Question 1

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 2

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

Accepted Answer

Total risk is not the same as market ris

Question 3

If the company cost of capital is 20% and a proposed project's cost of capital is 15%,then discounting the projects' cash flows at 20% would:

Accepted Answer

A)  determine where the project plots in relation to the security market line. 
B)  make the project look more attractive. 
C)  be correct from a theoretical perspective. 
D)  be incorrect. 
A)  determine where the project plots in relation to the security market line. 
B)  make the project look more attractive. 
C)  be correct from a theoretical perspective. 
D)  be incorrect.

Question 4

According to the CAPM,a stock's expected return is positively related to its beta.

Accepted Answer

A) True 
 B)False

Question 5

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 6

The average beta of individual stocks in the market portfolio:

Accepted Answer

A)  is one. 
B)  is zero. 
C)  is 1/2 (midway between one and zero). 
D)  cannot be calculated without knowing the stocks in the portfolio. 
A)  is one. 
B)  is zero. 
C)  is 1/2 (midway between one and zero). 
D)  cannot be calculated without knowing the stocks in the portfolio.

Question 7

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

Accepted Answer

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

Question 8

The beta of an investment in U.S.Treasury bills is:

Accepted Answer

A)  0.0. 
B)  0.5. 
C)  1.0. 
D)  meaningless; only common stocks have betas. 
A)  0.0. 
B)  0.5. 
C)  1.0. 
D)  meaningless; only common stocks have betas.

Question 9

What should be the beta of a replacement stock if an investor wishes to achieve a portfolio beta of 1.0 by replacing stock C in the following equally weighted portfolio: stock A = .9 beta; stock B = 1.1 beta; stock C = 1.35 beta?

Accepted Answer

A)  .93 beta 
B)  1.00 beta 
C)  1.08 beta 
D)  1.15 beta 
A)  .93 beta 
B)  1.00 beta 
C)  1.08 beta 
D)  1.15 beta

Question 10

Investing borrowed funds in a stock portfolio will:

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 11

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 12

The capital asset pricing model (CAPM)assumes that the stock market is dominated by well-diversified investors who are concerned only with market risk.

Accepted Answer

A) True 
 B)False

Question 13

The average of 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 14

If a low-risk company invests in a high-risk project,those cash flows should be discounted at a high cost of capital.

Accepted Answer

A) True 
 B)False

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

The security market line provides a standard for project rejection.

Accepted Answer

A) True 
 B)False

Question 17

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 18

What rate of return should an investor expect for a stock that has a beta of 1.25 when the market is expected to yield 14% and Treasury bills offer 6%?

Accepted Answer

A)  10.0% 
B)  11.2% 
C)  12.4% 
D)  16.0% 
A)  10.0% 
B)  11.2% 
C)  12.4% 
D)  16.0%

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Empirical evidence suggested that over a long period of time returns did indeed increase with beta.

Accepted Answer

A) True 
 B)False

Exam 12: Risk,Return,and Capital Budgeting

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

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

If the company cost of capital is 20% and a proposed project's cost of capital is 15%,then discounting the projects' cash flows at 20% would:

According to the CAPM,a stock's expected return is positively related to its beta.

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%?

The average beta of individual stocks in the market portfolio:

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

The beta of an investment in U.S.Treasury bills is:

What should be the beta of a replacement stock if an investor wishes to achieve a portfolio beta of 1.0 by replacing stock C in the following equally weighted portfolio: stock A = .9 beta; stock B = 1.1 beta; stock C = 1.35 beta?

Investing borrowed funds in a stock portfolio will:

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

The capital asset pricing model (CAPM)assumes that the stock market is dominated by well-diversified investors who are concerned only with market risk.

The average of beta values for all individual stocks is:

If a low-risk company invests in a high-risk project,those cash flows should be discounted at a high cost of capital.

The project cost of capital is:

The security market line provides a standard for project rejection.

In theory,the "market portfolio" should contain:

What rate of return should an investor expect for a stock that has a beta of 1.25 when the market is expected to yield 14% and Treasury bills offer 6%?

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

Empirical evidence suggested that over a long period of time returns did indeed increase with beta.

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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters