Question 1

Which of the following statements is more likely to be correct concerning the statement, "Stock A has a higher expected return than Stock B"?

Accepted Answer

A) Stock A has more unique risk 
B) Stock B plots below the security market line 
C) Stock B is a cyclical stock 
D) Stock A has a higher Beta 
A) Stock A has more unique risk 
B) Stock B plots below the security market line 
C) Stock B is a cyclical stock 
D) Stock A has a higher Beta

Question 2

A project should be accepted if its return plots above the security market line.

Accepted Answer

A) True 
 B)False

Question 3

What return would be expected by an investor whose portfolio was 25% market portfolio and 75% Treasury bills if the risk-free rate was 7% and the market risk premium was 8%?

Accepted Answer

A) 8.00% 
B) 9.00% 
C) 10.75% 
D) 13.00% Expected return on market = rf + market risk premium
= 7% + 8%
= 15%
Rf = (.25 x .07) + (.75 x 15)
= 1)75 + 11.25 
A) 8.00% 
B) 9.00% 
C) 10.75% 
D) 13.00% Expected return on market = rf + market risk premium
= 7% + 8%
= 15%
Rf = (.25 x .07) + (.75 x 15)
= 1)75 + 11.25

Question 4

Discuss how Betas are measured and used for individual stocks.

Accepted Answer

To measure Betas, historic returns of th

Question 5

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 6

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 7

If the line measuring a stock's historic returns against the market's historic returns has a slope greater than 1.0, then the:

Accepted Answer

A) Stock is currently underpriced 
B) Market risk premium is increasing 
C) Stock has a significant amount of unique risk 
D) Stock has a Beta exceeding 1.0 
A) Stock is currently underpriced 
B) Market risk premium is increasing 
C) Stock has a significant amount of unique risk 
D) Stock has a Beta exceeding 1.0

Question 8

A project is determined to have equal probability of generating $1 million annually or $500,000 annually for four years.The initial outlay is $2 million.The expected return on Treasury bills is 6% and the market risk premium is 8%.What is the highest project Beta that will justify acceptance of the project?

Accepted Answer

A) 0.0 
B) 1.00 
C) 1.56 
D) 2.31 Expected cash flow = (1 million x .5) + (500,000 x .5)
= 750,000
$2 million = 750,000 
A) 0.0 
B) 1.00 
C) 1.56 
D) 2.31 Expected cash flow = (1 million x .5) + (500,000 x .5)
= 750,000
$2 million = 750,000

Question 9

Based on the following information, make an estimate of the stock's Beta: Month 1 = Stock +1.5%, Market +1.1%; Month 2 = Stock +2.0%, Market +1.4%; Month 3 = Stock -2.5%, Market -2.0%.

Accepted Answer

A) Beta is greater than 1.0 
B) Beta is less than 1.0 
C) Beta equals 1.0 
D) There is no consistent pattern of returns 
A) Beta is greater than 1.0 
B) Beta is less than 1.0 
C) Beta equals 1.0 
D) There is no consistent pattern of returns

Question 10

Macro events only are reflected in the performance of the market portfolio because:

Accepted Answer

A) The market portfolio has no individual firms 
B) Only macro events are tracked by economists 
C) Unique risks have been diversified away 
D) Firm-specific events would be too numerous to list 
A) The market portfolio has no individual firms 
B) Only macro events are tracked by economists 
C) Unique risks have been diversified away 
D) Firm-specific events would be too numerous to list

Question 11

Suppose you believe that the Beta of the firm is .4.How much is the firm worth if the risk-free rate is 5% and the expected rate of return on the market portfolio is 15%?

Accepted Answer

The expected cash flows from t

Question 12

Diversification decreases the variability of both unique and market risk.

Accepted Answer

A) True 
 B)False

Question 13

Calculate the expected returns of each company based on the given data provided:

Accepted Answer

The answer of Calculate the expected returns of each company...

Question 14

If a security plots below the security market line, it is:

Accepted Answer

A) Not rewarding the investor for its unique risk 
B) Underpriced, a situation that should be temporary 
C) Offering too little return to justify its risk 
D) A defensive security, which expects to offer lower returns 
A) Not rewarding the investor for its unique risk 
B) Underpriced, a situation that should be temporary 
C) Offering too little return to justify its risk 
D) A defensive security, which expects to offer lower returns

Question 15

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 16

As a project's Beta increases, the project's opportunity cost of capital increases.

Accepted Answer

A) True 
 B)False

Question 17

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 18

87.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 19

A stock's Beta measures the:

Accepted Answer

A) Average return on the stock 
B) Variability in the stock's returns compared to that of the market portfolio 
C) Difference between the return on the stock and return on the market portfolio 
D) Market risk premium on the stock 
A) Average return on the stock 
B) Variability in the stock's returns compared to that of the market portfolio 
C) Difference between the return on the stock and return on the market portfolio 
D) Market risk premium on the stock

Question 20

A proposed investment must earn at least as much as the ______ if it is to be deemed acceptable.

Accepted Answer

A) Company cost of capital 
B) Risk-free rate 
C) Market risk premium 
D) Project cost of capital 
A) Company cost of capital 
B) Risk-free rate 
C) Market risk premium 
D) Project cost of capital

Exam 12: Risk, Return, and Capital Budgeting

Which of the following statements is more likely to be correct concerning the statement, "Stock A has a higher expected return than Stock B"?

A project should be accepted if its return plots above the security market line.

What return would be expected by an investor whose portfolio was 25% market portfolio and 75% Treasury bills if the risk-free rate was 7% and the market risk premium was 8%?

Discuss how Betas are measured and used for individual stocks.

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

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?

If the line measuring a stock's historic returns against the market's historic returns has a slope greater than 1.0, then the:

Based on the following information, make an estimate of the stock's Beta: Month 1 = Stock +1.5%, Market +1.1%; Month 2 = Stock +2.0%, Market +1.4%; Month 3 = Stock -2.5%, Market -2.0%.

Macro events only are reflected in the performance of the market portfolio because:

Suppose you believe that the Beta of the firm is .4.How much is the firm worth if the risk-free rate is 5% and the expected rate of return on the market portfolio is 15%?

Diversification decreases the variability of both unique and market risk.

Calculate the expected returns of each company based on the given data provided:

If a security plots below the security market line, it is:

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

As a project's Beta increases, the project's opportunity cost of capital increases.

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

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

A stock's Beta measures the:

A proposed investment must earn at least as much as the ______ if it is to be deemed acceptable.

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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