Question 1

Zacher Co.'s stock has a beta of 1.40,the risk-free rate is 4.25%,and the market risk premium is 5.50%.What is the firm's required rate of return?

Accepted Answer

A)  11.36% 
B)  11.65% 
C)  11.95% 
D)  12.25% 
E)  12.55% 
A)  11.36% 
B)  11.65% 
C)  11.95% 
D)  12.25% 
E)  12.55%

Question 2

Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks.The portfolio's beta is 1.25.Now suppose Stan decided to sell one of his stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35.What would the portfolio's new beta be?

Accepted Answer

A)  1.17 
B)  1.23 
C)  1.29 
D)  1.36 
E)  1.43 
A)  1.17 
B)  1.23 
C)  1.29 
D)  1.36 
E)  1.43

Question 3

Suppose that Federal Reserve actions have caused an increase in the risk-free rate,rRF.Meanwhile,investors are afraid of a recession,so the market risk premium, (rM -rRF),has increased.Under these conditions,with other things held constant,which of the following statements is most correct?

Accepted Answer

A)  The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. 
B)  Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices. 
C)  The prices of all stocks would decline, but the decline would be greatest for high-beta stocks. 
D)  The prices of all stocks would increase, but the increase would be greatest for high-beta stocks. 
E)  The required return on all stocks would increase by the same amount. 
A)  The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. 
B)  Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices. 
C)  The prices of all stocks would decline, but the decline would be greatest for high-beta stocks. 
D)  The prices of all stocks would increase, but the increase would be greatest for high-beta stocks. 
E)  The required return on all stocks would increase by the same amount.

Question 4

If the price of money (e.g.,interest rates and equity capital costs)increases due to an increase in anticipated inflation,the risk-free rate will also increase.If there is no change in investors' risk aversion,then the market risk premium (rM -rRF)will remain constant.Also,if there is no change in stocks' betas,then the required rate of return on each stock as measured by the CAPM will increase by the same amount as the increase in expected inflation.

Accepted Answer

A) True 
 B)False

Question 5

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations. 
B)  A two-stock portfolio will always have a lower beta than a one-stock portfolio. 
C)  If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio. 
D)  A stock with an above-average standard deviation must also have an above-average beta. 
E)  A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio. 
A)  A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations. 
B)  A two-stock portfolio will always have a lower beta than a one-stock portfolio. 
C)  If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio. 
D)  A stock with an above-average standard deviation must also have an above-average beta. 
E)  A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

Zacher Co.'s stock has a beta of 1.40,the risk-free rate is 4.25%,and the market risk premium is 5.50%.What is the firm's required rate of return?

Suppose that Federal Reserve actions have caused an increase in the risk-free rate,r_RF.Meanwhile,investors are afraid of a recession,so the market risk premium, (r_M -r_RF),has increased.Under these conditions,with other things held constant,which of the following statements is most correct?

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Which of the following statements is CORRECT?

An Overview of Financial Management and the Financial Environment

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, bond Valuation, and Interest Rates

Valuation of Stocks and Corporations

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

Filters

Exam 6: Risk and Return

Zacher Co.'s stock has a beta of 1.40,the risk-free rate is 4.25%,and the market risk premium is 5.50%.What is the firm's required rate of return?

Suppose that Federal Reserve actions have caused an increase in the risk-free rate,rRF.Meanwhile,investors are afraid of a recession,so the market risk premium, (rM -rRF),has increased.Under these conditions,with other things held constant,which of the following statements is most correct?

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Which of the following statements is CORRECT?

An Overview of Financial Management and the Financial Environment

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, bond Valuation, and Interest Rates

Valuation of Stocks and Corporations

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Agency Conflicts and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

Filters

Suppose that Federal Reserve actions have caused an increase in the risk-free rate,r_RF.Meanwhile,investors are afraid of a recession,so the market risk premium, (r_M -r_RF),has increased.Under these conditions,with other things held constant,which of the following statements is most correct?