Question 1

The sensitivity of a stock's returns to the returns on a market portfolio is referred to as the:

Accepted Answer

A) stock's market risk premium. 
B) Stock's Beta. 
C) market portfolio's systematic risk. 
D) stock's unique risk. 
A) stock's market risk premium. 
B) Stock's Beta. 
C) market portfolio's systematic risk. 
D) stock's unique risk.

Question 2

When the overall market is up by 10%, an investor with a portfolio of defensive stocks will probably have:

Accepted Answer

A) negative portfolio returns less than 10%. 
B) negative portfolio returns greater than 10%. 
C) positive portfolio returns less than 10%. 
D) positive portfolio returns greater than 10%. 
A) negative portfolio returns less than 10%. 
B) negative portfolio returns greater than 10%. 
C) positive portfolio returns less than 10%. 
D) positive portfolio returns greater than 10%.

Question 3

A portfolio of three stocks with total market value of $1,000,000 currently has a Beta of 1.4.In light of an expected market downturn, you wish to reduce the portfolio Beta to no more than 1.0.Two stocks are likely candidates for sale, one with a Beta of 1.8 and a market value of $200,000 and the other with a Beta of 1.5 and a market value of $250,000.Assuming that you could find one appropriate stock to replace these two, what should be its Beta?

Accepted Answer

Bp = @#IMG-DLM& 1.4 = .55 B1-(.2 × 1.8)-

Question 4

Given the CAPM's noted difficulties, which of the following statements may be correct concerning a low price-earnings ratio stock?

Accepted Answer

A) the stock has too much systematic risk. 
B) the stock plots above the security market line. 
C) the stock plots below the security market line. 
D) the stock has a zero Beta. 
A) the stock has too much systematic risk. 
B) the stock plots above the security market line. 
C) the stock plots below the security market line. 
D) the stock has a zero Beta.

Question 5

The line plotted to fit observations of a stock's returns versus the market's returns determines the:

Accepted Answer

A) security market line. 
B) Beta of the stock. 
C) market risk premium. 
D) capital asset pricing model. 
A) security market line. 
B) Beta of the stock. 
C) market risk premium. 
D) capital asset pricing model.

Question 6

What rate of return should an investor expect for a stock that has a Beta of 0.8 when the market is expected to yield 14% and Treasury bills offer 6%?

Accepted Answer

A) 9.2% 
B) 11.2% 
C) 12.4% 
D) 12.8% 
A) 9.2% 
B) 11.2% 
C) 12.4% 
D) 12.8%

Question 7

How is it possible to invest only in the market portfolio yet have a portfolio Beta of 1.5?

Accepted Answer

A) don't diversify away the unique risks. 
B) purchase only aggressive stocks for the portfolio. 
C) purchase only stocks with high levels of systematic risk. 
D) borrow funds to increase your investment. 
A) don't diversify away the unique risks. 
B) purchase only aggressive stocks for the portfolio. 
C) purchase only stocks with high levels of systematic risk. 
D) borrow funds to increase your investment.

Question 8

Stock returns can be explained by the stock's _________ and the stock's __________.

Accepted Answer

A) Beta; unique risk 
B) Beta; market risk 
C) unique risk; firm-specific risk 
D) aggressive risk; defensive risk 
A) Beta; unique risk 
B) Beta; market risk 
C) unique risk; firm-specific risk 
D) aggressive risk; defensive risk

Question 9

If the market portfolio is expected to offer returns of 16%, then what can be said about a portfolio expected to return 13%?

Accepted Answer

A) it plots below the security market line. 
B) part of the portfolio is invested in treasury bills. 
C) the portfolio is not diversified. 
D) the portfolio's Beta is less than 1.0. 
A) it plots below the security market line. 
B) part of the portfolio is invested in treasury bills. 
C) the portfolio is not diversified. 
D) the portfolio's Beta is less than 1.0.

Question 10

Stock A has a current price of $25.00, a Beta of 1.25, and a dividend yield of 6%.If the Treasury bill yield is 5% and the market portfolio is expected to return 14%, what should Stock A sell for at the end of an investor's two year investment horizon?

