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

Question 2

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 New Portfolio Beta = (.333 x .9) + (.333 x 1.1) + (.333 x Beta 
C) 
1)0 = .3 + .366 +.333 x Beta C
-)334 = .333 x Beta C 
A) 0.93 Beta 
B) 1.00 Beta 
C) 1.08 Beta 
D) 1.15 Beta New Portfolio Beta = (.333 x .9) + (.333 x 1.1) + (.333 x Beta 
C) 
1)0 = .3 + .366 +.333 x Beta C
-)334 = .333 x Beta C

Question 3

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 4

Why would a stock market investor not be concerned with unique risks when calculating expected rates of return?

Accepted Answer

A) There is no method to quantify unique risks. 
B) Unique risks are assumed to be diversified away. 
C) Unique risks are compensated by the risk-free rate. 
D) Beta includes a component to compensate unique risk. 
A) There is no method to quantify unique risks. 
B) Unique risks are assumed to be diversified away. 
C) Unique risks are compensated by the risk-free rate. 
D) Beta includes a component to compensate unique risk.

Question 5

Beta measures a stock's sensitivity to market risks.

Accepted Answer

A) True 
 B)False

Question 6

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 7

Treasury bills have a Beta of zero.

Accepted Answer

A) True 
 B)False

Question 8

A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market indicates the:

Accepted Answer

A) High Beta of the stock 
B) Unique risk of the stock 
C) Changes in market risk premium over time 
D) Current underpricing of the stock 
A) High Beta of the stock 
B) Unique risk of the stock 
C) Changes in market risk premium over time 
D) Current underpricing of the stock

Question 9

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% Old: 18% = rf + 1.25(8%)
= rf + 10.0%
8)0% = rf
New: Expected return = 8.0% + 1.25(10%)
= 8)0% + 12.5% 
A) 20.0% 
B) 20.5% 
C) 22.5% 
D) 26.0% Old: 18% = rf + 1.25(8%)
= rf + 10.0%
8)0% = rf
New: Expected return = 8.0% + 1.25(10%)
= 8)0% + 12.5%

Question 10

If the plotting of a portfolio's returns against returns on the market index produces a tight pattern, then:

Accepted Answer

A) The portfolio appears to be well diversified 
B) The portfolio has a Beta of 1.0 
C) The portfolio has very little systematic risk 
D) The portfolio has a very low market risk premium 
A) The portfolio appears to be well diversified 
B) The portfolio has a Beta of 1.0 
C) The portfolio has very little systematic risk 
D) The portfolio has a very low market risk premium

Question 11

What will happen to a stock that offers a lower risk premium than predicted by the CAPM?

Accepted Answer

A) Its Beta will increase 
B) Its Beta will decrease 
C) Its price will decrease until yield is increased 
D) Its price will increase until the yield is reduced 
A) Its Beta will increase 
B) Its Beta will decrease 
C) Its price will decrease until yield is increased 
D) Its price will increase until the yield is reduced

Question 12

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 13

88.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 14

Determine the expected return of a company's stock given a risk free rate of 7%, an expected market return of 12%, a market risk premium of 5% and a company Beta of 1.5.

Accepted Answer

A) 115 
B) 125 
C) 135 
D) 145 
A) 115 
B) 125 
C) 135 
D) 145

Question 15

If last month a stock with Beta of 1.0 lost two percent while the TSX 300 had a one percent gain, then it appears that:

Accepted Answer

A) Beta has been calculated incorrectly 
B) The S&P 500 cannot represent the market 
C) Betas are long-term "best fit" averages, not short-term stock measures 
D) The market index had a good month 
A) Beta has been calculated incorrectly 
B) The S&P 500 cannot represent the market 
C) Betas are long-term "best fit" averages, not short-term stock measures 
D) The market index had a good month

Question 16

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 17

Given recent evidence concerning the CAPM, which of the following portfolios might be expected to plot above the security market line?

Accepted Answer

A) A portfolio of cyclical stocks 
B) A portfolio that includes borrowed funds 
C) A portfolio of smaller companies 
D) A portfolio split between Treasury bills and the market index 
A) A portfolio of cyclical stocks 
B) A portfolio that includes borrowed funds 
C) A portfolio of smaller companies 
D) A portfolio split between Treasury bills and the market index

Question 18

According to the CAPM, a stock's expected return is positively related to its Beta.

Accepted Answer

A) True 
 B)False

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

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

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.

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?

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%?

Why would a stock market investor not be concerned with unique risks when calculating expected rates of return?

Beta measures a stock's sensitivity to market risks.

In theory, the "market portfolio" should contain:

Treasury bills have a Beta of zero.

A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market indicates the:

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?

If the plotting of a portfolio's returns against returns on the market index produces a tight pattern, then:

What will happen to a stock that offers a lower risk premium than predicted by the CAPM?

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

88.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%.

Determine the expected return of a company's stock given a risk free rate of 7%, an expected market return of 12%, a market risk premium of 5% and a company Beta of 1.5.

If last month a stock with Beta of 1.0 lost two percent while the TSX 300 had a one percent gain, then it appears that:

The Beta of an investment in Treasury bills is:

Given recent evidence concerning the CAPM, which of the following portfolios might be expected to plot above the security market line?

According to the CAPM, a stock's expected return is positively related to its Beta.

The average of Beta values for all individual stocks is:

Decreases in the risk-free rate will reduce:

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

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