Principles of Corporate Finance 12Th Edition Brealey Test Bank Full Chapter PDF

Principles of Corporate Finance 12th
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1. Which of the following portfolios has the least risk?
A. A portfolio of Treasury bills

B. A portfolio of long-term U.S. government bonds
C. A portfolio of U.S. common stocks of small firms
D. A portfolio of U.S. common stocks of large firms
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Difficulty: Basic
2. For long-term U.S. government bonds, which risk concerns investors the most?
A. Interest rate risk

B. Default risk
C. Market risk
D. Liquidity risk

Difficulty: Intermediate
3. What has been the average annual real rate of interest on Treasury bills over the past 114 years (from 1900
to 2014)?
A. Less than 2 percent

B. Between 2 percent and 3 percent
C. Between 3 percent and 4 percent
D. Greater than 4 percent

Difficulty: Basic
4. What has been the average annual nominal rate of interest on Treasury bills over the past 114 years (1900
to 2014)?

Difficulty: Basic
5. What has been the average annual nominal rate of return on a portfolio of U.S. common stocks over the past
114 years (from 1900 to 2014)?


Difficulty: Basic
6. One dollar invested in a portfolio of long-term U.S. government bonds in 1900 would have grown in nominal
value by the end of year 2014 to
A. $719.
B. $66.
C. $74.
D. $278.
7. One dollar invested in a portfolio of U.S. common stocks in 1900 would have grown in nominal value by the end
of year 2014 to
A. $38,255.
B. $245.
C. $74.
D. $6.

8. What has been the average annual rate of return in real terms for a portfolio of U.S. common stocks
between 1900 and 2014?


9. Which portfolio has had the lowest average annual nominal rate of return during the 1900 to 2014 periods?
A. Portfolio of small U.S. common stocks

B. Portfolio of U.S. government bonds
C. Portfolio of Treasury bills
D. Portfolio of large U.S. common stocks

10. Which portfolio had the highest average annual return in real terms between 1900 and 2014?
A. Portfolio of U.S. common stocks

C. Portfolio of Treasury bills
D. None of the answers

11. A standard error measures
A. nominal annual rate of return on a portfolio.

B. A. risk of a portfolio.
C. reliability of an estimate.
D. real annual rate of return on a portfolio.

Difficulty: Challenge
12. Which of the following is an estimate of the standard error of the mean?
A. The average annual rate of return divided by the square root of the number of observations
B. The variance divided by the number of observations
C. The standard deviation of returns divided by the square root of the number of observations
D. The variance of returns divided by the square root of the number of observations

13. Which portfolio has had the highest average risk premium during the period 1900 to 2014?
A. Common stocks
B. Government bonds
C. Treasury bills
D. None of the answers is correct.

14. If the standard deviation of annual returns is 19.8 percent and the number of years of observation is 107,
what is the standard error?
A. 4.23 percent
B. 1.91 percent
C. 0.47 percent
D. 19.8 percent

15. If the average annual rate of return for common stocks is 11.7 percent, and 4.0 percent for U.S. Treasury
bills, what is the average market risk premium?
A. 15.7 percent
B. 4.0 percent
C. 7.7 percent
D. Not enough information is provided.

Difficulty: Basic
16. Spill Drink Company's stocks had -8 percent, 11 percent, and 24 percent rates of return, respectively, during
the last three years; calculate the (arithmetic) average rate of return for the stock.
A. 8 percent per year

B. 9 percent per year
C. 10 percent per year
D. 11 percent per year

Difficulty: Basic
17. For log normally distributed returns, annual compound returns equal
A. the arithmetic average return minus half the variance.

B. the arithmetic average return plus half the variance.
C. the arithmetic average return minus half the standard deviation.
D. the arithmetic average return plus half the standard deviation.

18. Which of the following provides a correct measure of the opportunity cost of capital regardless of the timing
of cash flows?
A. Arithmetic average
B. Geometric average
C. Hyperbolic mean
D. Opportunistic mean

19. Assume the following data: Risk-free rate = 4.0 percent; average risk premium = 7.7 percent. Calculate
the required rate of return for the risky asset.
A. 5.6 percent
B. 7.6 percent
C. 11.7 percent
D. 30.8 percent

Difficulty: Basic
20. Which of the following countries has had the lowest risk premium?
A. United States
B. Denmark
C. Italy
D. Germany

Difficulty: Basic
21. Which of the following countries has had the highest risk premium?
A. Germany
B. Denmark
C. United States
D. Switzerland

Difficulty: Basic
22. Mega Corporation has the following returns for the past three years: 7 percent, 13 percent, and 10 percent.
Use the following formulas to calculate the variance of the returns and the standard deviation of the returns:
Variance = expected value of

Standard deviation of .
A. 64.00 and 8.00 percent

B. 124.00 and 11.10 percent
C. 6.00 and 2.45 percent
D. 30.00 and 10.00 percent
23. Macro Corporation has had the following returns for the past three years: -10 percent, 10 percent, and 30
percent. Use the following formulas to calculate the standard deviation of the returns:
Variance = expected value of

Standard deviation of .
A. 10.00 percent
B. 16.33 percent
C. 18.21 percent
D. 30.00 percent
24. Sun Corporation has had returns of -6 percent, 16 percent, 18 percent, and 28 percent for the past four
years. Calculate the standard deviation of the returns using the correction for the loss of a degree of freedom
shown below.
When variance is estimated from a sample of observed returns, we add the squared deviations and divide
by N -1, where N is the number of observations. We divide by N -1 rather than N to correct for a loss of a
degree of freedom. The formula is
Where is the market return in period t and rm is the mean of the values of rmt.
A. 11.6 percent
B. 14.3 percent
C. 13.4 percent
D. 14.0 percent
25. Which portfolio had the highest standard deviation during the period between 1900 and 2014?
A. Common stocks
B. Government bonds
C. Treasury bills
D. None of the answers is correct.

