Question 1

What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a beta of 1.4 is expected to yield 18%?

Accepted Answer

A)  8.67% 
B)  10.84% 
C)  12.02% 
D) 14.57% 
A)  8.67% 
B)  10.84% 
C)  12.02% 
D) 14.57%

Question 2

The correct opportunity cost for a project is determined to be 15% and the project is expected to generate $1 million in cash flows at the end of the next 4 years after an initial outlay of $3 million. Based on this information, the project would plot:

Accepted Answer

A)  above the security market line. 
B)  below the security market line. 
C)  on the security market line. 
D) on the security market line, with a beta of 1.0. 
A)  above the security market line. 
B)  below the security market line. 
C)  on the security market line. 
D) on the security market line, with a beta of 1.0.

Question 3

If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2%, then its beta equals:

Accepted Answer

A)  1.04. 
B)  1.24. 
C)  1.33. 
D) 1.40. 
A)  1.04. 
B)  1.24. 
C)  1.33. 
D) 1.40.

Question 4

The CAPM provides a model of determining expected security returns that is:

Accepted Answer

A)  precise in its calculations of risk premiums. 
B)  imprecise, but generally an acceptable guideline. 
C)  excellent for high beta stocks. 
D) excellent for all well-diversified portfolios. 
A)  precise in its calculations of risk premiums. 
B)  imprecise, but generally an acceptable guideline. 
C)  excellent for high beta stocks. 
D) excellent for all well-diversified portfolios.

Question 5

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% 
A)  9.2% 
B)  11.2% 
C)  12.4% 
D) 12.8%

Question 6

The security market line shows how the expected rate of return depends on beta.

Accepted Answer

A) True 
 B)False

Question 7

The CAPM states that the expected risk premium on any security equals its beta times the market risk premium.

Accepted Answer

A) True 
 B)False

Question 8

An investor was expecting a return of 18% on his portfolio with a beta of 1.25 before the market risk premium increased from 8 to 10%. Based on this change, what return should he now expect on the portfolio?

Accepted Answer

A)  20.0% 
B)  20.5% 
C)  22.5% 
D) 26.0% 
A)  20.0% 
B)  20.5% 
C)  22.5% 
D) 26.0%

Question 9

In theory, the "market portfolio" should contain:

Accepted Answer

A)  the securities of the S&P 500. 
B)  the securities of the Dow. 
C)  the securities of the S&P 500 and Treasury bills. 
D) all risky assets. 
A)  the securities of the S&P 500. 
B)  the securities of the Dow. 
C)  the securities of the S&P 500 and Treasury bills. 
D) all risky assets.

Question 10

You want to develop a portfolio containing U.S. Treasury bills and two stocks that is equally as risky as the market. The securities will be equally weighted. If the beta of the first stock is 1.23, what does the beta of the second stock have to be?

Accepted Answer

A)  0.77 
B)  1.23 
C)  0.23 
D) 1.77 
A)  0.77 
B)  1.23 
C)  0.23 
D) 1.77

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Which one of these statements is correct?

Accepted Answer

A)  Betas are exact measurements. 
B)  If a stock has a very low beta, it is most apt to maintain that beta in the future. 
C)  The expected future risk premium is easy to accurately determine. 
D) CAPM is widely used as a means of valuing stock. 
A)  Betas are exact measurements. 
B)  If a stock has a very low beta, it is most apt to maintain that beta in the future. 
C)  The expected future risk premium is easy to accurately determine. 
D) CAPM is widely used as a means of valuing stock.

Question 13

Why is it important to make the distinction between company opportunity cost of capital and project opportunity cost of capital when evaluating projects?

Accepted Answer

The company opportunity cost of capital

Question 14

A stock's risk premium is equal to the:

Accepted Answer

A)  expected market return times beta. 
B)  Treasury bill yield plus the expected market return. 
C)  risk-free rate plus the expected market risk premium. 
D) expected market risk premium times beta. 
A)  expected market return times beta. 
B)  Treasury bill yield plus the expected market return. 
C)  risk-free rate plus the expected market risk premium. 
D) expected market risk premium times beta.

Question 15

The project cost of capital is:

Accepted Answer

A)  equal to the company cost of capital. 
B)  less than the company cost of capital. 
C)  greater than the company cost of capital. 
D) not necessarily related to the company cost of capital. 
A)  equal to the company cost of capital. 
B)  less than the company cost of capital. 
C)  greater than the company cost of capital. 
D) not necessarily related to the company cost of capital.

Question 16

What type of risk is properly reflected in a project's discount rate?

Accepted Answer

A)  Market risk 
B)  Unique risk 
C)  Total risk 
D) Diversifiable risk 
A)  Market risk 
B)  Unique risk 
C)  Total risk 
D) Diversifiable risk

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Assume the market rate of return is 12.5% and the risk-free rate is 3.1%. What will be the change in a stock's rate of return if its beta increases from 1.12 to 1.14?

Accepted Answer

A)  0.19% 
B)  0.25% 
C)  1.90% 
D) 2.50% 
A)  0.19% 
B)  0.25% 
C)  1.90% 
D) 2.50%

Question 19

The security market line sets a standard for other investments-investors will be willing to hold other investments only if they offer equally good prospects as shown by the points on the line.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 12: Risk, Return, and Capital Budgeting

What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a beta of 1.4 is expected to yield 18%?

The correct opportunity cost for a project is determined to be 15% and the project is expected to generate $1 million in cash flows at the end of the next 4 years after an initial outlay of $3 million. Based on this information, the project would plot:

If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2%, then its beta equals:

The CAPM provides a model of determining expected security returns that is:

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 security market line shows how the expected rate of return depends on beta.

The CAPM states that the expected risk premium on any security equals its beta times the market risk premium.

An investor was expecting a return of 18% on his portfolio with a beta of 1.25 before the market risk premium increased from 8 to 10%. Based on this change, what return should he now expect on the portfolio?

In theory, the "market portfolio" should contain:

You want to develop a portfolio containing U.S. Treasury bills and two stocks that is equally as risky as the market. The securities will be equally weighted. If the beta of the first stock is 1.23, what does the beta of the second stock have to be?

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

Which one of these statements is correct?

Why is it important to make the distinction between company opportunity cost of capital and project opportunity cost of capital when evaluating projects?

A stock's risk premium is equal to the:

The project cost of capital is:

What type of risk is properly reflected in a project's discount rate?

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

Assume the market rate of return is 12.5% and the risk-free rate is 3.1%. What will be the change in a stock's rate of return if its beta increases from 1.12 to 1.14?

The security market line sets a standard for other investments-investors will be willing to hold other investments only if they offer equally good prospects as shown by the points on the line.

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

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

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Long-Term Financial Planning

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Mergers, Acquisitions, and Corporate Control

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