Question 1

A scatter in the plot of a stock's returns versus the returns on the market reflects the:

Accepted Answer

A)  high beta of the stock. 
B)  specific risk of the stock. 
C)  changes in market risk premium over time. 
D)  current underpricing of the stock. 
A)  high beta of the stock. 
B)  specific risk of the stock. 
C)  changes in market risk premium over time. 
D)  current underpricing of the stock.

Question 2

Macro events only are reflected in the performance of the market portfolio because:

Accepted Answer

A)  the market portfolio contains only risk-free securities. 
B)  only macro events are tracked by economists. 
C)  the specific risks have been diversified away. 
D)  the firm-specific events would be too numerous to quantify. 
A)  the market portfolio contains only risk-free securities. 
B)  only macro events are tracked by economists. 
C)  the specific risks have been diversified away. 
D)  the firm-specific events would be too numerous to quantify.

Question 3

If the line measuring a stock's historic returns against the market's historic returns has a slope greater than 1.0,then the:

Accepted Answer

A)  stock is currently underpriced. 
B)  market risk premium is increasing. 
C)  stock has a significant amount of specific risk. 
D)  stock has a beta exceeding 1.0. 
A)  stock is currently underpriced. 
B)  market risk premium is increasing. 
C)  stock has a significant amount of specific risk. 
D)  stock has a beta exceeding 1.0.

Question 4

An investor prefers to invest in companies that have high operating leverage.How can this be accomplished if the investor also requires a portfolio beta of 1.0?

Accepted Answer

A)  Invest 50% in cyclical stocks and 50% in firms with high operating leverage 
B)  Invest 50% in a market index fund and 50% in firms with high operating leverage 
C)  Finance part of the portfolio with borrowing 
D)  Invest a portion of the portfolio in U.S. Treasury securities 
A)  Invest 50% in cyclical stocks and 50% in firms with high operating leverage 
B)  Invest 50% in a market index fund and 50% in firms with high operating leverage 
C)  Finance part of the portfolio with borrowing 
D)  Invest a portion of the portfolio in U.S. Treasury securities

Question 5

If Stock A has a higher expected return than Stock B,which of the following statements is most likely?

Accepted Answer

A)  Stock A has more specific 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 specific 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 6

If a stock with a beta of 1.4 is expected to return 18% when Treasury bills yield 6%,what is the expected return on the market portfolio?

Accepted Answer

A)  8.67% 
B)  10.84% 
C)  12.02% 
D)  14.57% 
A)  8.67% 
B)  10.84% 
C)  12.02% 
D)  14.57%

Question 7

Investing borrowed funds in a stock portfolio will generally:

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 8

Beta measures a stock's sensitivity to market risks.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A)  Market risk 
B)  Specific risk 
C)  Total risk 
D)  Diversifiable risk 
A)  Market risk 
B)  Specific risk 
C)  Total risk 
D)  Diversifiable risk

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

You believe that Alpha stock which has a beta of 1.32 will return 16.0% this coming year.The market is expected to return 11.4% and T-bills return 3.8%.According to CAPM,which one of these statements is correct given this information?

Accepted Answer

A)  The stock is currently underpriced. 
B)  The stock plots below the security market line. 
C)  The risk premium on the stock is too low given the stock's beta. 
D)  The stock plots to the left of the market on a security market line graph. 
A)  The stock is currently underpriced. 
B)  The stock plots below the security market line. 
C)  The risk premium on the stock is too low given the stock's beta. 
D)  The stock plots to the left of the market on a security market line graph.

Question 14

The security market line shows how the expected rate of return depends on beta.

Accepted Answer

A) True 
 B)False

Question 15

If a company with a low credit rating invests in a low-risk project,it should discount the cash flows at a relatively high cost of capital.

Accepted Answer

A) True 
 B)False

Question 16

The slope of the line fitted to a plot of a stock's returns versus the market's returns measures the:

Accepted Answer

A)  security market line. 
B)  beta of the stock. 
C)  market risk premium. 
D)  capital asset pricing model. 
A)  security market line. 
B)  beta of the stock. 
C)  market risk premium. 
D)  capital asset pricing model.

Question 17

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

Accepted Answer

A)  ignoring all of the security's specific 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)  ignoring all of the security's specific 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 18

Which one of the following is most likely correct for a diversified stock portfolio that exhibits a higher standard deviation than the market index?

Accepted Answer

A)  The portfolio contains aggressive stocks with a beta greater than 1.0 
B)  The portfolio plots below the security market line. 
C)  The portfolio's beta is less than 1.0. 
D)  The portfolio contains a significant amount of specific risk. 
A)  The portfolio contains aggressive stocks with a beta greater than 1.0 
B)  The portfolio plots below the security market line. 
C)  The portfolio's beta is less than 1.0. 
D)  The portfolio contains a significant amount of specific risk.

Question 19

A project with higher than average risk offers an expected return of 14%.Which statement is correct if the company's opportunity cost of capital is 12% and the project's opportunity cost of capital is 15%?

Accepted Answer

A)  Project NPV is positive; it should be accepted. 
B)  Project NPV is negative; it should be rejected. 
C)  Project NPV is positive but it should be rejected. 
D)  Project NPV is negative but it should be accepted. 
A)  Project NPV is positive; it should be accepted. 
B)  Project NPV is negative; it should be rejected. 
C)  Project NPV is positive but it should be rejected. 
D)  Project NPV is negative but it should be accepted.

Question 20

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

Accepted Answer

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

Exam 12: Risk,Return,and Capital Budgeting

A scatter in the plot of a stock's returns versus the returns on the market reflects the:

Macro events only are reflected in the performance of the market portfolio because:

If the line measuring a stock's historic returns against the market's historic returns has a slope greater than 1.0,then the:

An investor prefers to invest in companies that have high operating leverage.How can this be accomplished if the investor also requires a portfolio beta of 1.0?

If Stock A has a higher expected return than Stock B,which of the following statements is most likely?

If a stock with a beta of 1.4 is expected to return 18% when Treasury bills yield 6%,what is the expected return on the market portfolio?

Investing borrowed funds in a stock portfolio will generally:

Beta measures a stock's sensitivity to market risks.

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

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

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

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

You believe that Alpha stock which has a beta of 1.32 will return 16.0% this coming year.The market is expected to return 11.4% and T-bills return 3.8%.According to CAPM,which one of these statements is correct given this information?

The security market line shows how the expected rate of return depends on beta.

If a company with a low credit rating invests in a low-risk project,it should discount the cash flows at a relatively high cost of capital.

The slope of the line fitted to a plot of a stock's returns versus the market's returns measures the:

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

Which one of the following is most likely correct for a diversified stock portfolio that exhibits a higher standard deviation than the market index?

A project with higher than average risk offers an expected return of 14%.Which statement is correct if the company's opportunity cost of capital is 12% and the project's opportunity cost of capital is 15%?

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

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

Options

Risk Management

Filters