Difficulty: Basic
26. What has been the approximate standard deviation of returns of U.S. common stocks during the
period between 1900 and 2014?
A. 19.9 percent
B. 33.4 percent
C. 8.9 percent
D. 2.8 percent

27. The standard deviation of U.S. returns from 2005 to the financial crisis four years later had
increased (approximately) by a factor of
A. 2.
B. 3.
C. 4.
D. 6.

28. A statistical measure of the degree to which securities' returns move together is called a
A. variance.
B. correlation coefficient.
C. standard deviation.
D. geometric average.

29. The type of the risk that can be eliminated by diversification is called
A. market risk.
B. unique risk.
C. interest rate risk.
D. default risk.

30. Unique risk is also called
A. systematic risk.
B. nondiversifiable risk.
C. firm-specific risk.
D. market risk.

Difficulty: Basic
31. Market risk is also called
I) systematic risk; II) undiversifiable risk; III) firm-specific risk.
A. systematic risk.
B. undiversifiable risk.
C. firm-specific risk.
D. systematic risk and undiversifiable risk.

Difficulty: Basic
32. Stock A has an expected return of 10 percent per year and stock B has an expected return of 20 percent. If
40 percent of a portfolio's funds are invested in stock A and the rest in stock B, what is the expected return on
the portfolio of stock A and stock B?
A. 10 percent
B. 20 percent
C. 16 percent
D. 14 percent

Difficulty: Basic
33. As the number of stocks in a portfolio is increased,
A. unique risk decreases and approaches zero.

B. market risk decreases.
C. unique risk decreases and becomes equal to market risk.
D. total risk approaches zero.

34. Stock M and Stock N have had the following returns for the past three years: 12 percent, -10 percent, and
32 percent; and 15 percent, 6 percent, and 24 percent, respectively. Calculate the covariance between the
two securities. (Ignore the correction for the loss of a degree of freedom set out in the text.)
A. -99
B. 126
C. +250
D. -250

35. Stock P and Stock Q have had annual returns of -10 percent, 12 percent, and 28 percent; and 8 percent,
13 percent, and 24 percent, respectively. Calculate the covariance of return between the securities. (Ignore
the correction for the loss of a degree of freedom set out in the text.)
A. -149.00
B. +149.00
C. +99.33
D. -100.00

36. Stock X has a standard deviation of return of 10 percent. Stock Y has a standard deviation of return of 20
percent. The correlation coefficient between the two stocks is 0.5. If you invest 60 percent of your funds in stock X
and 40 percent in stock Y, what is the standard deviation of your portfolio?
A. 10.3 percent
B. 21.0 percent
C. 12.2 percent
D. 14.8 percent

37. If the correlation coefficient between the returns on stock C and stock D is +1.0, the standard deviation of
return for stock C is 15 percent, and that for stock D is 30 percent, calculate the covariance between stock C and
stock D.
A. +45
B. -450
C. +450
D. -45

38. What range of values can correlation coefficients take?
A. Zero to + 1
B. -1 to + 1
C. -Infinity to + infinity
D. Zero to + infinity

39. If the covariance between stock A and stock B is 100, the standard deviation of stock A is 10 percent and that
of stock B is 20 percent, calculate the correlation coefficient between the two securities.
A. -0.5
B. +1.0
C. +0.5
D. 0.0

40. For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between the
two stocks equals
A. +1.0.
B. -0.5.
C. -1.0.
D. 0.0.

41. For a portfolio of N-stocks, the formula for portfolio variance contains
A. N variance terms.
B. N(N - 1)/2 variance terms.
C. N2 variance terms.
D. N - 1 variance terms.

42. For a portfolio of N-stocks, the formula for portfolio variance contains
A. N covariance terms.
B. N(N - 1)/2 different covariance terms.
C. N2 covariance terms.
D. N - 1 covariance terms.

43. Beta is a measure of
A. unique risk.
B. total risk.
C. market risk.
D. liquidity risk.

44. The beta of the market portfolio is
A. +1.0.
B. +0.5.
C. 0.0.
D. -1.0.

Difficulty: Basic
45. For each additional 1 percent change in market return, the return on a stock having a beta of 2.2 changes,
on average, by
A. 1.00 percent.
B. 0.55 percent.
C. 2.20 percent.
D. 1.10 percent.

46. Which of the following portfolios will have the highest beta?
A. Portfolio of U.S. Treasury bills

C. Portfolio containing 50 percent U.S. Treasury bills and 50 percent U.S. government bonds
D. Portfolio of U.S. common stocks

Difficulty: Basic
47. If the standard deviation of returns on the market is 20 percent, and the beta of a well-diversified portfolio is
1.5, calculate the standard deviation of this portfolio.
A. 30 percent.
B. 20 percent.
C. 15 percent.
D. 10 percent.

48. The correlation coefficient between a stock and the market portfolio is +0.6. The standard deviation of return
of the stock is 30 percent and that of the market portfolio is 20 percent. Calculate the beta of the stock.
A. 1.1
B. 1.0
C. 0.9
D. 0.6

49. The historical nominal returns for stock A were -8 percent, +10 percent, and +22 percent. The nominal returns
for the market portfolio were +6 percent, +18 percent, and 24 percent during this same time. Calculate the beta for
stock A.
A. 1.64
B. 0.61
C. 1.00
D. 0.50

50. The annual returns for three years for stock B were 0 percent, 10 percent, and 26 percent. Annual returns for
three years for the market portfolio were +6 percent, 18 percent, and 24 percent. Calculate the beta for the stock.
A. 0.75
B. 1.36
C. 1.00
D. 0.74

