Question 1

Investors expect aggressive stocks to outperform the market periods of strong economic activity.

Accepted Answer

A) True 
 B)False

Question 2

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 3

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 4

When the overall market experiences a decline of 8%, an investor with a portfolio of aggressive stocks will probably experience:

Accepted Answer

A) Negative portfolio returns of less than 8% 
B) Negative portfolio returns of greater than 8% 
C) Positive portfolio returns of less than 8% 
D) Positive portfolio returns of greater than 8% 
A) Negative portfolio returns of less than 8% 
B) Negative portfolio returns of greater than 8% 
C) Positive portfolio returns of less than 8% 
D) Positive portfolio returns of greater than 8%

Question 5

How can a manager calculate the opportunity cost of capital for a project?

Accepted Answer

The opportunity cost of capital is the r

Question 6

What rate of return should an investor expect for a stock that has a Beta of 0.8 when the market is expected to yield 14% and Treasury bills offer 6%?

Accepted Answer

A) 9.2% 
B) 11.2% 
C) 12.4% 
D) 12.8% r = rf + B(rm - rf)
= 6% +.8(14% - 6%)
= 6% + 6.4% 
A) 9.2% 
B) 11.2% 
C) 12.4% 
D) 12.8% r = rf + B(rm - rf)
= 6% +.8(14% - 6%)
= 6% + 6.4%

Question 7

An analyst predicts two economic states next year.A boom economy has a 70% probability of occurring, while a recession has a 30% probability of occurrence.A portfolio contains two stocks L and U.Stock L has a 40% weighting in the portfolio, while stock U has a 60% weighting.Stock L is estimated to provide a 10% return in a boom economy and a 4% return in a recession.Stock U is estimated to provide a 5% return in a boom economy and a -8% return in a recession.Calculate the portfolio return.

Accepted Answer

The answer of An analyst predicts two economic states next...

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

Calculate the expected rate of return for the following portfolio, based on a Treasury bill yield of 4% and an expected market return of 13%:

Accepted Answer

@#IMG-DLM& Portfolio Beta = (.2 * 1.6) + (.25 *1.2

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 Rp = 5% + 1(8)
= 13%
Rp = 4% +1.5(9)
= 17.5% 
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 Rp = 5% + 1(8)
= 13%
Rp = 4% +1.5(9)
= 17.5%

Question 11

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% Stock C Risk Premium = Beta x (market risk premium)
= 1)3 x (13% - 5%) 
A) 8.0% 
B) 10.4% 
C) 15.4% 
D) 16.9% Stock C Risk Premium = Beta x (market risk premium)
= 1)3 x (13% - 5%)

Question 12

Why is Beta thought to be a more relevant measure of risk than standard deviation for a diversified investor?

Accepted Answer

Standard deviation measures both a stock

Question 13

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 14

Discuss the nature and uses of CAPM, including the method of determining expected returns.

Accepted Answer

The Capital Asset Pricing Model describe

Question 15

Stock A has a current price of $25.00, a Beta of 1.25, and a dividend yield of 6%.If the Treasury bill yield is 5% and the market portfolio is expected to return 14%, what should Stock A sell for at the end of an investor's two year investment horizon?

Accepted Answer

Expected Return = 5% + 1.25 (14% - 5%)
=

Question 16

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% Expected return = 3% + 1.5(9)
= )165
Expected return = 5% + 1.5(9)
= 18.5% 
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% Expected return = 3% + 1.5(9)
= )165
Expected return = 5% + 1.5(9)
= 18.5%

Question 17

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 18

Project cost of capital and company cost of capital are synonymous terms.

Accepted Answer

A) True 
 B)False

Question 19

Defensive stocks typically provide worse returns during periods of economic downturn.

Accepted Answer

A) True 
 B)False

Question 20

If a two-stock portfolio is equally invested in stocks with Betas of 1.4 and 0.7, then the portfolio Beta is:

Accepted Answer

A) 0.70 
B) 1.05 
C) 1.40 
D) 2.10 Portfolio Beta = (W1 x B1) + (W2 x B2)
= ()5 x 1.4) + (.5 x .70) 
A) 0.70 
B) 1.05 
C) 1.40 
D) 2.10 Portfolio Beta = (W1 x B1) + (W2 x B2)
= ()5 x 1.4) + (.5 x .70)

Exam 12: Risk, Return, and Capital Budgeting

Investors expect aggressive stocks to outperform the market periods of strong economic activity.

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:

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:

When the overall market experiences a decline of 8%, an investor with a portfolio of aggressive stocks will probably experience:

How can a manager calculate the opportunity cost of capital for a project?

What rate of return should an investor expect for a stock that has a Beta of 0.8 when the market is expected to yield 14% and Treasury bills offer 6%?

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.

Calculate the expected rate of return for the following portfolio, based on a Treasury bill yield of 4% and an expected market return of 13%:

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%?

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

Why is Beta thought to be a more relevant measure of risk than standard deviation for a diversified investor?

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

Discuss the nature and uses of CAPM, including the method of determining expected returns.

Stock A has a current price of $25.00, a Beta of 1.25, and a dividend yield of 6%.If the Treasury bill yield is 5% and the market portfolio is expected to return 14%, what should Stock A sell for at the end of an investor's two year investment horizon?

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%?

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

Project cost of capital and company cost of capital are synonymous terms.

Defensive stocks typically provide worse returns during periods of economic downturn.

If a two-stock portfolio is equally invested in stocks with Betas of 1.4 and 0.7, then the portfolio Beta is:

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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