Question 1

If an investor's portfolio is allocated 75% to the market portfolio and 25% to Treasury bills, then the investor should expect to receive:

Accepted Answer

A)  the risk-free rate plus 75% of the expected return on the market. 
B)  the risk-free rate plus 75% of the expected market risk premium. 
C)  75% of the expected return on the market. 
D) 25% of the risk-free rate plus 75% of the expected market risk premium. 
A)  the risk-free rate plus 75% of the expected return on the market. 
B)  the risk-free rate plus 75% of the expected market risk premium. 
C)  75% of the expected return on the market. 
D) 25% of the risk-free rate plus 75% of the expected market risk premium.

Question 2

Which one of the following is most likely correct for a diversified stock portfolio that exhibits a higher standard deviation than the market index?

Accepted Answer

A)  The portfolio contains fairly aggressive stocks. 
B)  The portfolio plots below the security market line. 
C)  The portfolio's beta is less than 1.0. 
D) The portfolio contains a significant amount of unique risk. 
A)  The portfolio contains fairly aggressive stocks. 
B)  The portfolio plots below the security market line. 
C)  The portfolio's beta is less than 1.0. 
D) The portfolio contains a significant amount of unique risk.

Question 3

Which one 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 4

Based on your analysis, you believe that Alpha stock which has a beta of 1.32 is going to yield 14.05% this coming year. The market is expected to yield 11.4% and T-bills are yielding 3.8%. According to CAPM, which one of these statements is correct given this information?

Accepted Answer

A)  The stock is currently underpriced. 
B)  The stock plots below the security market line. 
C)  The risk premium on the stock is too low given the stock's beta. 
D) The stock plots to the left of the market on a security market line graph. 
A)  The stock is currently underpriced. 
B)  The stock plots below the security market line. 
C)  The risk premium on the stock is too low given the stock's beta. 
D) The stock plots to the left of the market on a security market line graph.

Question 5

Defensive stocks typically provide better returns during periods of economic downturn since they are not very sensitive to market fluctuations.

Accepted Answer

A) True 
 B)False

Question 6

What should be the beta of a replacement stock if an investor wishes to achieve a portfolio beta of 1.2 by replacing stock C in the following equally weighted portfolio: stock A = 0.9 beta; stock B = 1.1 beta; stock C = 1.35 beta?

Accepted Answer

A)  0.7 
B)  1.6 
C)  1.2 
D) 1.8 
A)  0.7 
B)  1.6 
C)  1.2 
D) 1.8

Question 7

What is the beta of a U.S. Treasury bill?

Accepted Answer

A)  1.0 
B)  -1.0 
C)  0 
D) Unknown 
A)  1.0 
B)  -1.0 
C)  0 
D) Unknown

Question 8

The project cost of capital depends on how the capital is used.

Accepted Answer

A) True 
 B)False

Question 9

Assume last month a stock with a beta of 1.0 lost 2% while the S&P 500 had a 1% gain. Given this it is most likely that the:

Accepted Answer

A)  stock's beta has been calculated incorrectly. 
B)  S&P 500 cannot represent the overall market. 
C)  firm released some negative information about itself. 
D) market index had an exceptionally good month. 
A)  stock's beta has been calculated incorrectly. 
B)  S&P 500 cannot represent the overall market. 
C)  firm released some negative information about itself. 
D) market index had an exceptionally good month.

Question 10

Beta measures the total risk of an individual security.

Accepted Answer

A) True 
 B)False

Question 11

What is the beta of a security with an expected return of 12% if Treasury bills yield 6% and the market risk premium is 8%?

Accepted Answer

A)  0.50 
B)  0.75 
C)  0.90 
D) 1.50 
A)  0.50 
B)  0.75 
C)  0.90 
D) 1.50

Question 12

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

Question 13

Stock A has a current price of $25, a beta of 1.25, and a dividend yield of 6%. If the Treasury bill yield is 5% and the market portfolio is expected to return 14%, what should stock A sell for at the end of an investor's 2-year investment horizon?

Accepted Answer

Expected return = 5% + 1.25(14% - 5%) =

Question 14

Calculate the risk premium on stock C given the following information: risk-free rate = 5%, market return = 13%, stock C beta = 1.3.