51. The correlation coefficient between stock B and the market portfolio is 0.8. The standard deviation of stock B is
35 percent and that of the market is 20 percent. Calculate the beta of the stock.
A. 1.0
B. 1.4
C. 0.8
D. 0.7

52. The covariance between YOHO stock and the S&P 500 is 0.05. The standard deviation of the stock market is
20 percent. What is the beta of YOHO?
A. 0.00
B. 1.00
C. 1.25
D. 1.42

53. What is the beta of a security where the expected return is double that of the stock market, there is no
correlation coefficient relative to the U.S. stock market, and the standard deviation of the stock market is .18?
A. 0.00
B. 1.00
C. 1.25
D. 2.00

54. Treasury bills typically provide higher average returns, both in nominal terms and in real terms, than long-
term government bonds.
FALSE

Difficulty: Basic
55. A risk premium is the difference between a security's return and the Treasury bill return.
TRUE

Difficulty: Basic
56. For log normally distributed returns, the annual geometric average return is greater than the arithmetic
average return.
FALSE

57. According to the authors, a reasonable range for the risk premium in the United States is 5 percent to 8 percent.
TRUE

58. The standard statistical measures of the variability of stock returns are beta and covariance.
FALSE

Difficulty: Basic
59. Diversification reduces the risk of a portfolio because the prices of different securities do not move
exactly together.
TRUE

Difficulty: Basic
60. The portfolio risk that cannot be eliminated by diversification is called unique risk.
FALSE

61. The portfolio risk that cannot be eliminated by diversification is called market risk.
TRUE

62. The beta of a well-diversified portfolio is equal to the value weighted average beta of the securities included in
the portfolio.
TRUE

63. The average beta of all stocks in the market is zero.
FALSE

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

65. Stocks with high standard deviations will necessarily also have high betas.
FALSE

66. Low standard deviation stocks always have low betas.
FALSE

67. A stock having a covariance with the market that is higher than the variance of the market will always have a
beta above 1.0.
TRUE

68. By purchasing U.S. government bonds, an investor can achieve both a risk-free nominal rate of return
and a risk-free real rate of return.
FALSE

69. A risk premium generated by comparing stocks to 10-year U.S. Treasury bonds will be smaller than a
risk premium generated by comparing stocks to U.S. Treasury bills.
TRUE

70. One can easily calculate the estimated risk premium on stocks via the statistical analysis of historical
stock returns.
FALSE

71. The standard deviation of a two-stock portfolio generally equals the value-weighted average of the
standard deviations of the two stocks.
FALSE

72. The covariance between the returns on two stocks equals the correlation coefficient multiplied by the
standard deviations of the two stocks.
TRUE

73. For the most part, stock returns tend to move together. Thus, pairs of stocks tend to have both
positive covariances and correlations.
TRUE

74. If returns on two stocks tended to move in opposite directions, then the covariances and correlations on the
two stocks would be negative.
TRUE

75. Diversification can reduce portfolio risk even in the case when correlations across stock returns equal zero.
TRUE

76. The variability of a well-diversified portfolio mostly reflects the contributions to risk from the standard deviations
of the stocks within that portfolio.
FALSE

77. The risk of a well-diversified portfolio depends on the market risk of the securities included in the portfolio.
TRUE

Difficulty: Basic
78. Define the term risk premium.
The difference between the security return and the risk-free rate, such as a Treasury bill return, is called the risk
premium. This denotes the additional return on the security to additional risk.
79. Regarding stock returns, briefly explain the term variance.
Variance is a standard statistical measure of spread. The variance is the expected squared deviation from the
expected return. From a finance point of view, this measures the total risk of a portfolio: The higher the variance,
the higher the risk of the portfolio. This is also called a measure of total risk.
80. Briefly explain how diversification reduces risk.
Diversification reduces risk because prices of different securities do not move exactly together. When you form
portfolios using a large number of stocks, the variability of the portfolio is much less than the average variability of
individual stocks.
81. In the formula for calculating the variance of an N-stock portfolio, how many covariance and variance terms
are there?
In the formula for calculating the variance of an N-stock portfolio, there are [N(N – 1)]/2 different
covariance terms and N variance terms.
Difficulty: Basic
82. Briefly explain how the beta of a stock is estimated.
One can estimate the beta of a stock by plotting the market returns on the x-axis and the corresponding stock
returns on the y-axis. The slope of the resulting line of best fit is the beta estimate for the stock. [βi
= Cov(Ri, Rm)/Var(Rm).]
83. Briefly explain what the beta of a stock means.

