Question 1

Why is it important to make the distinction between company opportunity cost of capital and project opportunity cost of capital when evaluating projects?

Accepted Answer

The company opportunity cost of capital

Question 2

What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a Beta of 1.4 is expected to yield 18%?

Accepted Answer

A) 8.6% 
B) 10.8% 
C) 12.0% 
D) 14.6% 
A) 8.6% 
B) 10.8% 
C) 12.0% 
D) 14.6%

Question 3

What is the relationship between the market risk of a security and the rate of return that investors demand of that security?

Accepted Answer

The extra that investors require for tak

Question 4

Macro events only are reflected in the performance of the market portfolio because:

Accepted Answer

A) the market portfolio has no individual firms. 
B) only macro events are tracked by economists. 
C) unique risks have been diversified away. 
D) firm-specific events would be too numerous to list. 
A) the market portfolio has no individual firms. 
B) only macro events are tracked by economists. 
C) unique risks have been diversified away. 
D) firm-specific events would be too numerous to list.

Question 5

Investing borrowed funds in a stock portfolio will:

Accepted Answer

A) increase the Beta of the portfolio. 
B) decrease the volatility of the portfolio. 
C) decrease the expected return on the portfolio. 
D) increase the market risk premium. 
A) increase the Beta of the portfolio. 
B) decrease the volatility of the portfolio. 
C) decrease the expected return on the portfolio. 
D) increase the market risk premium.

Question 6

If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest in:

Accepted Answer

A) high Beta stocks. 
B) low Beta stocks. 
C) stocks with large amounts of unique risk. 
D) stocks that plot below the security market line. 
A) high Beta stocks. 
B) low Beta stocks. 
C) stocks with large amounts of unique risk. 
D) stocks that plot below the security market line.

Question 7

What can you assume about an investor whose diversified portfolio of stocks yielded 25% when the market portfolio yielded 15%?

Accepted Answer

A) treasury bills are offering a 10% yield 
B) the portfolio Beta is greater than 1.0 
C) the portfolio Beta equals 1.67 
D) the investor's portfolio contains many defensive stocks 
A) treasury bills are offering a 10% yield 
B) the portfolio Beta is greater than 1.0 
C) the portfolio Beta equals 1.67 
D) the investor's portfolio contains many defensive stocks

Question 8

What happens to expected portfolio return if the portfolio Beta increases from 1.0 to 1.5, the risk-free rate decreases from 5% to 4%, and the market risk premium increases from 8% to 9%?

Accepted Answer

A) it increases from 12% to 14%. 
B) it increases from 13% to 17.5%. 
C) it increases from 14% to 21%. 
D) it remains unchanged. 
A) it increases from 12% to 14%. 
B) it increases from 13% to 17.5%. 
C) it increases from 14% to 21%. 
D) it remains unchanged.

Question 9

If changing discount rates from the company cost of capital to the project cost of capital changes NPV from negative to positive, then the project should use the:

Accepted Answer

A) company cost of capital and be accepted. 
B) company cost of capital and be rejected. 
C) project cost of capital and be accepted. 
D) project cost of capital and be rejected. 
A) company cost of capital and be accepted. 
B) company cost of capital and be rejected. 
C) project cost of capital and be accepted. 
D) project cost of capital and be rejected.

Question 10

Based on the following information, make an estimate of the stock's Beta: Month 1 = Stock + 1.5%, Market + 1.1%; Month 2 = Stock + 2.0%, Market + 1.4%; Month 3 = Stock -2.5%, Market -2.0%.

Accepted Answer

A) Beta is greater than 1.0 
B) Beta is less than 1.0 
C) Beta equals 1.0 
D) there is no consistent pattern of returns. 
A) Beta is greater than 1.0 
B) Beta is less than 1.0 
C) Beta equals 1.0 
D) there is no consistent pattern of returns.

Question 11

If a two-stock portfolio is equally invested in stocks with Betas of 1.4 and 0.7, then the portfolio Beta is:

Accepted Answer

A) 0.70. 
B) 1.05. 
C) 1.40. 
D) 2.10 
A) 0.70. 
B) 1.05. 
C) 1.40. 
D) 2.10

Question 12

Which of the following portfolios might be expected to exhibit less unique risk?

Accepted Answer

A) Five different stocks; portfolio Beta = .8 
B) Three different stocks; portfolio Beta = 1.2 
C) Ten different stocks; portfolio Beta = 1.0 
D) Twelve different stocks; portfolio Beta unknown 
A) Five different stocks; portfolio Beta = .8 
B) Three different stocks; portfolio Beta = 1.2 
C) Ten different stocks; portfolio Beta = 1.0 
D) Twelve different stocks; portfolio Beta unknown

Question 13

What return would be expected by an investor whose portfolio was 25% market portfolio and 75% Treasury bills if the risk-free rate was 7% and the market risk premium was 8%?

