Question 1

If Treasury bills yield 6.0% and the market risk premium is 9.0%,then a portfolio with a Beta of 1.5 would be expected to yield:

Accepted Answer

A)  12.0%. 
B)  17.0%. 
C)  19.5%. 
D)  21.5%. 
A)  12.0%. 
B)  17.0%. 
C)  19.5%. 
D)  21.5%.

Question 2

Determine the risk free rate if a company's rate of return is 12%,its Beta is -1.2 and the expected return on the stock market is 14%.

Accepted Answer

A)  11.19% 
B)  12.29% 
C)  13.09% 
D)  14.19% 
A)  11.19% 
B)  12.29% 
C)  13.09% 
D)  14.19%

Question 3

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

Accepted Answer

A)  their earnings are not stable 
B)  their stocks are overpriced 
C)  their earnings are less diversifiable 
D)  their profit margins are small 
A)  their earnings are not stable 
B)  their stocks are overpriced 
C)  their earnings are less diversifiable 
D)  their profit margins are small

Question 4

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 5

Investing borrowed funds in a stock portfolio will:

Accepted Answer

A)  increase the Beta of the portfolio. 
B)  decrease the volatility of the portfolio. 
C)  decrease the expected return on the portfolio. 
D)  increase the market risk premium. 
A)  increase the Beta of the portfolio. 
B)  decrease the volatility of the portfolio. 
C)  decrease the expected return on the portfolio. 
D)  increase the market risk premium.

Question 6

Diversification decreases the variability of both unique and market risk.

Accepted Answer

A) True 
 B)False

Question 7

What will happen to the expected return on a stock with a Beta of 1.5 and a market risk premium of 9% if the Treasury bill yield increases from 3% to 5%?

Accepted Answer

A)  the expected return will remain unchanged 
B)  the expected return will increase by 1.0% 
C)  the expected return will increase by 2.0% 
D)  the expected return will increase by 3.0% 
A)  the expected return will remain unchanged 
B)  the expected return will increase by 1.0% 
C)  the expected return will increase by 2.0% 
D)  the expected return will increase by 3.0%

Question 8

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 9

The minimum acceptable expected rate of return on a project of a specific risk is the:

Accepted Answer

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

Question 10

What happens to expected portfolio return if the portfolio Beta increases from 1.0 to 1.5,the risk-free rate decreases from 5% to 4%,and the market risk premium increases from 8% to 9%?

Accepted Answer

A)  it increases from 12% to 14%. 
B)  it increases from 13% to 17.5%. 
C)  it increases from 14% to 21%. 
D)  it remains unchanged. 
A)  it increases from 12% to 14%. 
B)  it increases from 13% to 17.5%. 
C)  it increases from 14% to 21%. 
D)  it remains unchanged.

Question 11

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 12

What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a Beta of 1.4 is expected to yield 18%?

Accepted Answer

A)  8.6% 
B)  10.8% 
C)  12.0% 
D)  14.6% 
A)  8.6% 
B)  10.8% 
C)  12.0% 
D)  14.6%

Question 13

Which of the following portfolios might be expected to exhibit less unique risk?

Accepted Answer

A)  Five different stocks; portfolio Beta = .8 
B)  Three different stocks; portfolio Beta = 1.2 
C)  Ten different stocks; portfolio Beta = 1.0 
D)  Twelve different stocks; portfolio Beta unknown 
A)  Five different stocks; portfolio Beta = .8 
B)  Three different stocks; portfolio Beta = 1.2 
C)  Ten different stocks; portfolio Beta = 1.0 
D)  Twelve different stocks; portfolio Beta unknown

Question 14

A major benefit of investing in mutual funds is:

Accepted Answer

A)  reducing the Beta of the investment portfolio. 
B)  increasing the Beta of the investment portfolio. 
C)  low cost reduction of exposure to unique risks. 
D)  the elimination of market risk. 
A)  reducing the Beta of the investment portfolio. 
B)  increasing the Beta of the investment portfolio. 
C)  low cost reduction of exposure to unique risks. 
D)  the elimination of market risk.

Question 15

What return should be expected from investing in the market portfolio which is expected to yield 18% if the investment includes all of the investor's funds plus 100% of additional funds borrowed at the risk-free rate of 6%?

Accepted Answer

A)  18.6% 
B)  19.6% 
C)  21.6% 
D)  30.0% 
A)  18.6% 
B)  19.6% 
C)  21.6% 
D)  30.0%

Question 16

What should be the Beta of a replacement stock if an investor wishes to achieve a portfolio Beta of 1.0 by replacing Stock C in the following equally weighted portfolio: Stock A = .9 Beta; Stock B = 1.1 Beta; Stock C = 1.35 Beta?

Accepted Answer

A)  0.93 Beta 
B)  1.00 Beta 
C)  1.08 Beta 
D)  1.15 Beta 
A)  0.93 Beta 
B)  1.00 Beta 
C)  1.08 Beta 
D)  1.15 Beta

Question 17

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

Accepted Answer

A)  0.96 
B)  1.16 
C)  1.36 
D)  1.56 
A)  0.96 
B)  1.16 
C)  1.36 
D)  1.56

Question 18

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 19

The average of Beta values for all individual stocks is:

Accepted Answer

A)  greater than 1.0; most stocks are aggressive. 
B)  less than 1.0; most stocks are defensive. 
C)  unknown; Betas are continually changing. 
D)  exactly 1.0; these stocks represent the market. 
A)  greater than 1.0; most stocks are aggressive. 
B)  less than 1.0; most stocks are defensive. 
C)  unknown; Betas are continually changing. 
D)  exactly 1.0; these stocks represent the market.

Question 20

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.

Exam 12: Risk, Return, and Capital Budgeting

If Treasury bills yield 6.0% and the market risk premium is 9.0%,then a portfolio with a Beta of 1.5 would be expected to yield:

Determine the risk free rate if a company's rate of return is 12%,its Beta is -1.2 and the expected return on the stock market is 14%.

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

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:

Investing borrowed funds in a stock portfolio will:

Diversification decreases the variability of both unique and market risk.

What will happen to the expected return on a stock with a Beta of 1.5 and a market risk premium of 9% if the Treasury bill yield increases from 3% to 5%?

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

The minimum acceptable expected rate of return on a project of a specific risk is the:

What happens to expected portfolio return if the portfolio Beta increases from 1.0 to 1.5,the risk-free rate decreases from 5% to 4%,and the market risk premium increases from 8% to 9%?

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

What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a Beta of 1.4 is expected to yield 18%?

Which of the following portfolios might be expected to exhibit less unique risk?

A major benefit of investing in mutual funds is:

What return should be expected from investing in the market portfolio which is expected to yield 18% if the investment includes all of the investor's funds plus 100% of additional funds borrowed at the risk-free rate of 6%?

What should be the Beta of a replacement stock if an investor wishes to achieve a portfolio Beta of 1.0 by replacing Stock C in the following equally weighted portfolio: Stock A = .9 Beta; Stock B = 1.1 Beta; Stock C = 1.35 Beta?

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

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

The average of Beta values for all individual stocks is:

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%?

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