Exam 12: Risk,Return,and Capital Budgeting

Why do stock market investors appear not to be concerned with unique risks when calculating expected rates of return?

The line plotted to fit observations of a stock's returns versus the market's returns determines the:

Calculate the risk premium on stock C given the following information: risk-free rate = 5%,market return = 13%,stock C beta = 1.3.

The required risk premium for any investment is given by the security market line: Risk premium on investment = beta * expected market risk premium.

A stock's risk premium is equal to the:

A project with higher than average risk offers an expected return of 18%.Which statement is correct if the company's opportunity cost of capital is 12% and the project's opportunity cost of capital is 15%?

Why is beta thought to be a more relevant measure of risk than standard deviation for a diversified investor?

A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market indicates the:

If an investor's portfolio is allocated 75% to the market portfolio and 25% to Treasury bills,then the investor should expect to receive:

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 30% of additional funds borrowed at the risk-free rate of 6%?

When the overall market is up by 10%,an investor with a portfolio of defensive stocks will probably have:

A portfolio of three stocks with total market value of $1,000,000 currently has a beta of 1.4.In light of an expected market downturn,you wish to reduce the portfolio beta to no more than 1.0.Two stocks are likely candidates for sale,one with a beta of 1.8 and a market value of $200,000 and the other with a beta of 1.5 and a market value of $250,000.Assuming that you could find one appropriate stock to replace these two,what should be its beta?

Which of the following adjustment techniques would be preferred to account for additional project risk?

Explain why an insurance company is willing to sell life insurance to individuals,but will be more reluctant to issue policies insuring against earthquake damage to residents living along fault lines.Why don't insurance companies simply charge the residents a premium that reflects the actuarial probability of damage from earthquakes?

What will happen to a stock that offers a lower risk premium than predicted by the CAPM?

The company cost of capital may be an inappropriate discount rate for a capital budgeting proposal if:

What type of risk is properly reflected in a project's discount rate?

An investor was expecting an 18% return on her portfolio with beta of 1.25 before the market risk premium decreased from 8 to 6%.Based on this change,what return will now be expected on the portfolio?

As a project's beta increases,the project's opportunity cost of capital increases.

The project cost of capital depends on how the capital is used.