Exam 12: Risk,Return,and Capital Budgeting

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

Since 1926 the average annual difference between the returns on value and growth stocks has been 3.8%.

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

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.

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

Which of the following portfolios might be expected to exhibit less unique risk?

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%:

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

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

If Treasury bills are yielding 10% at a time when the market risk premium is 6%,then the:

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

Stock A has a current price of $25.00,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?

What two elements are represented in security returns?

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

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

A stock's beta measures the:

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.

What is the standard deviation of the market portfolio if the standard deviation of a fully diversified portfolio with a beta of 1.25 equals 20%?

Decreases in the risk-free rate will reduce:

What effect might operating leverage be expected to have on a project's beta?