Question 1

A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market indicates the:

Accepted Answer

A) high Beta of the stock. 
B) unique risk of the stock. 
C) changes in market risk premium over time. 
D) current underpricing of the stock. 
A) high Beta of the stock. 
B) unique risk of the stock. 
C) changes in market risk premium over time. 
D) current underpricing of the stock.

Question 2

What is the most logical explanation for a + 2.0% return on a stock with a Beta of 1.0 in a month where the market returned + 1.0%?

Accepted Answer

A) the stock is aggressive. 
B) the market is undervalued. 
C) favourable firm-specific news was reported. 
D) the Beta is incorrect. 
A) the stock is aggressive. 
B) the market is undervalued. 
C) favourable firm-specific news was reported. 
D) the Beta is incorrect.

Question 3

If an investor's portfolio is allocated 75% to the market portfolio and 25% to Treasury bills, then the investor should expect to receive:

Accepted Answer

A) the risk-free rate plus 75% of the expected return on the market. 
B) the risk-free rate plus 75% of the expected market risk premium. 
C) 75% of the expected return on the market. 
D) 25% of the risk-free rate plus 75% of the expected return on the market. 
A) the risk-free rate plus 75% of the expected return on the market. 
B) the risk-free rate plus 75% of the expected market risk premium. 
C) 75% of the expected return on the market. 
D) 25% of the risk-free rate plus 75% of the expected return on the market.

Question 4

Investment projects that plot above the security market line would be considered to have:

Accepted Answer

A) A positive NPV. 
B) A negative NPV. 
C) A zero NPV. 
D) an excessively high discount rate. 
A) A positive NPV. 
B) A negative NPV. 
C) A zero NPV. 
D) an excessively high discount rate.

Question 5

A proposed investment must earn at least as much as the ______ if it is to be deemed acceptable.

Accepted Answer

A) company cost of capital. 
B) risk-free rate. 
C) market risk premium. 
D) project cost of capital. 
A) company cost of capital. 
B) risk-free rate. 
C) market risk premium. 
D) project cost of capital.

Question 6

A stock's risk premium is equal to the:

Accepted Answer

A) expected market return times Beta. 
B) treasury bill yield plus expected market return. 
C) risk-free rate plus expected market risk premium. 
D) expected market risk premium times Beta. 
A) expected market return times Beta. 
B) treasury bill yield plus expected market return. 
C) risk-free rate plus expected market risk premium. 
D) expected market risk premium times Beta.

Question 7

Of what strategic use are the terms "defensive" and "aggressive" when applied to individual stocks or portfolios?

Accepted Answer

Defensive stocks are not as sensitive to

Question 8

What is the Beta of a three-stock portfolio including 25% of Stock A with a Beta of.90, 40% Stock B with a Beta of 1.05, and 35% Stock C with a Beta of 1.73?

Accepted Answer

A) 1.05 
B) 1.17 
C) 1.22 
D) 1.25 
A) 1.05 
B) 1.17 
C) 1.22 
D) 1.25

Question 9

Calculate the expected rate of return for the following portfolio, based on a Treasury bill yield of 4% and an expected market return of 13%:
 $$\begin{array} { | c | c | c | } 
\hline \text { Stock } & \text { \% of Portfolio } & \text { Beta } \
\hline \text { A } & 20 \% & 1.6 \
\hline \text { B } & 25 \%  & 1.2 \
\hline \text { C } & 10 \% & 1.0 \
\hline \text { D } & 30 \% & 0.9 \
\hline \text { E } & 15 \% & 0.8 \
\hline
\end{array}$$

Accepted Answer

Portfolio Beta = (.2 × 1.6) + (.25 × 1.2

Question 10

When Treasury bills yield 7.0% and the expected return on the market is 16%, then the risk premium on an asset is equal to:

Accepted Answer

A) 7.0%. 
B) 16.0%. 
C) 9.0% times the asset's Beta. 
D) 8.0% plus the risk-free rate. 
A) 7.0%. 
B) 16.0%. 
C) 9.0% times the asset's Beta. 
D) 8.0% plus the risk-free rate.

Question 11

If the company cost of capital is 20% and a proposed project's cost of capital is 15%, then discounting the projects' cash flows at 20% would:

Accepted Answer

A) determine where the project plots in relation to the security market line. 
B) make the project look more attractive. 
C) be correct from a theoretical perspective. 
D) be incorrect. 
A) determine where the project plots in relation to the security market line. 
B) make the project look more attractive. 
C) be correct from a theoretical perspective. 
D) be incorrect.

Question 12

An investor divides her portfolio into thirds, with one part in Treasury bills, one part in a market index, and one part in a diversified portfolio with Beta of 1.50.What is the Beta of the investor's overall portfolio?

Accepted Answer

A) 0.833 
B) 1.000 
C) 1.167 
D) 1.250 
A) 0.833 
B) 1.000 
C) 1.167 
D) 1.250

Question 13

Determine the market risk premium if the risk free rate is 2%, the company's Beta is 1.3 and its expected return is 11%.

