Question 1

What can you assume about an investor whose diversified portfolio of stocks yielded 25% when the market portfolio yielded 15%?

Accepted Answer

A)  treasury bills are offering a 10% yield 
B)  the portfolio Beta is greater than 1.0 
C)  the portfolio Beta equals 1.67 
D)  the investor's portfolio contains many defensive stocks 
A)  treasury bills are offering a 10% yield 
B)  the portfolio Beta is greater than 1.0 
C)  the portfolio Beta equals 1.67 
D)  the investor's portfolio contains many defensive stocks

Question 2

Determine the market risk premium if the risk free rate is 4%,the company's Beta is .85 and its expected return is 15%.

Accepted Answer

A)  11.64% 
B)  12.94% 
C)  13.54% 
D)  14.44% 
A)  11.64% 
B)  12.94% 
C)  13.54% 
D)  14.44%

Question 3

What return should be expected from investing in the market portfolio that is expected to yield 18% if the investment includes all of the investor's funds plus 30% of additional funds borrowed at the risk-free rate of 6%?

Accepted Answer

A)  18.6% 
B)  19.6% 
C)  21.6% 
D)  24.0% 
A)  18.6% 
B)  19.6% 
C)  21.6% 
D)  24.0%

Question 4

Why is it important to make the distinction between company opportunity cost of capital and project opportunity cost of capital when evaluating projects?

Accepted Answer

The company opportunity cost of capital

Question 5

An investor was expecting an 18% return on his portfolio with Beta of 1.25 before the market risk premium increased from 8% to 10%.Based on this change,what return will now be expected on the portfolio?

Accepted Answer

A)  20.0% 
B)  20.5% 
C)  22.5% 
D)  26.0% 
A)  20.0% 
B)  20.5% 
C)  22.5% 
D)  26.0%

Question 6

The basic tenet of the CAPM is that a stock's expected risk premium should be:

Accepted Answer

A)  greater than the expected market return. 
B)  proportionate to the market risk premium. 
C)  proportionate to the stock's Beta. 
D)  greater than the risk-free rate of return. 
A)  greater than the expected market return. 
B)  proportionate to the market risk premium. 
C)  proportionate to the stock's Beta. 
D)  greater than the risk-free rate of return.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Treasury bills have a Beta of zero.

Accepted Answer

A) True 
 B)False

Question 9

An investor divides her portfolio into thirds,with one part in Treasury bills,one part in a market index,and one part in a diversified portfolio with Beta of 1.50.What is the Beta of the investor's overall portfolio?

Accepted Answer

A)  0.833 
B)  1.000 
C)  1.167 
D)  1.250 
A)  0.833 
B)  1.000 
C)  1.167 
D)  1.250

Question 10

Discuss how Betas are measured and used for individual stocks.

Accepted Answer

To measure Betas,historic returns of the

Question 11

Investors expect the market rate of return this year to be 14%.A stock with a Beta of .8 has an expected rate of return on the market portfolio is 11%,is a security with a Beta of 1.25 and an expected rate of return of 11% overpriced or underpriced?

Accepted Answer

Required return = risk-free rate + Beta

Question 12

If you were willing to bet that the overall stock market was heading up on a sustained basis,it would be logical to invest in:

Accepted Answer

A)  high Beta stocks. 
B)  low Beta stocks. 
C)  stocks with large amounts of unique risk. 
D)  stocks that plot below the security market line. 
A)  high Beta stocks. 
B)  low Beta stocks. 
C)  stocks with large amounts of unique risk. 
D)  stocks that plot below the security market line.

Question 13

The Beta of an investment in Treasury bills is:

Accepted Answer

A)  0.0. 
B)  0.5. 
C)  1.0. 
D)  meaningless; only common stocks have Betas. 
A)  0.0. 
B)  0.5. 
C)  1.0. 
D)  meaningless; only common stocks have Betas.

Question 14

If a stock's Beta is .8 during a period when the market portfolio was down by 10%,then,a priori,we could expect the return on this individual stock to:

Accepted Answer

A)  lose more than 10%. 
B)  lose, but less than 10%. 
C)  gain more than 10%. 
D)  gain, but less than 10%. 
A)  lose more than 10%. 
B)  lose, but less than 10%. 
C)  gain more than 10%. 
D)  gain, but less than 10%.

Question 15

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 16

What effect might operating leverage be expected to have on a project's Beta?

Accepted Answer

A)  Beta will increase. 
B)  Beta will decrease. 
C)  Beta will not be affected. 
D)  The effect depends on the market risk premium. 
A)  Beta will increase. 
B)  Beta will decrease. 
C)  Beta will not be affected. 
D)  The effect depends on the market risk premium.

Question 17

Of what strategic use are the terms "defensive" and "aggressive" when applied to individual stocks or portfolios?

Accepted Answer

Defensive stocks are not as sensitive to

Question 18

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

Accepted Answer

The contribution of a security to the ri

Question 19

The manager of StarPerformer Mutual Fund expects the fund to earn a rate of return of 12% this year.The Beta of the fund's portfolio is .8.If the rate of return available on risk-free assets is 5% and you expect the rate of return on the market portfolio to be 15%,should you invest in StarPerformer? Can you create a portfolio with the same risk as StarPerformer Mutual Fund,but with a higher expected rate of return? Explain why in reality,a mutual fund must be able to provide an expected rate of return that is higher than that predicted by the security market line in order for investors to consider the fund an attractive investment opportunity.

Accepted Answer

The CAPM implies that the expected rate

Question 20

In practice,the market portfolio is often represented by:

Accepted Answer

A)  a portfolio of Canadian Treasury securities. 
B)  a diversified stock market index. 
C)  an investor's mutual fund portfolio. 
D)  the historic record of stock market returns. 
A)  a portfolio of Canadian Treasury securities. 
B)  a diversified stock market index. 
C)  an investor's mutual fund portfolio. 
D)  the historic record of stock market returns.

Exam 12: Risk, Return, and Capital Budgeting

What can you assume about an investor whose diversified portfolio of stocks yielded 25% when the market portfolio yielded 15%?

Determine the market risk premium if the risk free rate is 4%,the company's Beta is .85 and its expected return is 15%.

What return should be expected from investing in the market portfolio that is expected to yield 18% if the investment includes all of the investor's funds plus 30% of additional funds borrowed at the risk-free rate of 6%?

Why is it important to make the distinction between company opportunity cost of capital and project opportunity cost of capital when evaluating projects?

An investor was expecting an 18% return on his portfolio with Beta of 1.25 before the market risk premium increased from 8% to 10%.Based on this change,what return will now be expected on the portfolio?

The basic tenet of the CAPM is that a stock's expected risk premium should be:

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

Treasury bills have a Beta of zero.

An investor divides her portfolio into thirds,with one part in Treasury bills,one part in a market index,and one part in a diversified portfolio with Beta of 1.50.What is the Beta of the investor's overall portfolio?

Discuss how Betas are measured and used for individual stocks.

Investors expect the market rate of return this year to be 14%.A stock with a Beta of .8 has an expected rate of return on the market portfolio is 11%,is a security with a Beta of 1.25 and an expected rate of return of 11% overpriced or underpriced?

If you were willing to bet that the overall stock market was heading up on a sustained basis,it would be logical to invest in:

The Beta of an investment in Treasury bills is:

If a stock's Beta is .8 during a period when the market portfolio was down by 10%,then,a priori,we could expect the return on this individual stock to:

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

What effect might operating leverage be expected to have on a project's Beta?

Of what strategic use are the terms "defensive" and "aggressive" when applied to individual stocks or portfolios?

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

In practice,the market portfolio is often represented by:

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

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