14 = \mathbf{4\%}

🔥 CMA EXAM TIP

CV → comparison
SD → absolute risk
Beta → market risk
Diversification → removes unsystematic risk only
CAPM & portfolio numericals = high scoring

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Friday, February 6, 2026

Corporate finance MCQ

50 MCQs – Corporate Finance (Risk & Return) | CMA Part 2

1. Shareholders’ Wealth Maximization

2. Market Capitalization

3. Holding Period Return (HPR)

4. HPR Formula

5. Expected Return

6. Risk Measurement

7. Coefficient of Variation

8. Risk Comparison

9. Risk-Free Asset

10. Default Risk

11. Financial Risk

12. Business Risk

13. Risk Attitudes

14. Risk-Seeking Investor

15. Risk-Indifferent Investor

16. Certainty Equivalent

17. Portfolio Return

18. Portfolio Risk

19. Covariance

20. Correlation Coefficient

21. Diversification

22. Fully Diversified Portfolio

23. Systematic Risk

24. Unsystematic Risk

25. Beta

26. Beta = 1

27. Security Market Line (SML)

28. CAPM Formula

29. Market Portfolio

30. T-Bills

31. T-Bonds

32. Private Company Bonds

33. Equity vs Debt Risk

34. Portfolio Standard Deviation

35. Negative Correlation

36. Market Risk Premium

37. Alpha

38. CAPM Assumption

39. APT

40. Advantage of APT

41. Fama-French Model

42. SMB Factor

43. HML Factor

44. Efficient Portfolio

45. Efficient Frontier

46. Investor Choice

47. Capital Market Line

48. Zero Beta Asset

49. Market Risk Cannot Be

50. CMA Exam Focus

NUMERICAL PROBLEMS – CORPORATE FINANCE (RISK & RETURN)

1️⃣ Holding Period Return (HPR) – Common Stock

Solution:

2️⃣ Expected Return (Probability Method)

Solution:

3️⃣ Standard Deviation of Returns

Step 1: Mean Return

Step 2: Variance

Step 3: Standard Deviation

4️⃣ Coefficient of Variation (CV)

Solution:

5️⃣ Comparing Two Investments Using CV

CV Calculation

6️⃣ Portfolio Expected Return

Solution:

7️⃣ Portfolio Standard Deviation (2 Assets)

Formula:

Solution:

8️⃣ CAPM – Required Rate of Return

Solution (CAPM):

9️⃣ Security Over/Under Valued (SML Test)

Interpretation:

🔟 Certainty Equivalent Approach

Risk Premium:

🔥 CMA EXAM TIP

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