Exam 12: Risk, Return, and Capital Budgeting

For stock A, investors expect the market rate of return to be 14%.If stock A with a Beta of 0.8 has a required rate of return of 12%, does stock B with a Beta of 1.25 and a required rate of return of 11% have a higher or lower expected market rate of return? (show calculations)

If the slope of the line measuring a stock's historic returns against the market's historic returns is positive, then the stock:

Project cost of capital and company cost of capital are synonymous terms.

Determine the expected return of a company's stock given a risk free rate of 7%, an expected market return of 12%, a market risk premium of 5% and a company Beta of 1.5.

If the line measuring a stock's historic returns against the market's historic returns has a slope greater than 1.0, then the:

Determine the covariance, give that a company has a Beta of 1.6 and a variance of 0.6.

Where will the following projects plot in relation to the security market line if the risk-free rate is 6% and the market risk premium is 9%? Which projects should be undertaken? Project Beta IRR A.2.0 25% B.1.6 22% C.1.1 15% D.0.8 11%

The correct opportunity cost for a project is determined to be 15% and the project is expected to generate $1 million in cash flows at the end of the next four years after an initial outlay of $3 million.Based on this information, the project would plot:

Determine the Beta for Stock A based on the following set of returns.Of course, the reliability of a Beta calculated with only four data points may be low.Interpret the Beta that you have calculated. Stock A Returns Market Returns 6.0\% 5.0\% 15.0\% 12.5\% -4.2\% -3.5\% 9.0\% 7.5\%

How can you measure and interpret the market risk, or Beta, of a security?

The average of Beta values for all individual stocks is:

Changing the discount rate is equivalent to adjusting expected cash flows as a method of accounting for risk.

Which of the following statements best explains the fact that cyclical firms tend to have high Betas?

As a project's Beta increases, the project's opportunity cost of capital increases.

An analyst predicts two economic states next year.A boom economy has a 70% probability of occurring, while a recession has a 30% probability of occurrence.A portfolio contains two stocks L and U.Stock L has a 40% weighting in the portfolio, while stock U has a 60% weighting.Stock L is estimated to provide a 10% return in a boom economy and a 4% return in a recession.Stock U is estimated to provide a 5% return in a boom economy and a -8% return in a recession.Calculate the portfolio return.