Exam 12: Risk, Return, and Capital Budgeting

Based on the period 1926-2013, value stocks have:

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:

The company cost of capital may be an inappropriate discount rate for a capital budgeting proposal if:

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

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:

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

Discuss the capital asset pricing model in general, the CAPM method of determining expected returns, and how the SML can be used to help predict the movement of a stock's price.

If changing discount rates from the company cost of capital to the project cost of capital changes NPV from negative to positive, then the project should use the:

What is the standard deviation of the market portfolio if the standard deviation of a fully diversified portfolio with a beta of 1.25 equals 20%?

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

When the overall market is up by 10%, investors with portfolios of defensive stocks will probably have:

An investor prefers to invest in companies that have high fixed costs. How can this be accomplished if the investor also requires a portfolio beta of 1.0?

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

The manager of Star Performer Mutual Fund expects the fund to earn a rate of return of 12% this year. The beta of the fund's portfolio is 0.8. 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 Star Performer? Can you create a portfolio with the same risk as Star Performer 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.

The capital asset pricing model (CAPM) assumes that the stock market is dominated by well-diversified investors who are concerned only with market risk.

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 100% of additional funds borrowed at the risk-free rate of 6%?

According to the capital asset pricing model, the expected rates of return for all securities and all portfolios lie on the capital market line.

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

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

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