Question 1

If a stock's beta is 0.8 during a period when the market portfolio was down by 10%, then, a priori, we could expect 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 2

If a company with a low credit rating invests in a low-risk project, it should discount the cash flows at a relatively high cost of capital.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

Which one 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 6

If a low-risk company invests in a high-risk project, those cash flows should be discounted at a high cost of capital.

Accepted Answer

A) True 
 B)False

Question 7

A project with higher than average risk offers an expected return of 14%. Which statement is correct if the company's opportunity cost of capital is 12% and the project's opportunity cost of capital is 15%?

Accepted Answer

A)  Project NPV is positive; it should be accepted. 
B)  Project NPV is negative; it should be rejected. 
C)  Project NPV is positive but it should be rejected. 
D) Project NPV is negative but it should be accepted. 
A)  Project NPV is positive; it should be accepted. 
B)  Project NPV is negative; it should be rejected. 
C)  Project NPV is positive but it should be rejected. 
D) Project NPV is negative but it should be accepted.

Question 8

One of the easiest methods of diversifying away firm-specific risks is to:

Accepted Answer

A)  buy only stocks with a beta of 1.0. 
B)  build a portfolio with 40 to 55 individual stocks. 
C)  purchase the shares of a mutual fund. 
D) purchase stocks that plot above the security market line. 
A)  buy only stocks with a beta of 1.0. 
B)  build a portfolio with 40 to 55 individual stocks. 
C)  purchase the shares of a mutual fund. 
D) purchase stocks that plot above the security market line.

Question 9

When Treasury bills yield 7% and the expected return on the market is 16%, then the risk premium on an asset is equal to:

Accepted Answer

A)  9%. 
B)  16%. 
C)  9% times the asset's beta. 
D) 9% plus the risk-free rate. 
A)  9%. 
B)  16%. 
C)  9% times the asset's beta. 
D) 9% plus the risk-free rate.

Question 10

What is the beta of a 3-stock portfolio including 25% of stock A with a beta of 0.90, 40% of stock B with a beta of 1.05, and 35% of stock C with a beta of 1.73?

Accepted Answer

A)  1.0 
B)  1.17 
C)  1.22 
D) 1.25 
A)  1.0 
B)  1.17 
C)  1.22 
D) 1.25

Question 11

If the slope of the line measuring a stock's historic returns against the market's historic returns is positive, then the stock:

Accepted Answer

A)  has a beta greater than 1.0. 
B)  has no unique risk. 
C)  has a positive beta. 
D) plots above the security market line. 
A)  has a beta greater than 1.0. 
B)  has no unique risk. 
C)  has a positive beta. 
D) plots above the security market line.

Question 12

A stock has a beta of 1.4 and an expected return of 13.53%. What is the risk-free rate if the market rate of return is 10.6%?

Accepted Answer

A)  2.825% 
B)  3.250% 
C)  3.275% 
D) 3.415% 
A)  2.825% 
B)  3.250% 
C)  3.275% 
D) 3.415%

Question 13

Why do stock market investors seem to ignore unique risks when calculating expected rates of return?

Accepted Answer

A)  There is no method for quantifying 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 for unique risk. 
A)  There is no method for quantifying 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 for unique risk.

Question 14

How are the terms "defensive" and "aggressive" applied to individual stocks or portfolios?

Accepted Answer

Defensive stocks are less sensitive to c

Question 15

Diversification decreases the variability of both unique and market risk.

Accepted Answer

A) True 
 B)False

Question 16

What happens to the 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 14.0%. 
B)  It increases from 13 to 17.5%. 
C)  It increases from 12 to 12.5%. 
D) It increases from 13 to 13.5%. 
A)  It increases from 12 to 14.0%. 
B)  It increases from 13 to 17.5%. 
C)  It increases from 12 to 12.5%. 
D) It increases from 13 to 13.5%.

Question 17

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?

Accepted Answer

The answer of Where will the following projects plot in...

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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)  0.83 
B)  1.00 
C)  1.17 
D) 1.25 
A)  0.83 
B)  1.00 
C)  1.17 
D) 1.25

Question 20

The stock of Newmont Mining, the world's largest gold producer, has above-average volatility but a relatively low beta.

Accepted Answer

A) True 
 B)False

Exam 12: Risk, Return, and Capital Budgeting

If a stock's beta is 0.8 during a period when the market portfolio was down by 10%, then, a priori, we could expect this individual stock to:

If a company with a low credit rating invests in a low-risk project, it should discount the cash flows at a relatively high cost of capital.

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

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

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

If a low-risk company invests in a high-risk project, those cash flows should be discounted at a high cost of capital.

A project with higher than average risk offers an expected return of 14%. Which statement is correct if the company's opportunity cost of capital is 12% and the project's opportunity cost of capital is 15%?

One of the easiest methods of diversifying away firm-specific risks is to:

When Treasury bills yield 7% and the expected return on the market is 16%, then the risk premium on an asset is equal to:

What is the beta of a 3-stock portfolio including 25% of stock A with a beta of 0.90, 40% of stock B with a beta of 1.05, and 35% of stock C with a beta of 1.73?

If the slope of the line measuring a stock's historic returns against the market's historic returns is positive, then the stock:

A stock has a beta of 1.4 and an expected return of 13.53%. What is the risk-free rate if the market rate of return is 10.6%?

Why do stock market investors seem to ignore unique risks when calculating expected rates of return?

How are the terms "defensive" and "aggressive" applied to individual stocks or portfolios?

Diversification decreases the variability of both unique and market risk.

What happens to the 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%?

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

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?

The stock of Newmont Mining, the world's largest gold producer, has above-average volatility but a relatively low beta.

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Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

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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

How Corporations Raise Venture Capital and Issue Securities

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