Accepted Answer

A) 8.00% 
B) 9.00% 
C) 10.75% 
D) 13.00% 
A) 8.00% 
B) 9.00% 
C) 10.75% 
D) 13.00%

Question 14

The average Beta of individual stocks in the market portfolio is:

Accepted Answer

A) one. 
B) zero. 
C) midway between zero and one. 
D) cannot be calculated without knowing the stocks in the portfolio. 
A) one. 
B) zero. 
C) midway between zero and one. 
D) cannot be calculated without knowing the stocks in the portfolio.

Question 15

The project cost of capital is:

Accepted Answer

A) equal to the company cost of capital. 
B) less than the company cost of capital. 
C) greater than the company cost of capital. 
D) not necessarily related to the company cost of capital. 
A) equal to the company cost of capital. 
B) less than the company cost of capital. 
C) greater than the company cost of capital. 
D) not necessarily related to the company cost of capital.

Question 16

An investor was expecting an 18% return on his portfolio with Beta of 1.25 before the market risk premium increased from 8% to 10%.Based on this change, what return will now be expected on the portfolio?

Accepted Answer

A) 20.0% 
B) 20.5% 
C) 22.5% 
D) 26.0% 
A) 20.0% 
B) 20.5% 
C) 22.5% 
D) 26.0%

Question 17

The slope of the regression line that exhibits the past relationship between a stock's return and the market's return is the:

Accepted Answer

A) security market line. 
B) stock's Beta. 
C) market risk premium. 
D) stock's unique risk. 
A) security market line. 
B) stock's Beta. 
C) market risk premium. 
D) stock's unique risk.

Question 18

When the overall market experiences a decline of 8%, an investor with a portfolio of aggressive stocks will probably experience:

Accepted Answer

A) negative portfolio returns of less than 8%. 
B) negative portfolio returns of greater than 8%. 
C) positive portfolio returns of less than 8%. 
D) positive portfolio returns of greater than 8%. 
A) negative portfolio returns of less than 8%. 
B) negative portfolio returns of greater than 8%. 
C) positive portfolio returns of less than 8%. 
D) positive portfolio returns of greater than 8%.

Question 19

The slope of the security market line equals:

Accepted Answer

A) one. 
B) beta. 
C) the market risk premium. 
D) the expected return on the market portfolio. 
A) one. 
B) beta. 
C) the market risk premium. 
D) the expected return on the market portfolio.

Question 20

If the plotting of a portfolio's returns against returns on the market index produces a tight pattern, then:

Accepted Answer

A) the portfolio appears to be well diversified. 
B) the portfolio has a Beta of 1.0. 
C) the portfolio has very little systematic risk. 
D) the portfolio has a very low market risk premium. 
A) the portfolio appears to be well diversified. 
B) the portfolio has a Beta of 1.0. 
C) the portfolio has very little systematic risk. 
D) the portfolio has a very low market risk premium.

Exam 12: Risk, Return, and Capital Budgeting

Why is it important to make the distinction between company opportunity cost of capital and project opportunity cost of capital when evaluating projects?

What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a Beta of 1.4 is expected to yield 18%?

What is the relationship between the market risk of a security and the rate of return that investors demand of that security?

Macro events only are reflected in the performance of the market portfolio because:

Investing borrowed funds in a stock portfolio will:

If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest in:

What can you assume about an investor whose diversified portfolio of stocks yielded 25% when the market portfolio yielded 15%?

What happens to expected portfolio return if the portfolio Beta increases from 1.0 to 1.5, the risk-free rate decreases from 5% to 4%, and the market risk premium increases from 8% to 9%?

If changing discount rates from the company cost of capital to the project cost of capital changes NPV from negative to positive, then the project should use the:

Based on the following information, make an estimate of the stock's Beta: Month 1 = Stock + 1.5%, Market + 1.1%; Month 2 = Stock + 2.0%, Market + 1.4%; Month 3 = Stock -2.5%, Market -2.0%.

If a two-stock portfolio is equally invested in stocks with Betas of 1.4 and 0.7, then the portfolio Beta is:

Which of the following portfolios might be expected to exhibit less unique risk?

What return would be expected by an investor whose portfolio was 25% market portfolio and 75% Treasury bills if the risk-free rate was 7% and the market risk premium was 8%?

The average Beta of individual stocks in the market portfolio is:

The project cost of capital is:

An investor was expecting an 18% return on his portfolio with Beta of 1.25 before the market risk premium increased from 8% to 10%.Based on this change, what return will now be expected on the portfolio?

The slope of the regression line that exhibits the past relationship between a stock's return and the market's return is the:

When the overall market experiences a decline of 8%, an investor with a portfolio of aggressive stocks will probably experience:

The slope of the security market line equals:

If the plotting of a portfolio's returns against returns on the market index produces a tight pattern, then:

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

Options

Risk Management

Filters