Accepted Answer

A)  8.0% 
B)  10.4% 
C)  15.4% 
D) 16.9% 
A)  8.0% 
B)  10.4% 
C)  15.4% 
D) 16.9%

Question 15

The average of the beta values for all individual stocks is:

Accepted Answer

A)  greater than 1.0; most stocks are aggressive. 
B)  less than 1.0; most stocks are defensive. 
C)  unknown; betas are continually changing. 
D) exactly 1.0; these stocks represent the market. 
A)  greater than 1.0; most stocks are aggressive. 
B)  less than 1.0; most stocks are defensive. 
C)  unknown; betas are continually changing. 
D) exactly 1.0; these stocks represent the market.

Question 16

What is the most logical explanation for a +2.0% return on a stock with a beta of 1.0 in a month where the market returned +1.0%?

Accepted Answer

A)  The stock is aggressive. 
B)  The market is undervalued. 
C)  Favorable firm-specific news was reported. 
D) The beta is incorrect. 
A)  The stock is aggressive. 
B)  The market is undervalued. 
C)  Favorable firm-specific news was reported. 
D) The beta is incorrect.

Question 17

If Treasury bills yield 6% and the market risk premium is 9%, then a stock with a beta of 1.5 would be expected to yield:

Accepted Answer

A)  12.0%. 
B)  17.0%. 
C)  19.5%. 
D) 21.5%. 
A)  12.0%. 
B)  17.0%. 
C)  19.5%. 
D) 21.5%.

Question 18

Market risk premium is defined as the difference between the market rate of return and the return on risk-free Treasury bills.

Accepted Answer

A) True 
 B)False

Question 19

Investing borrowed funds in a stock portfolio will generally:

Accepted Answer

A)  increase the beta of the portfolio. 
B)  decrease the volatility of the portfolio. 
C)  decrease the expected return on the portfolio. 
D) increase the market risk premium. 
A)  increase the beta of the portfolio. 
B)  decrease the volatility of the portfolio. 
C)  decrease the expected return on the portfolio. 
D) increase the market risk premium.

Question 20

The security market line provides a standard that can be used to make project acceptance/rejection decisions.

Accepted Answer

A) True 
 B)False

Exam 12: Risk, Return, and Capital Budgeting

If an investor's portfolio is allocated 75% to the market portfolio and 25% to Treasury bills, then the investor should expect to receive:

Which one of the following is most likely correct for a diversified stock portfolio that exhibits a higher standard deviation than the market index?

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

Based on your analysis, you believe that Alpha stock which has a beta of 1.32 is going to yield 14.05% this coming year. The market is expected to yield 11.4% and T-bills are yielding 3.8%. According to CAPM, which one of these statements is correct given this information?

Defensive stocks typically provide better returns during periods of economic downturn since they are not very sensitive to market fluctuations.

What should be the beta of a replacement stock if an investor wishes to achieve a portfolio beta of 1.2 by replacing stock C in the following equally weighted portfolio: stock A = 0.9 beta; stock B = 1.1 beta; stock C = 1.35 beta?

What is the beta of a U.S. Treasury bill?

The project cost of capital depends on how the capital is used.

Assume last month a stock with a beta of 1.0 lost 2% while the S&P 500 had a 1% gain. Given this it is most likely that the:

Beta measures the total risk of an individual security.

What is the beta of a security with an expected return of 12% if Treasury bills yield 6% and the market risk premium is 8%?

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

Stock A has a current price of $25, a beta of 1.25, and a dividend yield of 6%. If the Treasury bill yield is 5% and the market portfolio is expected to return 14%, what should stock A sell for at the end of an investor's 2-year investment horizon?

Calculate the risk premium on stock C given the following information: risk-free rate = 5%, market return = 13%, stock C beta = 1.3.

The average of the beta values for all individual stocks is:

What is the most logical explanation for a +2.0% return on a stock with a beta of 1.0 in a month where the market returned +1.0%?

If Treasury bills yield 6% and the market risk premium is 9%, then a stock with a beta of 1.5 would be expected to yield:

Market risk premium is defined as the difference between the market rate of return and the return on risk-free Treasury bills.

Investing borrowed funds in a stock portfolio will generally:

The security market line provides a standard that can be used to make project acceptance/rejection decisions.

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

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