Question 1

What is the relationship between the market risk of a security and the rate of return that investors demand of that security?

Accepted Answer

The extra return that investors require

Question 2

What would you recommend to an investor who is considering an investment that,according to its beta,plots below the security market line (SML)?

Accepted Answer

A)  Invest; return is high relative to risk. 
B)  Don't invest; risk is high relative to return. 
C)  Invest; stocks revert to the SML over time. 
D)  Don't invest; stocks below the SML have too much unique risk. 
A)  Invest; return is high relative to risk. 
B)  Don't invest; risk is high relative to return. 
C)  Invest; stocks revert to the SML over time. 
D)  Don't invest; stocks below the SML have too much unique risk.

Question 3

The manager of StarPerformer Mutual Fund expects the fund to earn a rate of return of 12% this year.The beta of the fund's portfolio is .8.If the rate of return available on risk-free assets is 5% and you expect the rate of return on the market portfolio to be 15%,should you invest in StarPerformer? Can you create a portfolio with the same risk as StarPerformer Mutual Fund,but with a higher expected rate of return? Explain why in reality,a mutual fund must be able to provide an expected rate of return that is higher than that predicted by the security market line in order for investors to consider the fund an attractive investment opportunity.

Accepted Answer

The CAPM implies that the expected rate

Question 4

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

Accepted Answer

A)  not rewarding the investor for its 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)  not rewarding the investor for its 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 5

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

Accepted Answer

A) True 
 B)False

Question 6

If the slope of the line measuring a stock's historic returns against the market's historic returns is positive,then the stock:

Accepted Answer

A)  has a beta greater than 1.0. 
B)  has no unique risk. 
C)  has a positive beta. 
D)  plots above the security market line. 
A)  has a beta greater than 1.0. 
B)  has no unique risk. 
C)  has a positive beta. 
D)  plots above the security market line.

Question 7

One of the easiest methods of diversifying away firm-specific risks is to:

Accepted Answer

A)  buy only stocks with a beta of 1.0. 
B)  build a portfolio with 40 to 55 individual stocks. 
C)  purchase the shares of a mutual fund. 
D)  purchase stocks that plot above the security market line. 
A)  buy only stocks with a beta of 1.0. 
B)  build a portfolio with 40 to 55 individual stocks. 
C)  purchase the shares of a mutual fund. 
D)  purchase stocks that plot above the security market line.

Question 8

If you were willing to bet that the overall stock market was heading up on a sustained basis,it would be logical to invest in:

Accepted Answer

A)  high beta stocks. 
B)  low beta stocks. 
C)  stocks with large amounts of unique risk. 
D)  stocks that plot below the security market line. 
A)  high beta stocks. 
B)  low beta stocks. 
C)  stocks with large amounts of unique risk. 
D)  stocks that plot below the security market line.

Question 9

Discuss the capital asset pricing model in general,including the method of determining expected returns.

Accepted Answer

The CAPM describes the relationship betw

Question 10

What is the beta of a three-stock portfolio including 25% of stock A with a beta of .90,40% of stock B with a beta of 1.05,and 35% of stock C with a beta of 1.73?

Accepted Answer

A)  1.0 
B)  1.17 
C)  1.22 
D)  1.25 
A)  1.0 
B)  1.17 
C)  1.22 
D)  1.25

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

The slope of the regression line that exhibits the past relationship between a stock's return and the market's return is the:

Accepted Answer

A)  security market line. 
B)  stock's beta. 
C)  market risk premium. 
D)  stock's unique risk. 
A)  security market line. 
B)  stock's beta. 
C)  market risk premium. 
D)  stock's unique risk.

Question 13

The correct opportunity cost for a project is determined to be 15% and the project is expected to generate $1 million in cash flows at the end of the next 4 years after an initial outlay of $3 million.Based on this information,the project would plot:

Accepted Answer

A)  above the security market line. 
B)  below the security market line. 
C)  on the security market line. 
D)  on the security market line, with a beta of 1.0. 
A)  above the security market line. 
B)  below the security market line. 
C)  on the security market line. 
D)  on the security market line, with a beta of 1.0.

Question 14

How are the terms "defensive" and "aggressive" applied to individual stocks or portfolios?

