Question 1

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 an index 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 an index fund. 
D)  purchase stocks that plot above the security market line.

Question 2

The average of the betas for all stocks is:

Accepted Answer

A)  greater than 1.0; most stocks are aggressive. 
B)  less than 1.0; most stocks are defensive. 
C)  unknown; betas are continually changing. 
D)  exactly 1.0; these stocks represent the market. 
A)  greater than 1.0; most stocks are aggressive. 
B)  less than 1.0; most stocks are defensive. 
C)  unknown; betas are continually changing. 
D)  exactly 1.0; these stocks represent the market.

Question 3

Beta measures the total risk of an individual security.

Accepted Answer

A) True 
 B)False

Question 4

Diversification decreases the variability of both specific and market risk.

Accepted Answer

A) True 
 B)False

Question 5

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 6

An investor expects a return of 18% on his portfolio with a beta of 1.25.If the expected market risk premium increases from 8% to 10%,what return should he now expect on the portfolio?

Accepted Answer

A)  20.0% 
B)  20.5% 
C)  22.5% 
D)  26.0% 
A)  20.0% 
B)  20.5% 
C)  22.5% 
D)  26.0%

Question 7

The security market line displays the relationship between expected return and beta.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Empirical evidence suggests that over a long period of time returns are directly related to beta.

Accepted Answer

A) True 
 B)False

Question 10

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 11

A project should be accepted if its return plots below the security market line.

Accepted Answer

A) True 
 B)False

Question 12

What is the beta of a 3-stock portfolio including 25% of stock A with a beta of 0.90,40% 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 13

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

Accepted Answer

A)  it results in a negative NPV for the proposal. 
B)  the project has a different degree of risk from the company. 
C)  the company has specific risk. 
D)  the company expects to earn more than the risk-free rate. 
A)  it results in a negative NPV for the proposal. 
B)  the project has a different degree of risk from the company. 
C)  the company has specific risk. 
D)  the company expects to earn more than the risk-free rate.

Question 14

The CAPM states that the expected risk premium on any security equals its beta times the market risk premium.

Accepted Answer

A) True 
 B)False

Question 15

The stocks of gold-mining companies commonly have above-average volatility but relatively low betas.

Accepted Answer

A) True 
 B)False

Question 16

When the overall market experiences a decline of 8%,investors with portfolios of aggressive stocks will probably experience portfolio:

Accepted Answer

A)  losses of less than 8%. 
B)  losses greater than 8%. 
C)  gains of less than 8%. 
D)  gains greater than 8%. 
A)  losses of less than 8%. 
B)  losses greater than 8%. 
C)  gains of less than 8%. 
D)  gains greater than 8%.

Question 17

In theory,the "market portfolio" should contain:

Accepted Answer

A)  the securities of the S&P 500. 
B)  the securities of the Dow. 
C)  the securities of the S&P 500 and Treasury bills. 
D)  all risky assets. 
A)  the securities of the S&P 500. 
B)  the securities of the Dow. 
C)  the securities of the S&P 500 and Treasury bills. 
D)  all risky assets.

Question 18

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

Accepted Answer

A)  the risk-free rate plus 75% of the expected return on the market. 
B)  the risk-free rate plus 75% of the expected market risk premium. 
C)  75% of the expected return on the market. 
D)  25% of the risk-free rate plus 75% of the expected market risk premium. 
A)  the risk-free rate plus 75% of the expected return on the market. 
B)  the risk-free rate plus 75% of the expected market risk premium. 
C)  75% of the expected return on the market. 
D)  25% of the risk-free rate plus 75% of the expected market risk premium.

Question 19

The CAPM is a theory of the relationship between risk and return that states that the expected risk premium on any security equals its beta times the market return.

Accepted Answer

A) True 
 B)False

Question 20

If a two-stock portfolio is equally invested in stocks with betas of 1.4 and 0.7,then the portfolio beta is:

Accepted Answer

A)  0.70. 
B)  1.05. 
C)  1.40. 
D)  2.10. 
A)  0.70. 
B)  1.05. 
C)  1.40. 
D)  2.10.

Exam 12: Risk,Return,and Capital Budgeting

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

The average of the betas for all stocks is:

Beta measures the total risk of an individual security.

Diversification decreases the variability of both specific and market risk.

In practice,the market portfolio is often represented by:

An investor expects a return of 18% on his portfolio with a beta of 1.25.If the expected market risk premium increases from 8% to 10%,what return should he now expect on the portfolio?

The security market line displays the relationship between expected return and beta.

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

Empirical evidence suggests that over a long period of time returns are directly related to beta.

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

A project should be accepted if its return plots below the security market line.

What is the beta of a 3-stock portfolio including 25% of stock A with a beta of 0.90,40% of stock B with a beta of 1.05,and 35% of stock C with a beta of 1.73?

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

The CAPM states that the expected risk premium on any security equals its beta times the market risk premium.

The stocks of gold-mining companies commonly have above-average volatility but relatively low betas.

When the overall market experiences a decline of 8%,investors with portfolios of aggressive stocks will probably experience portfolio:

In theory,the "market portfolio" should contain:

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

The CAPM is a theory of the relationship between risk and return that states that the expected risk premium on any security equals its beta times the market return.

If a two-stock portfolio is equally invested in stocks with betas of 1.4 and 0.7,then the portfolio beta is:

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