Question 1

How is it possible to invest only in the market portfolio yet have a portfolio beta of 1.5?

Accepted Answer

A)  Don't diversify away the unique risks. 
B)  Purchase only aggressive stocks for the portfolio. 
C)  Purchase only stocks with high levels of systematic risk. 
D)  Borrow funds to increase your investment. 
A)  Don't diversify away the unique risks. 
B)  Purchase only aggressive stocks for the portfolio. 
C)  Purchase only stocks with high levels of systematic risk. 
D)  Borrow funds to increase your investment.

Question 2

Which of the following statements is more likely to be correct concerning the statement,"Stock A has a higher expected return than stock B"?

Accepted Answer

A)  Stock A has more unique risk. 
B)  Stock B plots below the security market line. 
C)  Stock B is a cyclical stock. 
D)  Stock A has a higher beta. 
A)  Stock A has more unique risk. 
B)  Stock B plots below the security market line. 
C)  Stock B is a cyclical stock. 
D)  Stock A has a higher beta.

Question 3

What return should be expected from investing in the market portfolio that is expected to yield 18% if the investment includes all of the investor's funds plus 100% of additional funds borrowed at the risk-free rate of 6%?

Accepted Answer

A)  18.6% 
B)  19.6% 
C)  21.6% 
D)  30.0% 
A)  18.6% 
B)  19.6% 
C)  21.6% 
D)  30.0%

Question 4

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 5

Stock returns can be explained by the stock's _________ and the stock's _________.

Accepted Answer

A)  beta; unique risk 
B)  beta; market risk 
C)  unique risk; firm-specific risk 
D)  aggressive risk; defensive risk 
A)  beta; unique risk 
B)  beta; market risk 
C)  unique risk; firm-specific risk 
D)  aggressive risk; defensive risk

Question 6

The slope of the security market line equals:

Accepted Answer

A)  one. 
B)  beta. 
C)  the market risk premium. 
D)  the expected return on the market portfolio. 
A)  one. 
B)  beta. 
C)  the market risk premium. 
D)  the expected return on the market portfolio.

Question 7

Where will the following projects plot in relation to the security market line if the risk-free rate is 6% and the market risk premium is 9%? Which projects should be undertaken?

Accepted Answer

@#IMG-DLM& Expected return_A= 6% + 2.0% (9%) = 24% v

Question 8

A project is determined to have equal probability of generating $1 million annually or $500,000 annually for 4 years.The initial outlay is $2 million.The expected return on Treasury bills is 6% and the market risk premium is 10%.What is the highest project beta that will justify acceptance of the project?

Accepted Answer

A)  0.245 
B)  1.000 
C)  1.245 
D)  2.310 
A)  0.245 
B)  1.000 
C)  1.245 
D)  2.310

Question 9

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 10

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 11

Market risk premium,also known as the risk premium of market portfolio,is defined as the difference between market return and return on risk-free Treasury bills.

Accepted Answer

A) True 
 B)False

Question 12

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 13

When Treasury bills yield 7.0% and the expected return on the market is 16%,then the risk premium on an asset is equal to:

Accepted Answer

A)  9.0%. 
B)  16.0%. 
C)  9.0% times the asset's beta. 
D)  8.0% plus the risk-free rate. 
A)  9.0%. 
B)  16.0%. 
C)  9.0% times the asset's beta. 
D)  8.0% plus the risk-free rate.

Question 14

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

Question 15

If last month a stock with beta of 1.0 lost 2% while the S&P 500 had a 1% gain,then it appears that:

Accepted Answer

A)  beta has been calculated incorrectly. 
B)  the S&P 500 cannot represent the market. 
C)  the firm may have released negative information. 
D)  the market index had a good month. 
A)  beta has been calculated incorrectly. 
B)  the S&P 500 cannot represent the market. 
C)  the firm may have released negative information. 
D)  the market index had a good month.

Question 16

Discuss how betas are measured for individual stocks.

Accepted Answer

To measure betas,historic returns of the

Question 17

What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a beta of 1.4 is expected to yield 18%?

Accepted Answer

A)  8.6% 
B)  10.8% 
C)  12.0% 
D)  14.6% 
A)  8.6% 
B)  10.8% 
C)  12.0% 
D)  14.6%

Question 18

If the market portfolio is expected to offer returns of 16%,then what can be said about a portfolio expected to return 13%?

Accepted Answer

A)  It plots below the security market line. 
B)  Part of the portfolio is invested in Treasury bills. 
C)  The portfolio is not diversified. 
D)  The portfolio's beta is less than 1.0. 
A)  It plots below the security market line. 
B)  Part of the portfolio is invested in Treasury bills. 
C)  The portfolio is not diversified. 
D)  The portfolio's beta is less than 1.0.

Question 19

What will happen to the expected return on a stock with a beta of 1.5 and a market risk premium of 9% if the Treasury bill yield increases from 3 to 5%?

Accepted Answer

A)  The expected return will remain unchanged. 
B)  The expected return will increase by 1.0%. 
C)  The expected return will increase by 2.0%. 
D)  The expected return will increase by 3.0%. 
A)  The expected return will remain unchanged. 
B)  The expected return will increase by 1.0%. 
C)  The expected return will increase by 2.0%. 
D)  The expected return will increase by 3.0%.

Question 20

The CAPM provides a model of determining expected security returns that is:

Accepted Answer

A)  precise in its calculations of risk premiums. 
B)  imprecise, but generally an acceptable guideline. 
C)  excellent for high beta stocks. 
D)  excellent for well-diversified portfolios. 
A)  precise in its calculations of risk premiums. 
B)  imprecise, but generally an acceptable guideline. 
C)  excellent for high beta stocks. 
D)  excellent for well-diversified portfolios.

Exam 12: Risk,Return,and Capital Budgeting

How is it possible to invest only in the market portfolio yet have a portfolio beta of 1.5?

Which of the following statements is more likely to be correct concerning the statement,"Stock A has a higher expected return than stock B"?

What return should be expected from investing in the market portfolio that is expected to yield 18% if the investment includes all of the investor's funds plus 100% of additional funds borrowed at the risk-free rate of 6%?

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

Stock returns can be explained by the stock's _________ and the stock's _________.

The slope of the security market line equals:

Where will the following projects plot in relation to the security market line if the risk-free rate is 6% and the market risk premium is 9%? Which projects should be undertaken?

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

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

Market risk premium,also known as the risk premium of market portfolio,is defined as the difference between market return and return on risk-free Treasury bills.

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

When Treasury bills yield 7.0% and the expected return on the market is 16%,then the risk premium on an asset is equal to:

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

If last month a stock with beta of 1.0 lost 2% while the S&P 500 had a 1% gain,then it appears that:

Discuss how betas are measured for individual stocks.

What is the expected yield on the market portfolio at a time when Treasury bills yield 6% and a stock with a beta of 1.4 is expected to yield 18%?

If the market portfolio is expected to offer returns of 16%,then what can be said about a portfolio expected to return 13%?

What will happen to the expected return on a stock with a beta of 1.5 and a market risk premium of 9% if the Treasury bill yield increases from 3 to 5%?

The CAPM provides a model of determining expected security returns that is:

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

Stock returns can be explained by the stock's _ and the stock's _.