Exam 12: Risk,Return,and Capital Budgeting

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

Beta measures a stock's sensitivity to market risks.

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

Which of the following statements is correct when Treasury bills yield 7.5% and the market risk premium is 9.5%?

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

Diversification decreases the variability of both unique and market risk.

The project cost of capital depends on the project and hence also on the risk of the company.

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:

A major benefit of investing in mutual funds is:

Given the CAPM's noted empirical difficulties,which of the following statements may be correct concerning a low price-earnings ratio stock?

An investor divides her portfolio into thirds,with one part in Treasury bills,one part in a market index,and one part in a diversified portfolio with beta of 1.50.What is the beta of the investor's overall portfolio?

Project cost of capital and company cost of capital are synonymous terms.

If the line measuring a stock's historic returns against the market's historic returns has a slope greater than 1.0,then the:

If Treasury bills yield 6.0% and the market risk premium is 9.0%,then a portfolio with a beta of 1.5 would be expected to yield:

Based on the following information,make an estimate of the stock's beta: Month 1 = Stock +1.5%,Market +1.1%; Month 2 = Stock +2.0%,Market +1.4%; Month 3 = Stock -2.5%,Market -2.0%.

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%?

Given recent evidence concerning the CAPM,which of the following portfolios might be expected to plot above the security market line?

According to the capital asset pricing model,expected rates of return for all securities and all portfolios lie on the capital market line.

The cost of capital for a project depends on the risk of the company.