Question 1

There is little doubt that the CAPM captures everything that is going on in the market.

Accepted Answer

A) True 
 B)False

Question 2

A portfolio consists of an index mutual fund which represents the overall market and Treasury bills. The fund has a portfolio weight of 60%. The risk-free rate is 3.2% and the market risk premium is 7.6%. What is your best estimate of the portfolio expected rate of return?

Accepted Answer

A)  8.39% 
B)  7.76% 
C)  10.80% 
D) 9.02% 
A)  8.39% 
B)  7.76% 
C)  10.80% 
D) 9.02%

Question 3

A stock with a beta greater than 1.0 would be termed:

Accepted Answer

A)  an aggressive stock, expected to increase more than the market increases. 
B)  a defensive stock, expected to decrease more than the market increases. 
C)  an aggressive stock, expected to decrease more than the market increases. 
D) a defensive stock, expected to increase more than the market decreases. 
A)  an aggressive stock, expected to increase more than the market increases. 
B)  a defensive stock, expected to decrease more than the market increases. 
C)  an aggressive stock, expected to decrease more than the market increases. 
D) a defensive stock, expected to increase more than the market decreases.

Question 4

A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market reflects the:

Accepted Answer

A)  high beta of the stock. 
B)  unique risk of the stock. 
C)  changes in market risk premium over time. 
D) current underpricing of the stock. 
A)  high beta of the stock. 
B)  unique risk of the stock. 
C)  changes in market risk premium over time. 
D) current underpricing of the stock.

Question 5

Calculate the expected rate of return for the following portfolio, based on a Treasury bill yield of 4% and an expected market return of 13%: (Show your work)

Accepted Answer

@#IMG-DLM& β_Portfolio = (0.2 × 1.6) + (0.25 × 1.2

Question 6

If a security plots below the security market line, it is:

Accepted Answer

A)  ignoring all of the security's unique risk. 
B)  underpriced, a situation that should be temporary. 
C)  offering too little return to justify its risk. 
D) a defensive security, which expects to offer lower returns. 
A)  ignoring all of the security's unique risk. 
B)  underpriced, a situation that should be temporary. 
C)  offering too little return to justify its risk. 
D) a defensive security, which expects to offer lower returns.

Question 7

As a project's beta increases, the project's opportunity cost of capital increases.

Accepted Answer

A) True 
 B)False

Question 8

Empirical evidence suggests that over a long period of time returns are directly related to beta.

Accepted Answer

A) True 
 B)False

Question 9

The CAPM is a theory of the relationship between risk and return that states that the expected risk premium on any security equals its beta times the market return.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

Total risk is not the same as market ris

Question 11

The security market line displays the relationship between expected return and beta.

Accepted Answer

A) True 
 B)False

Question 12

If the plotting of a portfolio's returns against returns on the market index produces a tight pattern, then the portfolio:

Accepted Answer

A)  appears to be well diversified. 
B)  has a beta of 0. 
C)  has very little systematic risk. 
D) has a risk premium lower than the market. 
A)  appears to be well diversified. 
B)  has a beta of 0. 
C)  has very little systematic risk. 
D) has a risk premium lower than the market.

Question 13

Investment projects that plot above the security market line would be considered to have:

Accepted Answer

A)  a positive NPV. 
B)  a negative NPV. 
C)  a zero NPV. 
D) an excessively high discount rate. 
A)  a positive NPV. 
B)  a negative NPV. 
C)  a zero NPV. 
D) an excessively high discount rate.

Question 14

Estimate a stock's beta based on the following information: Month 1 = Stock +1.5%, Market +1.1%; Month 2 = Stock +2.0%, Market +1.4%; Month 3 = Stock -2.5%, Market -2.0%.

Accepted Answer

A)  Greater than 1.0 
B)  Less than 1.0 
C)  Equal to 1.0 
D) Indeterminate 
A)  Greater than 1.0 
B)  Less than 1.0 
C)  Equal to 1.0 
D) Indeterminate

Question 15

A portfolio of three stocks with total market value of $1,000,000 currently has a beta of 1.4. In light of an expected market downturn, you wish to reduce the portfolio beta to no more than 1.0. Two stocks are likely candidates for sale, one with a beta of 1.8 and a market value of $200,000 and the other with a beta of 1.5 and a market value of $250,000. Assuming that you could find one appropriate stock to replace these two, what should be its beta? (Show your work)

Accepted Answer

The weights of the stocks are: Stock A =

Question 16

If a two-stock portfolio is equally invested in stocks with betas of 1.4 and 0.7, then the portfolio beta is:

Accepted Answer

A)  0.70. 
B)  1.05. 
C)  1.40. 
D) 2.10. 
A)  0.70. 
B)  1.05. 
C)  1.40. 
D) 2.10.

Question 17

The minimum acceptable expected rate of return on a project of a specific risk is the:

Accepted Answer

A)  project cost of capital. 
B)  company cost of capital. 
C)  risk-free rate of return. 
D) project beta times the market risk premium. 
A)  project cost of capital. 
B)  company cost of capital. 
C)  risk-free rate of return. 
D) project beta times the market risk premium.

Question 18

The project cost of capital depends on the risk of the company undertaking the project.

Accepted Answer

A) True 
 B)False

Question 19

Discuss how betas are measured for individual stocks.

Accepted Answer

To measure betas, historic returns of th

Question 20

When the overall market experiences a decline of 8%, investors with portfolios of aggressive stocks will probably experience portfolio:

Accepted Answer

A)  losses of less than 8%. 
B)  losses greater than 8%. 
C)  gains of less than 8%. 
D) gains greater than 8%. 
A)  losses of less than 8%. 
B)  losses greater than 8%. 
C)  gains of less than 8%. 
D) gains greater than 8%.

Exam 12: Risk, Return, and Capital Budgeting

There is little doubt that the CAPM captures everything that is going on in the market.

A portfolio consists of an index mutual fund which represents the overall market and Treasury bills. The fund has a portfolio weight of 60%. The risk-free rate is 3.2% and the market risk premium is 7.6%. What is your best estimate of the portfolio expected rate of return?

A stock with a beta greater than 1.0 would be termed:

A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market reflects the:

Calculate the expected rate of return for the following portfolio, based on a Treasury bill yield of 4% and an expected market return of 13%: (Show your work)

If a security plots below the security market line, it is:

As a project's beta increases, the project's opportunity cost of capital increases.

Empirical evidence suggests that over a long period of time returns are directly related to beta.

The CAPM is a theory of the relationship between risk and return that states that the expected risk premium on any security equals its beta times the market return.

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

The security market line displays the relationship between expected return and beta.

If the plotting of a portfolio's returns against returns on the market index produces a tight pattern, then the portfolio:

Investment projects that plot above the security market line would be considered to have:

Estimate a stock's beta based on the following information: Month 1 = Stock +1.5%, Market +1.1%; Month 2 = Stock +2.0%, Market +1.4%; Month 3 = Stock -2.5%, Market -2.0%.

If a two-stock portfolio is equally invested in stocks with betas of 1.4 and 0.7, then the portfolio beta is:

The minimum acceptable expected rate of return on a project of a specific risk is the:

The project cost of capital depends on the risk of the company undertaking the project.

Discuss how betas are measured for individual stocks.

When the overall market experiences a decline of 8%, investors with portfolios of aggressive stocks will probably experience portfolio:

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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