Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

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. A

Question 3

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% B

Question 4

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 5

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%

Accepted Answer

Expected ReturnA = 6% + 2.0% (9%)
= 24%

Question 6

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 7

What two elements are represented in security returns?

Accepted Answer

A)  a premium for market risk and for unique risk 
B)  a premium for unique risk and a premium for firm-specific risk 
C)  a premium for diversification and a premium for portfolio risk 
D)  a premium for time value of money and a premium for market risk 
A)  a premium for market risk and for unique risk 
B)  a premium for unique risk and a premium for firm-specific risk 
C)  a premium for diversification and a premium for portfolio risk 
D)  a premium for time value of money and a premium for market risk

Question 8

The covariance of a particular stock within a portfolio is -0.5.The variance of the stock is 0.3.Calculate the stock's Beta.

Accepted Answer

A)  -1.67 
B)  -0.60 
C)  1.67 
D)  0.60 
A)  -1.67 
B)  -0.60 
C)  1.67 
D)  0.60

Question 9

If Treasury bills are yielding 10% at a time when the market risk premium is 6%,then the:

Accepted Answer

A)  market portfolio should yield 4%. 
B)  market portfolio should yield 6%. 
C)  market portfolio should yield 16%. 
D)  market portfolio should yield 22%. 
A)  market portfolio should yield 4%. 
B)  market portfolio should yield 6%. 
C)  market portfolio should yield 16%. 
D)  market portfolio should yield 22%.

Question 10

In theory,the "market portfolio" should contain:

Accepted Answer

A)  the securities of the S&P 500. 
B)  the securities of the Dow. 
C)  the securities of the S&P 500 and Treasury bills. 
D)  all risky assets. 
A)  the securities of the S&P 500. 
B)  the securities of the Dow. 
C)  the securities of the S&P 500 and Treasury bills. 
D)  all risky assets.

Question 11

Decreases in the risk-free rate will reduce:

Accepted Answer

A)  the market risk premium. 
B)  the stock's risk premium. 
C)  the stock's Beta. 
D)  the stock's expected return. 
A)  the market risk premium. 
B)  the stock's risk premium. 
C)  the stock's Beta. 
D)  the stock's expected return.

Question 12

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 13

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 14

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 15

The cost of capital for a project depends on the risk of the company.

Accepted Answer

A) True 
 B)False

Question 16

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 17

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 18

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 19

What is the Beta of a portfolio with an expected return of 12% if Treasury bills yield 6% and the market risk premium is 8%?

Accepted Answer

A)  0.50 
B)  0.75 
C)  0.90 
D)  1.50 
A)  0.50 
B)  0.75 
C)  0.90 
D)  1.50

Question 20

What is the standard deviation of the market portfolio if the standard deviation of a diversified portfolio with a Beta of 1.25 equals 20%?

Accepted Answer

A)  16.00% 
B)  18.75% 
C)  25.00% 
D)  32.505% 
A)  16.00% 
B)  18.75% 
C)  25.00% 
D)  32.505%

Exam 12: Risk, Return, and Capital Budgeting

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

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%.

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

A stock's Beta measures the:

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%

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%.

What two elements are represented in security returns?

The covariance of a particular stock within a portfolio is -0.5.The variance of the stock is 0.3.Calculate the stock's Beta.

If Treasury bills are yielding 10% at a time when the market risk premium is 6%,then the:

In theory,the "market portfolio" should contain:

Decreases in the risk-free rate will reduce:

The project cost of capital is:

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

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

The cost of capital for a project depends on the risk of the company.

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%.

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

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

What is the Beta of a portfolio with an expected return of 12% if Treasury bills yield 6% and the market risk premium is 8%?

What is the standard deviation of the market portfolio if the standard deviation of a diversified portfolio with a Beta of 1.25 equals 20%?

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 and Payout 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