Question 1

Which of the following statements is correct when Treasury bills yield 7.5% and the market risk premium is 9.5%?

Accepted Answer

A) The S&P 500 would be expected to yield about 8.50% 
B) The S&P 500 would be expected to yield about 9.50% 
C) The S&P 500 would be expected to yield about 12.68% 
D) The S&P 500 would be expected to yield about 17.00% 
A) The S&P 500 would be expected to yield about 8.50% 
B) The S&P 500 would be expected to yield about 9.50% 
C) The S&P 500 would be expected to yield about 12.68% 
D) The S&P 500 would be expected to yield about 17.00% D

Question 2

The manager of Star Performer Mutual Fund expects the fund to earn a rate of return of 12% this year.The Beta of the fund's portfolio is.8.If the rate of return available on risk-free assets is 5% and you expect the rate of return on the market portfolio to be 15%, should you invest in Star Performer? Can you create a portfolio with the same risk as Star Performer Mutual Fund, but with a higher expected rate of return? Explain why in reality, a mutual fund must be able to provide an expected rate of return that is higher than that predicted by the security market line in order for investors to consider the fund an attractive investment opportunity.

Accepted Answer

The CAPM implies that the expected rate of return that investors will demand of the portfolio is:
r = rf + b(rm-rf) = 5% + 0.8 × (15%-5%) = 13%
If the portfolio is expected to provide only a 12% rate of return, it is an unattractive investment.The portfolio does not provide an expected return that is sufficiently high relative to its risk.
A portfolio that is invested 80% in a stock index mutual fund (with a Beta of 1.0) and 20% in Treasury bills or a money market mutual fund (with a Beta of zero) would have the same Beta as Star Performer Mutual Fund:
b = (0.80 × 1.0) + (0.20 × 0) = 0.80
However, the portfolio will provide an expected return of:
(0.80 × 15%) + (0.20 × 5%) = 13%
This is better than the expected return for Star Performer Mutual Fund.
The security market line provides a benchmark expected return that an investor can earn by mixing index funds with money market funds.Before an investor places funds with a professional mutual fund manager, the investor must be convinced that the mutual fund can earn an expected return (net of fees) in excess of the expected return available on an equally risky index fund strategy.

Question 3

What return should be expected from investing in the market portfolio that is expected to yield 18% if the investment includes all of the investor's funds plus 30% of additional funds borrowed at the risk-free rate of 6%?

Accepted Answer

A) 18.6% 
B) 19.6% 
C) 21.6% 
D) 24.0% 
A) 18.6% 
B) 19.6% 
C) 21.6% 
D) 24.0% C

Question 4

A project should be accepted if its return plots above the security market line.

Accepted Answer

A) True 
 B)False

Question 5

In theory, the "market portfolio" should contain:

Accepted Answer

A) the securities of the S&P 500. 
B) the securities of the Dow. 
C) the securities of the S&P 500 and Treasury bills. 
D) all risky assets. 
A) the securities of the S&P 500. 
B) the securities of the Dow. 
C) the securities of the S&P 500 and Treasury bills. 
D) all risky assets.

Question 6

According to the CAPM, a stock's expected return is positively related to its Beta.

Accepted Answer

A) True 
 B)False

Question 7

Determine the risk free rate if a company's rate of return is 12%, its Beta is -1.2 and the expected return on the stock market is 14%.

Accepted Answer

A) 11.19% 
B) 12.29% 
C) 13.09% 
D) 14.19% 
A) 11.19% 
B) 12.29% 
C) 13.09% 
D) 14.19%

Question 8

Which of the following is most likely correct for a diversified stock portfolio that exhibits a higher standard deviation than the market index?

Accepted Answer

A) the portfolio contains fairly aggressive stocks 
B) the portfolio's stock plot below the security market line 
C) the portfolio's Beta is less than 1.0 
D) the portfolio contains a significant amount of unique risk 
A) the portfolio contains fairly aggressive stocks 
B) the portfolio's stock plot below the security market line 
C) the portfolio's Beta is less than 1.0 
D) the portfolio contains a significant amount of unique risk

Question 9

What return should be expected from investing in the market portfolio which is expected to yield 18% if the investment includes all of the investor's funds plus 100% of additional funds borrowed at the risk-free rate of 6%?

Accepted Answer

A) 18.6% 
B) 19.6% 
C) 21.6% 
D) 30.0% 
A) 18.6% 
B) 19.6% 
C) 21.6% 
D) 30.0%

Question 10

The CAPM provides a model of determining expected security returns that is:

Accepted Answer

A) precise in its calculations of risk premiums. 
B) imprecise, but generally an acceptable guideline. 
C) excellent for high beta stocks. 
D) excellent for well-diversified portfolios. 
A) precise in its calculations of risk premiums. 
B) imprecise, but generally an acceptable guideline. 
C) excellent for high beta stocks. 
D) excellent for well-diversified portfolios.

Question 11

What will happen to the expected return on a stock with a Beta of 1.5 and a market risk premium of 9% if the Treasury bill yield increases from 3% to 5%?