Accepted Answer

A) 9.92% 
B) 8.92% 
C) 7.92% 
D) 6.92% 
A) 9.92% 
B) 8.92% 
C) 7.92% 
D) 6.92%

Question 14

If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2% then its Beta:

Accepted Answer

A) equals 1.40. 
B) equals 1.24. 
C) equals 1.33. 
D) equals 1.41. 
A) equals 1.40. 
B) equals 1.24. 
C) equals 1.33. 
D) equals 1.41.

Question 15

What would you recommend to an investor who is considering an investment that, according to its Beta, plots below the security market line (SML)?

Accepted Answer

A) invest; return is high relative to risk 
B) don't invest; risk is high relative to return 
C) invest; stocks revert to the SML over time 
D) don't invest; stocks below the SML have too much unique risk 
A) invest; return is high relative to risk 
B) don't invest; risk is high relative to return 
C) invest; stocks revert to the SML over time 
D) don't invest; stocks below the SML have too much unique risk

Question 16

A stock's Beta measures the:

Accepted Answer

A) average return on the stock. 
B) variability in the stock's returns compared to that of the market portfolio. 
C) difference between the return on the stock and return on the market portfolio. 
D) market risk premium on the stock. 
A) average return on the stock. 
B) variability in the stock's returns compared to that of the market portfolio. 
C) difference between the return on the stock and return on the market portfolio. 
D) market risk premium on the stock.

Question 17

A project with a higher than average risk offers an expected return of 18%.Which statement is correct if the company's opportunity cost of capital is 12% and the project's opportunity cost of capital is 15%?

Accepted Answer

A) Project NPV is positive; it should be accepted. 
B) Project NPV is negative; it should be rejected. 
C) Project NPV is positive but it should be rejected. 
D) Project NPV is negative but it should be accepted. 
A) Project NPV is positive; it should be accepted. 
B) Project NPV is negative; it should be rejected. 
C) Project NPV is positive but it should be rejected. 
D) Project NPV is negative but it should be accepted.

Question 18

Why would a stock market investor not be concerned with unique risks when calculating expected rates of return?

Accepted Answer

A) there is no method to quantify unique risks. 
B) unique risks are assumed to be diversified away. 
C) unique risks are compensated by the risk-free rate. 
D) Beta includes a component to compensate unique risk. 
A) there is no method to quantify unique risks. 
B) unique risks are assumed to be diversified away. 
C) unique risks are compensated by the risk-free rate. 
D) Beta includes a component to compensate unique risk.

Question 19

Calculate the risk premium on Stock C given the following information: risk-free rate = 5%, market return = 13%, Stock C = 1.3 Beta.

Accepted Answer

A) 8.0% 
B) 10.4% 
C) 15.4% 
D) 16.9% 
A) 8.0% 
B) 10.4% 
C) 15.4% 
D) 16.9%

Question 20

Why is Beta thought to be a more relevant measure of risk than standard deviation for a diversified investor?

Accepted Answer

Standard deviation measures both a stock

Exam 12: Risk, Return, and Capital Budgeting

A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market indicates the:

What is the most logical explanation for a + 2.0% return on a stock with a Beta of 1.0 in a month where the market returned + 1.0%?

If an investor's portfolio is allocated 75% to the market portfolio and 25% to Treasury bills, then the investor should expect to receive:

Investment projects that plot above the security market line would be considered to have:

A proposed investment must earn at least as much as the ______ if it is to be deemed acceptable.

A stock's risk premium is equal to the:

Of what strategic use are the terms "defensive" and "aggressive" when applied to individual stocks or portfolios?

What is the Beta of a three-stock portfolio including 25% of Stock A with a Beta of.90, 40% Stock B with a Beta of 1.05, and 35% Stock C with a Beta of 1.73?

Calculate the expected rate of return for the following portfolio, based on a Treasury bill yield of 4% and an expected market return of 13%: Stock \% of Portfolio Beta A 20\% 1.6 B 25\% 1.2 C 10\% 1.0 D 30\% 0.9 E 15\% 0.8

When Treasury bills yield 7.0% and the expected return on the market is 16%, then the risk premium on an asset is equal to:

If the company cost of capital is 20% and a proposed project's cost of capital is 15%, then discounting the projects' cash flows at 20% would:

An investor divides her portfolio into thirds, with one part in Treasury bills, one part in a market index, and one part in a diversified portfolio with Beta of 1.50.What is the Beta of the investor's overall portfolio?

Determine the market risk premium if the risk free rate is 2%, the company's Beta is 1.3 and its expected return is 11%.

If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2% then its Beta:

What would you recommend to an investor who is considering an investment that, according to its Beta, plots below the security market line (SML)?

A stock's Beta measures the:

A project with a higher than average risk offers an expected return of 18%.Which statement is correct if the company's opportunity cost of capital is 12% and the project's opportunity cost of capital is 15%?

Why would a stock market investor not be concerned with unique risks when calculating expected rates of return?

Calculate the risk premium on Stock C given the following information: risk-free rate = 5%, market return = 13%, Stock C = 1.3 Beta.

Why is Beta thought to be a more relevant measure of risk than standard deviation for a diversified investor?

Goals and Governance of the Firm

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Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

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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

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