For each additional 1 percent change in the market return, the return on the stock on average changes by beta
times 1 percent. For example, if the beta of IBM is 1.59, then for an additional 1 percent change in the market
return, the expected change in the return of IBM stock will equal 1.59 percent.
84. Discuss the importance of beta as a measure of risk.
Beta is a measure of market risk. It is also called the relative measure of risk as it measures risk relative to the
market portfolio. Beta is useful as a measure of risk in the context of well-diversified portfolios. It measures the risk
contribution of a single security to the portfolio.
85. Briefly explain the difference between beta as a measure of risk and variance as a measure of risk.
Variance measures the total risk of a security and is a measure of stand-alone risk. Total risk has both unique risk
and market risk. In a well-diversified portfolio, unique risks tend to cancel each other out and only market risk
remains. Beta is a measure of market risk and is useful in the context of a well-diversified portfolio. Beta measures
the sensitivity of the security returns to changes in market returns. The market portfolio has a beta of one and thus
has average risk.
86. Briefly explain how individual securities affect portfolio risk.
The risk of a well-diversified portfolio depends on the market risk of the securities included in the portfolio.
Portfolio beta is the weighted average of individual security betas included in the portfolio. Individual
securities affect portfolio risk to the extent that they change the beta of the portfolio.
87. What is the beta of a portfolio with a large number of randomly selected stocks?
The beta of a portfolio with a large number of randomly selected stocks equals one. The standard
deviation of such a portfolio is equal to the standard deviation of the market.
88. How can individual investors diversify?
A very simple way for an individual investor to diversify is to buy shares in a mutual fund that holds a diversified
portfolio.
89. Briefly explain the concept of value additivity.
If the capital market establishes a value PV(A) for asset A and PV(B) for asset B, the market value of a firm that
holds both these assets is given by PV(AB) = PV(A) + PV(B). This logic can be extended for any number of assets.
Value additivity is also applicable to cash flows. We can add the present values of two separate cash flows and get
the present value of the combined cash flows. It can be stated as follows:
PV(A + B) = PV(A) + PV(B) and PV(A + B + C) = PV(A) + PV(B) + PV(C).
This idea can be extended for any number of cash flows.
90. Explain why international stocks may have high standard deviations but low betas.
Beta is traditionally measured relative to the S&P 500 index. As such, there may be a weaker statistical
relationship between the S&P 500 and an international stock. If these two assets are mostly independent of one
another, there is little chance they will have a statistically significant covariance. With a low covariance, by
definition, the stock will have a low beta. This could occur even if the standard deviation of the beta is very high.
This answer assumes that the market risk in domestic stocks is largely independent of the market risk in
international stocks.
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between the tropics. Several species (P. vulgaris, P. auriga, P.
bocagii) occur in the Mediterranean and the neighbouring parts of
the Atlantic; one (P. argyrops) is well known on the coasts of the
United States under the names of “Scup,” “Porgy,” or “Mishcup,” and
one of the most important food fishes, growing to a length of 18
inches and a weight of 4 lbs.; another (P. unicolor) is one of the best-
known sea-fishes of Southern Australia and New Zealand, where it is
called “Snapper;” it is considered very good eating, like all the other
species of this genus, and attains, like some of them, a length of
more than 3 feet and a weight exceeding 20 lbs.
Pagellus.—Body oblong, compressed, with scales of moderate
size. Jaws without canines; molars on the sides arranged in several
series. Cheeks scaly. The spines of the dorsal fin, from eleven to
thirteen in number, can be received in a groove; anal spines three.
Seven species are known, the majority of which are European, as
P. erythrinus, common in the Mediterranean, and not rare on the
south coast of England, where it is generally termed “Becker;” P.
centrodontus, the common “Sea-bream” of the English coasts,
distinguished by a black spot on the origin of the lateral line; in the
young, which are called “Chad” by Cornish and Devon fishermen,
this spot is absent; P. owenii, the “Axillary or Spanish Sea-Bream,”
likewise from the British coasts. Pagellus lithognathus, from the
coasts of the Cape of Good Hope, attains to a length of four feet,
and is one of the fishes which are dried for export and sale to
whalers.
Chrysophrys.—Body oblong, compressed, with scales of
moderate size. Jaws with four or six canine teeth in front, and with
three or more series of rounded molars on each side. Cheeks scaly.
The spines of the dorsal fin, eleven or twelve in number, can be
received in a groove; anal spines three.
Some twenty species are known from tropical seas and the
warmer parts of the temperate zones. Generally known is Ch.
aurata, from the Mediterranean, occasionally found on the south
coast of England, where it is named “Gilthead.” The French call it
“Daurade,” no doubt from the Latin Aurata, a term applied to it by
ancient authors. The Greeks named it Chrysophrys (i.e. golden
eyebrow), in allusion to the brilliant spot of gold which it bears
between its eyes. According to Columella, the Aurata was among the
number of the fishes brought up by the Romans in their vivaria; and
the inventor of those vivaria, one Sergius Orata, is supposed to have
derived his surname from this fish. It is said to grow extremely fat in
artificial ponds. Duhamel states that it stirs up the sand with the tail,
so as to discover the shell-fish concealed in it. It is extremely fond of
mussels, and its near presence is sometimes ascertained by the
noise which it makes while breaking their shells with its teeth.
Several species found on the Cape of Good Hope attain to as large
a size as Pagellus lithognathus, and are preserved for sale like that
species. Chrysophrys hasta is one of the most common species of
the East Indian and Chinese coasts, and enters large rivers.
Fifth Group—Pimelepterina.—In both jaws a single anterior
series of cutting teeth, implanted by a horizontal posterior process,
behind which is a band of villiform teeth. Villiform teeth on the vomer,
palatines and the tongue. Vertical fins densely covered with minute
scales. Only one genus is known, Pimelepterus, with six species
from tropical seas. These fishes are sometimes found at a great
distance from the land.
Fifth Family—Hoplognathidæ.
Body compressed and elevated, covered with very small ctenoid
scales. Lateral line continuous. The bones of the jaws have a sharp
dentigerous edge, as in Scarus. The teeth, if at all conspicuous,
being continuous with the bone, forming a more or less indistinct
serrature; no teeth on the palate. The spinous portion of the dorsal
fin is rather more developed than the soft; the spines strong; anal
with three spines, similar to the soft dorsal. Ventrals thoracic, with
one spine and five soft rays.
One genus only is known, Hoplognathus, with four species from
Australian, Japanese, and Peruvian coasts.
Fig. 176.—Teeth of Hoplognathus.
Sixth Family—Cirrhitidæ.
Body oblong, compressed, covered with cycloid scales; lateral
line continuous. Mouth in front of the snout, with lateral cleft. Eye
lateral, of moderate size. Cheeks without a bony stay for the
præoperculum. Generally six, sometimes five or three
branchiostegals. Dentition more or less complete, composed of small
pointed teeth, sometimes with the addition of canines. One dorsal
fin, formed by a spinous and soft portion, of nearly equal
development. Anal with three spines, generally less developed than
the soft dorsal. The lower rays of the pectoral fins simple and
generally enlarged; ventrals thoracic, but remote from the root of the
pectorals, with one spine and five rays.
The fishes of this family may be readily recognised by their
thickened, undivided lower pectoral rays, which in some are
evidently auxiliary organs of locomotion, in others, probably, organs
of touch. They differ from the following family, the Scorpænidæ, in
lacking the bony connection between the infraorbital ring and the
præoperculum. Two groups may be distinguished in this family,
which, however, are connected by an intermediate genus
(Chironemus). The first, distinguished by the presence of vomerine
teeth, consists of Cirrhites and Chorinemus, small prettily coloured
fishes. The former genus is peculiar to the Indo-Pacific, and consists
of sixteen species; the second, with three species, seems to be
confined to the coasts of Australia and New Zealand. The second
group lacks the vomerine teeth, and comprises the following genera:
—
Chilodactylus.—One dorsal fin, with from sixteen to nineteen
spines; anal fin of moderate length; caudal forked. One of the simple
pectoral rays more or less prolonged, and projecting beyond the
margin of the fin. Teeth in villiform bands; no canines. Præoperculum
not serrated. Scales of moderate size. Air-bladder with many lobes.
Fig. 177.—Chilodactylus macropterus, from Australia.