Accepted Answer

A) the expected return will remain unchanged 
B) the expected return will increase by 1.0% 
C) the expected return will increase by 2.0% 
D) the expected return will increase by 3.0% 
A) the expected return will remain unchanged 
B) the expected return will increase by 1.0% 
C) the expected return will increase by 2.0% 
D) the expected return will increase by 3.0%

Question 12

One of the easiest methods of diversifying away firm-specific risks is to:

Accepted Answer

A) buy stocks with a Beta of 1.0. 
B) build a portfolio with 20-25 individual stocks. 
C) purchase the shares of a mutual fund. 
D) purchase stocks that plot above the security market line. 
A) buy stocks with a Beta of 1.0. 
B) build a portfolio with 20-25 individual stocks. 
C) purchase the shares of a mutual fund. 
D) purchase stocks that plot above the security market line.

Question 13

If a stock's Beta is.8 during a period when the market portfolio was down by 10%, then, a priori, we could expect the return on this individual stock to:

Accepted Answer

A) lose more than 10%. 
B) lose, but less than 10%. 
C) gain more than 10%. 
D) gain, but less than 10%. 
A) lose more than 10%. 
B) lose, but less than 10%. 
C) gain more than 10%. 
D) gain, but less than 10%.

Question 14

Which of the following adjustment techniques would be preferred to account for additional project risk?

Accepted Answer

A) increase the discount rate. 
B) adjust expected cash flows downward. 
C) increase the beta. 
D) adjust the market risk premium. 
A) increase the discount rate. 
B) adjust expected cash flows downward. 
C) increase the beta. 
D) adjust the market risk premium.

Question 15

How can a manager calculate the opportunity cost of capital for a project?

Accepted Answer

The opportunity cost of capital is the r

Question 16

The covariance of a particular stock within a portfolio is -0.5.The variance of the stock is 0.3.Calculate the stock's Beta.

Accepted Answer

A) -1.67 
B) -0.60 
C) 1.67 
D) 0.60 
A) -1.67 
B) -0.60 
C) 1.67 
D) 0.60

Question 17

The basic tenet of the CAPM is that a stock's expected risk premium should be:

Accepted Answer

A) greater than the expected market return. 
B) proportionate to the market risk premium. 
C) proportionate to the stock's Beta. 
D) greater than the risk-free rate of return. 
A) greater than the expected market return. 
B) proportionate to the market risk premium. 
C) proportionate to the stock's Beta. 
D) greater than the risk-free rate of return.

Question 18

If Treasury bills yield 6.0% and the market risk premium is 9.0%, then a portfolio with a Beta of 1.5 would be expected to yield:

Accepted Answer

A) 12.0%. 
B) 17.0%. 
C) 19.5%. 
D) 21.5%. 
A) 12.0%. 
B) 17.0%. 
C) 19.5%. 
D) 21.5%.

Question 19

Beta measures a stock's sensitivity to market risks.

Accepted Answer

A) True 
 B)False

Question 20

If last month a stock with Beta of 1.0 lost two percent while the TSX 300 had a one percent gain, then it appears that:

Accepted Answer

A) beta has been calculated incorrectly. 
B) the S&P 500 cannot represent the market. 
C) betas are long-term "best fit" averages, not short-term stock measures. 
D) the market index had a good month. 
A) beta has been calculated incorrectly. 
B) the S&P 500 cannot represent the market. 
C) betas are long-term "best fit" averages, not short-term stock measures. 
D) the market index had a good month.

Exam 12: Risk, Return, and Capital Budgeting

Which of the following statements is correct when Treasury bills yield 7.5% and the market risk premium is 9.5%?

What return should be expected from investing in the market portfolio that is expected to yield 18% if the investment includes all of the investor's funds plus 30% of additional funds borrowed at the risk-free rate of 6%?

A project should be accepted if its return plots above the security market line.

In theory, the "market portfolio" should contain:

According to the CAPM, a stock's expected return is positively related to its Beta.

Determine the risk free rate if a company's rate of return is 12%, its Beta is -1.2 and the expected return on the stock market is 14%.

Which of the following is most likely correct for a diversified stock portfolio that exhibits a higher standard deviation than the market index?

What return should be expected from investing in the market portfolio which is expected to yield 18% if the investment includes all of the investor's funds plus 100% of additional funds borrowed at the risk-free rate of 6%?

The CAPM provides a model of determining expected security returns that is:

What will happen to the expected return on a stock with a Beta of 1.5 and a market risk premium of 9% if the Treasury bill yield increases from 3% to 5%?

One of the easiest methods of diversifying away firm-specific risks is to:

If a stock's Beta is.8 during a period when the market portfolio was down by 10%, then, a priori, we could expect the return on this individual stock to:

Which of the following adjustment techniques would be preferred to account for additional project risk?

How can a manager calculate the opportunity cost of capital for a project?

The covariance of a particular stock within a portfolio is -0.5.The variance of the stock is 0.3.Calculate the stock's Beta.

The basic tenet of the CAPM is that a stock's expected risk premium should be:

If Treasury bills yield 6.0% and the market risk premium is 9.0%, then a portfolio with a Beta of 1.5 would be expected to yield:

Beta measures a stock's sensitivity to market risks.

If last month a stock with Beta of 1.0 lost two percent while the TSX 300 had a one percent gain, then it appears that:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

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