Accepted Answer

Expected Return = 5% + 1.25 (14% - 5%)
=

Question 11

The security market line plots the historic relationship between returns on an individual stock and the market portfolio.

Accepted Answer

A) True 
 B)False

Question 12

Determine the risk free rate if a company's rate of return is 9%, its Beta is 1.8 and the expected return on the stock market is 10%.

Accepted Answer

A) 11.25% 
B) 12.25% 
C) 13.25% 
D) 14.25% 
A) 11.25% 
B) 12.25% 
C) 13.25% 
D) 14.25%

Question 13

If a security plots below the security market line, it is:

Accepted Answer

A) not rewarding the investor for its unique risk. 
B) underpriced, a situation that should be temporary. 
C) offering too little return to justify its risk. 
D) a defensive security, which expects to offer lower returns. 
A) not rewarding the investor for its unique risk. 
B) underpriced, a situation that should be temporary. 
C) offering too little return to justify its risk. 
D) a defensive security, which expects to offer lower returns.

Question 14

Treasury bills have a Beta of zero.

Accepted Answer

A) True 
 B)False

Question 15

Why do stock market investors appear not to 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 16

Discuss the nature and uses of CAPM, including the method of determining expected returns.

Accepted Answer

The Capital Asset Pricing Model describe

Question 17

Defensive stocks typically provide worse returns during periods of economic downturn.

Accepted Answer

A) True 
 B)False

Question 18

Discuss how Betas are measured and used for individual stocks.

Accepted Answer

To measure Betas, historic returns of th

Question 19

A stock with a Beta greater than 1.0 would be termed:

Accepted Answer

A) an aggressive stock, expected to increase more than the market increases. 
B) a defensive stock, expected to decrease more than the market increases. 
C) an aggressive stock, expected to decrease more than the market increases. 
D) a defensive stock, expected to increase more than the market decreases. 
A) an aggressive stock, expected to increase more than the market increases. 
B) a defensive stock, expected to decrease more than the market increases. 
C) an aggressive stock, expected to decrease more than the market increases. 
D) a defensive stock, expected to increase more than the market decreases.

Question 20

A project is determined to have equal probability of generating $1 million annually or $500,000 annually for four years.The initial outlay is $2 million.The expected return on Treasury bills is 6% and the market risk premium is 8%.What is the highest project Beta that will justify acceptance of the project?

Accepted Answer

A) 0.0 
B) 1.00 
C) 1.56 
D) 2.31 
A) 0.0 
B) 1.00 
C) 1.56 
D) 2.31

Exam 12: Risk, Return, and Capital Budgeting

The sensitivity of a stock's returns to the returns on a market portfolio is referred to as the:

When the overall market is up by 10%, an investor with a portfolio of defensive stocks will probably have:

Given the CAPM's noted difficulties, which of the following statements may be correct concerning a low price-earnings ratio stock?

The line plotted to fit observations of a stock's returns versus the market's returns determines the:

What rate of return should an investor expect for a stock that has a Beta of 0.8 when the market is expected to yield 14% and Treasury bills offer 6%?

How is it possible to invest only in the market portfolio yet have a portfolio Beta of 1.5?

Stock returns can be explained by the stock's _________ and the stock's __________.

If the market portfolio is expected to offer returns of 16%, then what can be said about a portfolio expected to return 13%?

Stock A has a current price of $25.00, a Beta of 1.25, and a dividend yield of 6%.If the Treasury bill yield is 5% and the market portfolio is expected to return 14%, what should Stock A sell for at the end of an investor's two year investment horizon?

The security market line plots the historic relationship between returns on an individual stock and the market portfolio.

Determine the risk free rate if a company's rate of return is 9%, its Beta is 1.8 and the expected return on the stock market is 10%.

If a security plots below the security market line, it is:

Treasury bills have a Beta of zero.

Why do stock market investors appear not to be concerned with unique risks when calculating expected rates of return?

Discuss the nature and uses of CAPM, including the method of determining expected returns.

Defensive stocks typically provide worse returns during periods of economic downturn.

Discuss how Betas are measured and used for individual stocks.

A stock with a Beta greater than 1.0 would be termed:

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

Stock returns can be explained by the stock's _ and the stock's __.