Seventeen species are known, chiefly from the temperate parts
of the Southern Pacific, and also from the coasts of Japan and
China. They belong to the most valuable food-fishes, as they grow to
a considerable size (from five to twenty-five lbs.), and are easily
caught in numbers. At the Cape of Good Hope they are very
abundant, and preserved in large quantities for export.
Mendosoma from the coast of Chili, and Nemadactylus from
Tasmania, are allied genera.
Latris.—Dorsal fin deeply notched; the spinous portion with
seventeen spines; anal fin many-rayed. None of the simple pectoral
rays passes the margin of the fin. Teeth villiform; no canines.
Præoperculum minutely serrated. Scales small.
Two species only are known from Tasmania and New Zealand,
which belong to the most important food-fishes of the Southern
Hemisphere. Latris hecateia or the “Trumpeter,” ranges from sixty to
thirty lbs. in weight, and is considered by the colonists the best
flavoured of any of the fishes of South Australia, Tasmania, and New
Zealand, and consumed smoked as well as fresh. The second
species, Latris ciliaris, is smaller, scarcely attaining a weight of
twenty lbs., but more abundant; it is confined to the coast of New
Zealand.
Fig. 178.—Skull of Scorpæna percoides; so, Suborbital ring;

pr, Præoperculum; st, Bony stay, connecting the sub-orbital with
the præoperculum.
Seventh Family—Scorpænidæ.
Body oblong, more or less compressed, covered with ordinary
scales, or naked. Cleft of the mouth lateral or subvertical. Dentition
feeble, consisting of villiform teeth; and generally without canines.
Some bones of the head armed, especially the angle of the
præoperculum, its armature receiving additional support by a bony
stay, connecting it with the infraorbital ring. The spinous portion of
the dorsal fin equally or more developed than the soft and than the
anal. Ventrals thoracic, generally with one spine and five soft rays,
sometimes rudimentary.
This family consists of carnivorous marine fishes only; some
resemble the Sea-Perches in form and habits, as Sebastes,
Scorpæna, etc., whilst others live at the bottom of the sea, and
possess in various degrees of development those skinny
appendages resembling the fronds of seaweeds, by which they
either attract other fishes, or by which they are enabled more
effectually to hide themselves. Species provided with those
appendages have generally a coloration resembling that of their
surroundings, and varying with the change of locality. The habit of
living on the bottom has also developed in many Scorpænoids
separate pectoral rays, by means of which they move or feel. Some
of the genera live at a considerable depth, but apparently not beyond
300 fathoms. Nearly all are distinguished by a powerful armature
either of the head, or fin spines, or both; and in some the spines
have been developed into poison organs.
The only fossil representative known at present is a species of
Scorpæna from the Eocene of Oran.
Sebastes.—Head and body compressed; crown of the head scaly
to, or even beyond, the orbits; no transverse groove on the occiput.
Body covered with scales of moderate or small size, and without
skinny tentacles. Fin-rays not elongate; one dorsal, divided by a notch
into a spinous and soft portion, with twelve or thirteen spines; the anal
with three. No pectoral appendages. Villiform teeth in the jaws, on the
vomer, and generally on the palatine bones. Vertebræ more than
twenty-four.
About twenty species are known, principally from seas of the
temperate zones, as from the coasts of Northern Europe (S.
norvegicus, S. viviparus), of Japan, California, New Zealand, and
Van Diemen’s Land. All seem to prefer deep water to the surface,
and Sebastes macrochir has been obtained at a depth of 345
fathoms. In their general form they resemble the Sea-Perches, attain
to a weight of from one to four lbs., and are generally esteemed as
food.
Scorpæna.—Head large, slightly compressed, generally with a
transverse naked depression on the occiput; bones of the head armed
with spines, and generally with skinny tentacles. Scales of moderate
size. Mouth large, oblique. Villiform teeth in the jaws, and at least on
the vomer. One dorsal, 12–13/9, A. 3/5. Pectoral fins without detached
rays, large, rounded, with the lower rays simple and thickened. Air-
bladder none. Vertebræ twenty-four.
Fig. 179.—Head of Scorpæna percoides, from New Zealand.

