Question 1

Which one of the following adjustment techniques would be preferred to account for additional project risk?

Accepted Answer

A)  Increase the discount rate 
B)  Adjust expected cash flows downward 
C)  Increase the beta 
D) Adjust the market risk premium 
A)  Increase the discount rate 
B)  Adjust expected cash flows downward 
C)  Increase the beta 
D) Adjust the market risk premium

Question 2

The project cost of capital depends on the use to which that capital is put. Therefore, it depends on both the risk of the project and also on the risk of the company.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A)  Invest; The return is high relative to the risk. 
B)  Don't invest; The risk is high relative to the return. 
C)  Invest; All stocks revert to the SML over time. 
D) Don't invest; All stocks below the SML are low-growth stocks. 
A)  Invest; The return is high relative to the risk. 
B)  Don't invest; The risk is high relative to the return. 
C)  Invest; All stocks revert to the SML over time. 
D) Don't invest; All stocks below the SML are low-growth stocks.

Question 4

The line plotted to fit observations of a stock's returns versus the market's returns determines the:

Accepted Answer

A)  security market line. 
B)  beta of the stock. 
C)  market risk premium. 
D) capital asset pricing model. 
A)  security market line. 
B)  beta of the stock. 
C)  market risk premium. 
D) capital asset pricing model.

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A)  the market portfolio contains only risk-free securities. 
B)  only macro events are tracked by economists. 
C)  the unique risks have been diversified away. 
D) the firm-specific events would be too numerous to quantify. 
A)  the market portfolio contains only risk-free securities. 
B)  only macro events are tracked by economists. 
C)  the unique risks have been diversified away. 
D) the firm-specific events would be too numerous to quantify.

Question 7

The slope of the security market line equals:

Accepted Answer

A)  one. 
B)  beta. 
C)  the market risk premium. 
D) the expected return on the market portfolio. 
A)  one. 
B)  beta. 
C)  the market risk premium. 
D) the expected return on the market portfolio.

Question 8

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 return. 
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 return. 
C)  proportionate to the stock's beta. 
D) greater than the risk-free rate of return.

Question 9

An investor was expecting a return of 14.7% on her portfolio with a beta of 1.13 before the market risk premium decreased from 8 to 7%. Based on this change, what return should she now expect on the portfolio?

Accepted Answer

A)  13.57% 
B)  13.89% 
C)  14.67% 
D) 15.87% 
A)  13.57% 
B)  13.89% 
C)  14.67% 
D) 15.87%

Question 10

In practice, the market portfolio is often represented by:

Accepted Answer

A)  a portfolio of U.S. Treasury securities. 
B)  a diversified stock market index. 
C)  an investor's mutual fund portfolio. 
D) the historic record of stock market returns. 
A)  a portfolio of U.S. Treasury securities. 
B)  a diversified stock market index. 
C)  an investor's mutual fund portfolio. 
D) the historic record of stock market returns.

Question 11

A project has an assigned beta of 0.97, the risk-free rate is 4.1%, and the market risk premium is 8.1%. What is the project's expected rate of return?

Accepted Answer

A)  7.98% 
B)  11.96% 
C)  8.35% 
D) 11.83% 
A)  7.98% 
B)  11.96% 
C)  8.35% 
D) 11.83%

Question 12

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

Accepted Answer

The opportunity cost of capital is the r

Question 13

Assuming positive returns on Treasury bills, 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 14

The required risk premium for any given investment is defined by the security market line.

Accepted Answer

A) True 
 B)False

Question 15

Beta measures a stock's sensitivity to market risks.

Accepted Answer

A) True 
 B)False

Question 16

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 the 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 the return on the market portfolio. 
D) market risk premium on the stock.

Question 17

If the market portfolio is expected to return 16%, then a portfolio that is expected to return 13%:

Accepted Answer

A)  plots above the security market line. 
B)  plots to the right of the market on an SML graph. 
C)  is not diversified. 
D) has a beta that is less than 1.0. 
A)  plots above the security market line. 
B)  plots to the right of the market on an SML graph. 
C)  is not diversified. 
D) has a beta that is less than 1.0.

Question 18

The return on a security includes premiums for:

Accepted Answer

A)  market risk and unique risk. 
B)  unique risk and firm-specific risk. 
C)  diversification and portfolio risk. 
D) time value of money and market risk. 
A)  market risk and unique risk. 
B)  unique risk and firm-specific risk. 
C)  diversification and portfolio risk. 
D) time value of money and market risk.

Question 19

The slope of the regression line that exhibits the past relationship between a stock's returns and the market's returns is the:

Accepted Answer

A)  market's beta. 
B)  stock's beta. 
C)  market risk premium. 
D) stock's standard deviation. 
A)  market's beta. 
B)  stock's beta. 
C)  market risk premium. 
D) stock's standard deviation.

Question 20

A project has an assigned beta of 1.24, the risk-free rate is 3.8%, and the market rate of return is 9.2%. What is the project's expected rate of return?

Accepted Answer

A)  15.21% 
B)  11.41% 
C)  10.50% 
D) 14.61% 
A)  15.21% 
B)  11.41% 
C)  10.50% 
D) 14.61%

Exam 12: Risk, Return, and Capital Budgeting

Which one of the following adjustment techniques would be preferred to account for additional project risk?

The project cost of capital depends on the use to which that capital is put. Therefore, it depends on both the risk of the project and also on the risk of the company.

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

The line plotted to fit observations of a stock's returns versus the market's returns determines the:

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

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

The slope of the security market line equals:

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

An investor was expecting a return of 14.7% on her portfolio with a beta of 1.13 before the market risk premium decreased from 8 to 7%. Based on this change, what return should she now expect on the portfolio?

In practice, the market portfolio is often represented by:

A project has an assigned beta of 0.97, the risk-free rate is 4.1%, and the market risk premium is 8.1%. What is the project's expected rate of return?

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

Assuming positive returns on Treasury bills, what can you assume about an investor whose diversified portfolio of stocks yielded 25% when the market portfolio yielded 15%?

The required risk premium for any given investment is defined by the security market line.

Beta measures a stock's sensitivity to market risks.

A stock's beta measures the:

If the market portfolio is expected to return 16%, then a portfolio that is expected to return 13%:

The return on a security includes premiums for:

The slope of the regression line that exhibits the past relationship between a stock's returns and the market's returns is the:

A project has an assigned beta of 1.24, the risk-free rate is 3.8%, and the market rate of return is 9.2%. What is the project's expected rate of return?

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

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

Filters