Question 1

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 C

Question 2

Given the CAPM's noted difficulties, which of the following statements may be correct concerning a low price-earnings ratio stock?

Accepted Answer

A) The stock has too much systematic risk 
B) The stock plots above the security market line 
C) The stock plots below the security market line 
D) The stock has a zero Beta 
A) The stock has too much systematic risk 
B) The stock plots above the security market line 
C) The stock plots below the security market line 
D) The stock has a zero Beta B

Question 3

What is the relationship between the market risk of a security and the rate of return that investors demand of that security?

Accepted Answer

The extra that investors require for taking risk is known as the risk premium.The market risk premium-that is, the risk premium on the market portfolio-averaged 7% between 1926 and 2004.The capital asset pricing model states that the expected risk premium of an investment should be proportional to both its Beta and the market risk premium.The expected rate of return from any investment is equal to the risk-free interest rate plus the risk premium, so the CAPM boils down to r=r_f + $\beta$(r_m-r_f)

Question 4

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 5

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 6

If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.

Accepted Answer

We take an average of returns

Question 7

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 8

The covariance of a particular stock within a portfolio is 0.35.The variance of the stock is 0.42.Calculate the stock's Beta.

Accepted Answer

A) 0.833 
B) 1.20 
C) 1.77 
D) 1.50 Using the following formula: 
A) 0.833 
B) 1.20 
C) 1.77 
D) 1.50 Using the following formula:

Question 9

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 10

If an investor's portfolio is allocated 75% to the market portfolio and 25% to Treasury bills, then the investor should expect to receive:

Accepted Answer

A) The risk-free rate plus 75% of the expected return on the market 
B) The risk-free rate plus 75% of the expected market risk premium 
C) 75% of the expected return on the market 
D) 25% of the risk-free rate plus 75% of the expected return on the market 
A) The risk-free rate plus 75% of the expected return on the market 
B) The risk-free rate plus 75% of the expected market risk premium 
C) 75% of the expected return on the market 
D) 25% of the risk-free rate plus 75% of the expected return on the market

Question 11

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) Rsk-free rate of return 
D) Project Beta times market risk premium 
A) Project cost of capital 
B) Company cost of capital 
C) Rsk-free rate of return 
D) Project Beta times market risk premium

Question 12

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 13

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 14

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 15

A portfolio of three stocks with total market value of $1,000,000 currently has a Beta of 1.4.In light of an expected market downturn, you wish to reduce the portfolio Beta to no more than 1.0.Two stocks are likely candidates for sale, one with a Beta of 1.8 and a market value of $200,000 and the other with a Beta of 1.5 and a market value of $250,000.Assuming that you could find one appropriate stock to replace these two, what should be its Beta?

Accepted Answer

B_p = @#IMG-DLM& 1.4 = .55 B₁-(.2 x 1.8)-(.

Question 16

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 17

Which of the following statements is correct when Treasury bills yield 7.5% and the market risk premium is 9.5%?

Accepted Answer

A) The S&P 500 would be expected to yield about 8.50% 
B) The S&P 500 would be expected to yield about 9.50% 
C) The S&P 500 would be expected to yield about 12.68% 
D) The S&P 500 would be expected to yield about 17.00% 
A) The S&P 500 would be expected to yield about 8.50% 
B) The S&P 500 would be expected to yield about 9.50% 
C) The S&P 500 would be expected to yield about 12.68% 
D) The S&P 500 would be expected to yield about 17.00%

Question 18

The line plotted to fit observations of a stock's returns versus the market's returns determines the:

Accepted Answer

A) Security market line 
B) Beta of the stock 
C) Market risk premium 
D) Capital asset pricing model 
A) Security market line 
B) Beta of the stock 
C) Market risk premium 
D) Capital asset pricing model

Question 19

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 20

Which of the following adjustment techniques would be preferred to account for additional project risk?

Accepted Answer

A) Increase the discount rate 
B) Adjust expected cash flows downward 
C) Increase the Beta 
D) Adjust the market risk premium 
A) Increase the discount rate 
B) Adjust expected cash flows downward 
C) Increase the Beta 
D) Adjust the market risk premium

Exam 12: Risk, Return, and Capital Budgeting

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

Given the CAPM's noted difficulties, which of the following statements may be correct concerning a low price-earnings ratio stock?

What is the relationship between the market risk of a security and the rate of return that investors demand of that security?

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

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%.

If each scenario is equally likely, find the expected rate of return on the market portfolio and on each stock.

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:

The covariance of a particular stock within a portfolio is 0.35.The variance of the stock is 0.42.Calculate the stock's Beta.

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

If an investor's portfolio is allocated 75% to the market portfolio and 25% to Treasury bills, then the investor should expect to receive:

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

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

The project cost of capital is:

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%

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

Which of the following statements is correct when Treasury bills yield 7.5% and the market risk premium is 9.5%?

The line plotted to fit observations of a stock's returns versus the market's returns determines the:

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?

Which of the following adjustment techniques would be preferred to account for additional project risk?

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 Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

Filters

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