Fig. 180.—Scorpæna bynoensis, from the coasts of Australia.
About forty species are known from tropical and sub-tropical
seas. They lead a sedentary life, lying hidden in the sand, or
between rocks covered with seaweed, watching for their prey, which
chiefly consists of small fishes. Their strong undivided pectoral rays
aid them in burrowing in the sand, and in moving along the bottom.
The type of their coloration is very much the same in all the species,
viz. an irregular mottling of red, yellow, brown, and black colours, but
the distribution of these colours varies exceedingly, not only in the
same species but also in the same individuals. They do not attain to
any considerable size, probably never exceeding a length of 18
inches. Their flesh is well flavoured. Wounds inflicted by their fin-
spines are exceedingly painful, but not followed by serious
consequences.
Glyptauchen and Lioscorpius are genera closely allied to
Scorpæna, from Australian seas.
Setarches is also allied to the preceding genera, and provided
with very large eyes, in accordance with the depth (215 fathoms)
which the two species known at present inhabit; one has been found
near Madeira, the other near the Fiji Islands.
Pterois.—Head and body compressed; scales of small or
moderate size. Bones of the head armed with numerous spinous
projections, between which often skinny tentacles are developed. The
dorsal spines and pectoral rays are more or less prolonged, passing
beyond the margin of the connecting membrane. Twelve or thirteen
dorsal spines. Villiform teeth in the jaws and on the vomer.
Nine species are known from the tropical Indo-Pacific. They
belong to the most singularly formed and most beautifully coloured
fishes of the Tropics, and formerly were believed to be able to fly, like
Dactylopterus. But the membrane connecting their pectoral rays is
much too short and feeble to enable them to raise themselves from
the surface of the water.
Apistus.—Head and body compressed, covered with ctenoid
scales of rather small size. Some bones of the head, and especially
the præorbital, are armed with spines. One dorsal with fifteen spines;
the anal with three. The pectoral fin is elongate, and one ray is
completely detached from the fin. Villiform teeth in the jaws, on the
vomer, and palatine bones. Air-bladder present. A cleft behind the
fourth gill.
Two species from the Indian Ocean. These fishes are very small,
but of interest on account of the prolongation of their pectoral fins,
which indicates that they can take long flying leaps out of the water.
However, this requires confirmation by actual observation.
Agriopus.—Head and body compressed, scaleless; head without
any, or with very feeble, armature. Cleft of the mouth small, at the end
of the produced snout. One dorsal fin, which commences from the
head, the spinous portion being formed by from seventeen to twenty-
one strong spines; anal short. Villiform teeth in the jaws, generally
none on the vomer.
Seven species. This singular genus is peculiar to the temperate
parts of the South Pacific, occurring at the Cape, on the coast of
South Australia, and Chili. The largest species (A. torvus) attains a
length of two and a half feet. Nothing is known of its mode of life.
Synanceia.—General appearance of the fish, especially of the
head, monstrous. Scales none; skin with numerous soft warty
protuberances or filaments. Mouth directed upwards, wide. Eyes
small. From thirteen to sixteen dorsal spines; pectoral fins very large.
Villiform teeth in the jaws, and sometimes on the vomer.
Four species are known from the Indo-Pacific, of which S. horrida
and S. verrucosa are the most generally distributed, and,
unfortunately, the most common. They are justly feared on account
of the great danger accompanying wounds which they inflict with
their poisoned dorsal spines, as has been already noticed above, p.
191. The greatest length to which they attain does not seem to
exceed eighteen inches. They are very voracious fishes, and their
stomach is of so great a capacity that they are able to swallow fishes
one-third of their own bulk.
Micropus.—Head and body strongly compressed, short, and
deep; no scales, but the skin is covered with minute tubercles. Snout
very short, with nearly vertical anterior profile. Præorbital, præ- and
inter-operculum with spines on the edge. Dorsal fin with seven or
eight, anal with two spines. Pectorals short, ventrals rudimentary.
Jaws with villiform teeth.
These fishes belong to the smallest of Acanthopterygians,
scarcely exceeding 1½ inches in length. Two species are known,
which are rather common on the coral reefs of the Pacific.
Chorismodactylus.—Head and body rather compressed,
scaleless, with skinny flaps. Bones of the head with prominent ridges;
the præorbital, præoperculum, and operculum armed; a depression on
the occiput. One dorsal fin, with thirteen spines; the anal with two.
Three free pectoral appendages. Ventral fins with one spine and five
rays. Villiform teeth in the jaws only.
Only one small species, Ch. multibarbis, is known, from the
coasts of India and China.
Fig. 181.—Chorismodactylus multibarbis.
To complete the list of Scorpænoid genera, we have to mention
Tænianotus, Centropogon, Pentaroge, Tetraroge, Prosopodasys,
Aploactis, Trichopleura, Hemitripterus, Minous and Pelor.
Eighth Family—Nandidæ.
Body oblong, compressed, covered with scales. Lateral line
interrupted. Dorsal fin formed by a spinous and soft portion, the
number of spines and rays being nearly equal; anal fin with three
spines, and with the soft portion similar to the soft dorsal. Ventral fins
thoracic, with one spine, and five or four rays. Dentition more or less
complete, but feeble.
This small family consists of two very distinct groups.
A. Plesiopina. Marine fishes of small size, with pseudobranchiæ
and only four ventral rays. Plesiops from the coral-reefs of the Indo-
Pacific, and Trachinops from the coast of New South Wales, belong
to this group.
B. Nandina. Freshwater fishes of small size from the East Indies,
without pseudobranchiæ, and five ventral rays. The genera are
Badis, Nandus, and Catopra.
Ninth Family—Polycentridæ.
Body compressed, deep, scaly. Lateral line none. Dorsal and
anal fins long, both with numerous spines, the spinous portion being
the more developed. Ventrals thoracic, with one spine and five soft
rays. Teeth feeble. Pseudobranchiæ hidden.
Only two genera, each represented by one or two species in the
Atlantic rivers of Tropical America, Polycentrus and Monocirrhus,
belong to this family. They are small insectivorous fishes.
Tenth Family—Teuthididæ.
Body oblong, strongly compressed, covered with very small
scales. Lateral line continuous. Eye lateral, of moderate size. A
single series of cutting incisors in each jaw; palate toothless. One
dorsal fin, the spinous portion being the more developed; anal with
seven spines. Ventral fins thoracic, with an outer and an inner spine,
and with three soft rays between.
This family consists of one very natural genus, Teuthis, readily
recognised by the singular structure of the fins. In all the species the
fin-formula is D. 13/10. A. 7/9. The incisors are small, narrow, and
provided with a serrated edge. The air-bladder is large, and forked
anteriorly as well as posteriorly. Their skeleton shows several
peculiarities: the number of vertebræ is twenty-three, ten of which
belong to the abdominal portion. The abdominal cavity is surrounded
by a complete ring of bones, the second piece of the coracoid being
exceedingly long, and extending along the whole length of the
abdomen, where it is joined to a spinous process of the first
interhæmal. The pubic bones are slender, long, firmly attached to
each other, without leaving a free space between them. They are
fastened by a long process which passes the symphysis of the radii,
and extends on to that of the humeri.
Fig. 182.—Teuthis nebulosa, Indian Ocean.