Accepted Answer

Defensive stocks are not as sensitive to

Question 15

Assuming some positive returns on Treasury bills,what can you assume about an investor whose diversified portfolio of stocks yielded 25% when the market portfolio yielded 15%?

Accepted Answer

A)  Treasury bills are offering a 10% yield. 
B)  The portfolio beta is greater than 1.0. 
C)  The portfolio beta equals 1.67. 
D)  The investor's portfolio contains many defensive stocks. 
A)  Treasury bills are offering a 10% yield. 
B)  The portfolio beta is greater than 1.0. 
C)  The portfolio beta equals 1.67. 
D)  The investor's portfolio contains many defensive stocks.

Question 16

How can a manager calculate the opportunity cost of capital for a project?

Accepted Answer

The opportunity cost of capital is the r

Question 17

In practice,the market portfolio is often represented by:

Accepted Answer

A)  a portfolio of U.S. Treasury securities. 
B)  a diversified stock market index. 
C)  an investor's mutual fund portfolio. 
D)  the historic record of stock market returns. 
A)  a portfolio of U.S. Treasury securities. 
B)  a diversified stock market index. 
C)  an investor's mutual fund portfolio. 
D)  the historic record of stock market returns.

Question 18

What happens to expected portfolio return if the portfolio beta increases from 1.0 to 1.5,the risk-free rate decreases from 5 to 4%,and the market risk premium increases from 8 to 9%?

Accepted Answer

A)  It increases from 12 to 14.0%. 
B)  It increases from 13 to 17.5%. 
C)  It increases from 14 to 21.0%. 
D)  It remains unchanged. 
A)  It increases from 12 to 14.0%. 
B)  It increases from 13 to 17.5%. 
C)  It increases from 14 to 21.0%. 
D)  It remains unchanged.

Question 19

If a stock consistently goes down (up)by 1.6% when the market portfolio goes down (up)by 1.2%,then its beta:

Accepted Answer

A)  equals 1.04. 
B)  equals 1.24. 
C)  equals 1.33. 
D)  equals 1.40. 
A)  equals 1.04. 
B)  equals 1.24. 
C)  equals 1.33. 
D)  equals 1.40.

Question 20

Which of the following statements best explains the fact that cyclical firms tend to have high betas?

Accepted Answer

A)  Their earnings are not stable. 
B)  Their stocks are overpriced. 
C)  Their earnings are less diversifiable. 
D)  Their profit margins are small. 
A)  Their earnings are not stable. 
B)  Their stocks are overpriced. 
C)  Their earnings are less diversifiable. 
D)  Their profit margins are small.

Exam 12: Risk,Return,and Capital Budgeting

What is the relationship between the market risk of a security and the rate of return that investors demand of that security?

What would you recommend to an investor who is considering an investment that,according to its beta,plots below the security market line (SML)?

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

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

If the slope of the line measuring a stock's historic returns against the market's historic returns is positive,then the stock:

One of the easiest methods of diversifying away firm-specific risks is to:

If you were willing to bet that the overall stock market was heading up on a sustained basis,it would be logical to invest in:

Discuss the capital asset pricing model in general,including the method of determining expected returns.

What is the beta of a three-stock portfolio including 25% of stock A with a beta of .90,40% of stock B with a beta of 1.05,and 35% of stock C with a beta of 1.73?

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

The slope of the regression line that exhibits the past relationship between a stock's return and the market's return is the:

The correct opportunity cost for a project is determined to be 15% and the project is expected to generate $1 million in cash flows at the end of the next 4 years after an initial outlay of $3 million.Based on this information,the project would plot:

How are the terms "defensive" and "aggressive" applied to individual stocks or portfolios?

Assuming some positive returns on Treasury bills,what can you assume about an investor whose diversified portfolio of stocks yielded 25% when the market portfolio yielded 15%?

How can a manager calculate the opportunity cost of capital for a project?

In practice,the market portfolio is often represented by:

What happens to expected portfolio return if the portfolio beta increases from 1.0 to 1.5,the risk-free rate decreases from 5 to 4%,and the market risk premium increases from 8 to 9%?

If a stock consistently goes down (up)by 1.6% when the market portfolio goes down (up)by 1.2%,then its beta:

Which of the following statements best explains the fact that cyclical firms tend to have high betas?

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