Question 1

When the overall market is up by 10%,investors with portfolios of defensive stocks will probably have:

Accepted Answer

A)  negative portfolio returns less than 10%. 
B)  negative portfolio returns greater than 10%. 
C)  positive portfolio returns less than 10%. 
D)  positive portfolio returns greater than 10%. 
A)  negative portfolio returns less than 10%. 
B)  negative portfolio returns greater than 10%. 
C)  positive portfolio returns less than 10%. 
D)  positive portfolio returns greater than 10%. C

Question 2

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

Accepted Answer

A)  Their earnings are particularly sensitive to the state of the economy. 
B)  Their stocks are overpriced. 
C)  Their earnings are less diversifiable. 
D)  Their profit margins are small. 
A)  Their earnings are particularly sensitive to the state of the economy. 
B)  Their stocks are overpriced. 
C)  Their earnings are less diversifiable. 
D)  Their profit margins are small. A

Question 3

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

Accepted Answer

A)  0.83 
B)  1.00 
C)  1.17 
D)  1.25 
A)  0.83 
B)  1.00 
C)  1.17 
D)  1.25 A

Question 4

What is the beta of a U.S.Treasury bill?

Accepted Answer

A)  1.0 
B)  −1.0 
C)  0 
D)  Unknown 
A)  1.0 
B)  −1.0 
C)  0 
D)  Unknown

Question 5

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 6

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 7

What happens to the 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 12 to 12.5%. 
D)  It increases from 13 to 13.5%. 
A)  It increases from 12 to 14.0%. 
B)  It increases from 13 to 17.5%. 
C)  It increases from 12 to 12.5%. 
D)  It increases from 13 to 13.5%.

Question 8

Investors expect aggressive stocks to outperform the market in periods of strong economic activity.

Accepted Answer

A) True 
 B)False

Question 9

Which one of the following portfolios might be expected to exhibit less specific risk?

Accepted Answer

A)  Five random stocks; portfolio beta = 0.8 
B)  Three random stocks; portfolio beta = 1.2 
C)  Ten random stocks; portfolio beta = 1.0 
D)  Twelve random stocks; portfolio beta unknown 
A)  Five random stocks; portfolio beta = 0.8 
B)  Three random stocks; portfolio beta = 1.2 
C)  Ten random stocks; portfolio beta = 1.0 
D)  Twelve random stocks; portfolio beta unknown

Question 10

According to the capital asset pricing model,the expected rates of return for all projects lie on the security market line.

Accepted Answer

A) True 
 B)False

Question 11

If a stock's beta is 0.8 during a period when the market portfolio was down by 10%,then,a priori,we could expect this individual stock to:

Accepted Answer

A)  lose more than 10%. 
B)  lose, but less than 10%. 
C)  gain more than 10%. 
D)  gain, but less than 10%. 
A)  lose more than 10%. 
B)  lose, but less than 10%. 
C)  gain more than 10%. 
D)  gain, but less than 10%.

Question 12

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 13

The security market line sets a standard for other investments-investors will be willing to hold other investments only if they offer equally good prospects as shown by the points on the line.

Accepted Answer

A) True 
 B)False

Question 14

Market risk premium is defined as the difference between the market rate of return and the risk-free interest rate.

Accepted Answer

A) True 
 B)False

Question 15

The expected return on a security includes a reward for:

Accepted Answer

A)  market risk and specific risk. 
B)  specific risk. 
C)  diversification and portfolio risk. 
D)  time value of money and market risk. 
A)  market risk and specific risk. 
B)  specific risk. 
C)  diversification and portfolio risk. 
D)  time value of money and market risk.

Question 16

What would you recommend to an investor who is considering an investment that plots below the security market line?

Accepted Answer

A)  Invest; The expected return is high relative to the risk. 
B)  Don't invest; The risk is high relative to the expected return. 
C)  Invest; All stocks revert to the SML over time. 
D)  Don't invest; All stocks below the SML are low-growth stocks. 
A)  Invest; The expected return is high relative to the risk. 
B)  Don't invest; The risk is high relative to the expected return. 
C)  Invest; All stocks revert to the SML over time. 
D)  Don't invest; All stocks below the SML are low-growth stocks.

Question 17

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

Accepted Answer

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

Question 18

A stock has a beta of 1.4 and an expected return of 13.53%.What is the risk-free rate if the market rate of return is 10.6%?

Accepted Answer

A)  2.825% 
B)  3.250% 
C)  3.275% 
D)  3.415% 
A)  2.825% 
B)  3.250% 
C)  3.275% 
D)  3.415%

Question 19

The market rate of return is 12.5% and the risk-free rate is 3.1%.What will be the change in a stock's expected rate of return if its beta increases from 1.2 to 1.4?

Accepted Answer

A)  1.88% 
B)  2.5% 
C)  18.8% 
D)  25.0% 
A)  1.88% 
B)  2.5% 
C)  18.8% 
D)  25.0%

Question 20

What is the standard deviation of the market portfolio if the standard deviation of a well-diversified portfolio with a beta of 1.25 equals 20%?

Accepted Answer

A)  16.00% 
B)  18.75% 
C)  25.00% 
D)  32.50% 
A)  16.00% 
B)  18.75% 
C)  25.00% 
D)  32.50%

Exam 12: Risk,Return,and Capital Budgeting

When the overall market is up by 10%,investors with portfolios of defensive stocks will probably have:

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

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

What is the beta of a U.S.Treasury bill?

The slope of the security market line equals:

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

What happens to the 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%?

Investors expect aggressive stocks to outperform the market in periods of strong economic activity.

Which one of the following portfolios might be expected to exhibit less specific risk?

According to the capital asset pricing model,the expected rates of return for all projects lie on the security market line.

If a stock's beta is 0.8 during a period when the market portfolio was down by 10%,then,a priori,we could expect this individual stock to:

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

The security market line sets a standard for other investments-investors will be willing to hold other investments only if they offer equally good prospects as shown by the points on the line.

Market risk premium is defined as the difference between the market rate of return and the risk-free interest rate.

The expected return on a security includes a reward for:

What would you recommend to an investor who is considering an investment that plots below the security market line?

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

A stock has a beta of 1.4 and an expected return of 13.53%.What is the risk-free rate if the market rate of return is 10.6%?

The market rate of return is 12.5% and the risk-free rate is 3.1%.What will be the change in a stock's expected rate of return if its beta increases from 1.2 to 1.4?

What is the standard deviation of the market portfolio if the standard deviation of a well-diversified portfolio with a beta of 1.25 equals 20%?

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers,Acquisitions,and Corporate Control

International Financial Management

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Risk Management

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