Thirty species are known, all from the Indo-Pacific; but they do
not extend eastwards beyond 140° long., or to the Sandwich Islands.
They are herbivorous, and do not exceed a length of fifteen inches.
Second Division—Acanthopterygii Beryciformes.

Body compressed, oblong, or elevated; head with large
muciferous cavities which are covered with a thin skin. Ventral fins
thoracic, with one spine and more than five soft rays (in Monocentris
with two only).
One family only belongs to this division.
Family—Berycidæ.
Body short, with ctenoid scales, which are rarely absent. Eyes
lateral, large (except Melamphaës). Cleft of the mouth lateral,
oblique; jaws with villiform teeth; palate generally toothed. Opercular
bones more or less armed. Eight (four) branchiostegals.
This family offers several points of biological interest. All its
members are strictly marine; but only two of the genera are surface-
forms (Holocentrum and Myripristis). All the others descend
considerably below the surface, and even some of the species of
Myripristis habitually inhabit depths of from 50 to 100 fathoms.
Polymixia and Beryx have been found in 345 fathoms. Melamphaës
must live at a still greater depth, as we may infer from the small size
of its eye; this fish is not likely to come nearer to the surface than to
about 200 fathoms. The other genera named have extremely large
eyes, and, therefore, may be assumed to ascend into such
superficial strata as are still lit up by a certain proportion of sun-rays.
The highly-developed apparatus for the secretion of superficial
mucus, with which these fishes are provided, is another sign of their
living at a greater depth than any of the preceding families of
Acanthopterygians. In accordance with this vertical distribution,
Berycoid fishes have a wide horizontal range, and several species
occur at Madeira as well as in Japan.
Fossil Berycoids show a still greater diversity of form than living;
they belong to the oldest Teleosteous fishes, the majority of the
Acanthopterygians found in the chalk being representatives of this
family. Beryx has been found in several species, with other genera
now extinct: Pseudoberyx, with abdominal ventrals, from Mount
Lebanon; Berycopsis, with cycloid scales; Homonotus, Stenostoma,
Sphenocephalus, Acanus, Hoplopteryx, Platycornus, with granular
scales; Podocys, with a dorsal fin extending to the neck; Acrogaster,
Macrolepis, and Rhacolepis, from the chalk of Brazil. Species of
Holocentrum and Myripristis occur in the Monte Bolca formation.
Monocentris.—Snout obtuse, convex, short; eye of moderate
size. Villiform teeth on the palatine bones, but none on the vomer.
Opercular bones without armature. Scales very large, bony, forming a
rigid carapace. Ventrals reduced to a single strong spine and a few
rudimentary rays.
Fig. 183.—Monocentris japonicus.
One species only is known (M. japonicus) from the seas off
Japan and Mauritius. It does not attain to any size, and is not
common.
Hoplostethus.—Snout very short and obtuse; eye large. Villiform
teeth on the palatine bones, but none on the vomer. Operculum
unarmed, a strong spine at the scapulary and the angle of the
præoperculum. Scales ctenoid, of moderate size; abdominal edge
serrated. One dorsal, with six spines; ventrals with six soft rays;
caudal deeply forked.
One species only is known (H. mediterraneus), which occurs in
the Mediterranean, the neighbouring parts of the Atlantic, and in the
sea off Japan.
Trachichthys.—Snout very short and obtuse, with prominent
chin; eye large. Villiform teeth on the palatine bones and on the
vomer. A strong spine at the scapulary and at the angle of the
præoperculum. Scales rather small; abdomen serrated. One dorsal,
with from three to six spines; ventral with six soft rays. Caudal forked.
Four species are known from New Zealand and Madeira.
Anoplogaster is an allied genus from tropical parts of the Atlantic;
it is scaleless.
Beryx.—Snout short, with oblique cleft of the mouth and
prominent chin; eye large. Villiform teeth on the palatine bones and
vomer. Opercular bones serrated; no spine at the angle of the
præoperculum. Scales ctenoid, of moderate or large size. One dorsal,
with several spines; ventrals with seven or more soft rays. Anal with
four spines; caudal forked.
Fig. 184.—Beryx decadactylus.

Five species are known from Madeira, the tropical Atlantic, and
the seas of Japan and Australia. The species figured is B.
decadactylus, common at Madeira, and occurring near Japan at a
depth of 345 fathoms; it attains a length of 1½ feet.
Melamphaes.—Head large and thick, with very thin bones, nearly
all the superficial bones being transformed into wide muciferous
channels. Eye small. Palate toothless; no barbels; opercles not
armed. Scales large, cycloid. One dorsal, with six spines; anal spines
very feeble; caudal forked. Ventrals with seven rays.
Two species, deep-sea fishes of the Atlantic; they are very
scarce, as only three or four specimens have been found hitherto.
Polymixia.—Snout short, with the cleft of the mouth nearly
horizontal; eye large. Two barbels at the throat. Opercles without
armature. Scales of moderate size. One dorsal. Anal with three or four
spines; caudal forked; ventrals with six or seven soft rays.
Three species are known: P. nobilis from Madeira and St. Helena,
P. lowei from Cuba, and P. japonica from Japan; the latter species
from a depth of 345 fathoms. Average size eighteen inches.
Myripristis.—Snout short, with oblique cleft of the mouth and
prominent chin; eye large or very large. Villiform teeth on the vomer
and palatine bones. Opercular bones serrated; præoperculum without
spine. Scales large, ctenoid. Two dorsals, the first with ten or eleven
spines; anal with four spines; caudal forked; ventrals with seven soft
rays. Air-bladder divided by a contraction in two parts, the anterior of
which is connected with the organ of hearing.
Eighteen species from the tropical seas of both hemispheres, the
majority living near the coast at the surface. The coloration is
(principally) red or pink on the back and silvery on the sides. They
attain a length of about 15 inches, and are esteemed as food.
Holocentrum.—Snout somewhat projecting, with the cleft of the
mouth nearly horizontal; eye large. Villiform teeth on the vomer and
palatine bones. Opercular bones and præorbital serrated; operculum
with two spines behind; a large spine at the angle of the
præoperculum. Scales ctenoid, of moderate size. Two dorsals, the
first with twelve spines; anal with four spines, the third being very long
and strong; caudal forked. Ventrals with seven soft rays.
Fig. 185.—Holocentrum unipunctatum, from the South Sea.
About thirty species are known from the tropical seas of both
hemispheres; all are surface fishes, and very common. The young
have the upper part of the snout pointed and elongate, and were
described as a distinct genus (Rhynchichthys). The coloration of the
adult is uniform; red, pink, and silvery prevailing. They attain to a
length of about 15 inches, and are esteemed as food.
Third Division—Acanthopterygii Kurtiformes.

One dorsal fin only, much shorter than the anal, which is long and
many-rayed. No superbranchial organ.
Family—Kurtidæ.
Body compressed, oblong, deep in front, attenuated behind.
Snout short. The spines of the short dorsal are few in number, if
developed. Scales small or of moderate size. Villiform teeth in the
jaws, on the vomer, and palatine bones.
This family consists of a small number of species only, which
form two distinct genera, Pempheris and Kurtus. They are shore
fishes of tropical seas. In both the air-bladder shows some
peculiarity: in Pempheris it is divided into an anterior and posterior
portion; in Kurtus it is lodged within the ribs, which are dilated,
convex, forming rings. The number of vertebræ is respectively
twenty-four and twenty-three.
Fourth Division—Acanthopterygii Polynemiformes.

Two rather short dorsal fins, somewhat remote from each other;
free filaments at the humeral arch, below the pectoral fins;
muciferous canals of the head well developed.
Family—Polynemidæ.
Body oblong, rather compressed, covered with smooth or very
feebly ciliated scales. Lateral line continuous. Snout projecting
beyond the mouth, which is inferior, with lateral cleft. Eye lateral,
large. Villiform teeth in the jaws and on the palate. Ventrals thoracic,
with one spine and five rays.
The fishes of this natural family have been divided, on slight
differences, into three genera—Polynemus, Pentanemus, and
Galeoides. They are found in rather numerous species on the coasts
between the tropics, and the majority enter brackish or even fresh
water. Very characteristic are the free filaments which in this family
are organs of touch; they are inserted on the humeral arch at some
distance from the pectoral fin; but, nevertheless, can be regarded
only as a detached portion of that fin; they can be moved quite
independently of the fin; their number varies from three to fourteen,
according to the species; in some they are exceedingly elongate,
twice as long as the fish, in others they are not longer or even
shorter than the pectoral. It is evident from the whole organisation of
these fishes that they live on muddy bottom or in thick water, such as
is found near the mouths of great rivers. Their eyes are large, but
generally obscured by a filmy skin, so that those feelers must be of
great use to them in finding their way and their food. The
Polynemoids are very useful to man: their flesh is esteemed, and
some of the species are provided with an air-bladder which yields a
good sort of isinglass, and forms an article of trade in the East
Indies. Some of these fishes attain to a length of four feet.
Fig. 186.—Pentanemus quinquarius, from the West Coast of Africa and the
West Indies.
Fifth Division—Acanthopterygii Sciæniformes.

The soft dorsal is more, generally much more, developed than
the spinous, and than the anal. No pectoral filaments; head with the
muciferous canals well developed.
Also this division is composed of one family only.
Family—Sciænidæ.
Body rather elongate, compressed, covered with ctenoid scales.
Lateral line continuous, and frequently extending over the caudal fin.

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Principles of Corporate Finance 12th

Edition Brealey Test Bank

A. A portfolio of Treasury bills

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A. Interest rate risk

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A. Less than 2 percent

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A. Less than 1 percent

A. Less than 2 percent

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A. Less than 2 percent

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A. Portfolio of small U.S. common stocks

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A. Portfolio of U.S. common stocks

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11. A standard error measures

A. nominal annual rate of return on a portfolio.

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A. 8 percent per year

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A. the arithmetic average return minus half the variance.

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Variance = expected value of

A. 64.00 and 8.00 percent

Variance = expected value of

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30. Unique risk is also called

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31. Market risk is also called

I) systematic risk; II) undiversifiable risk; III) firm-specific risk.

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33. As the number of stocks in a portfolio is increased,

A. unique risk decreases and approaches zero.

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38. What range of values can correlation coefficients take?

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43. Beta is a measure of

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