Question 1

If the risk-free rate is 10 percent and the market risk premium is 4 percent, what is the required return for the market?

Accepted Answer

A) 4 percent 
B) 7 percent 
C) 10 percent 
D) 14 percent 
A) 4 percent 
B) 7 percent 
C) 10 percent 
D) 14 percent

Question 2

Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset?

Accepted Answer

A) Unable to answer since there is no data to calculate the standard deviation. 
B) A very low number since it would have very low risk. 
C) 1 
D) 0 
A) Unable to answer since there is no data to calculate the standard deviation. 
B) A very low number since it would have very low risk. 
C) 1 
D) 0

Question 3

Stock A has a required return of 19 percent. Stock B has a required return of 11 percent. Assume a risk-free rate of 4.75 percent. By how much does Stock A's risk premium exceed the risk premium of Stock B?

Accepted Answer

A) 3.25 percent 
B) 6.25 percent 
C) 8.00 percent 
D) 7.00 percent 
A) 3.25 percent 
B) 6.25 percent 
C) 8.00 percent 
D) 7.00 percent

Question 4

U.S. Bancorp holds a press conference to announce a positive news event that was unexpected to the market. As soon as the announcement is made, the stock price increases $8 per share but then over the next hour the price falls resulting in a net increase of only $4. Given this information which of the following statements is correct?

Accepted Answer

A) This is an example of a market overreaction. 
B) This is an example of a market underreaction. 
C) This is an example of a semi-strong efficient market. 
D) None of these statements are correct. 
A) This is an example of a market overreaction. 
B) This is an example of a market underreaction. 
C) This is an example of a semi-strong efficient market. 
D) None of these statements are correct.

Question 5

You own $1,000 of City Steel stock that has a beta of 1.5. You also own $5,000 of Rent-N-Co (beta = 1.8) and $4,000 of Lincoln Corporation (beta = 0.9). What is the beta of your portfolio?

Accepted Answer

A) 1.4 
B) 1.5 
C) 4.2 
D) 4.65 
A) 1.4 
B) 1.5 
C) 4.2 
D) 4.65

Question 6

You own $9,000 of Olympic Steel stock that has a beta of 2.5. You also own $7,000 of Rent-a-Center (beta = 1.2) and $8,000 of Lincoln Educational (beta = 0.4). What is the beta of your portfolio?

Accepted Answer

A) 1.18 
B) 1.07 
C) 1.42 
D) 1.53 
A) 1.18 
B) 1.07 
C) 1.42 
D) 1.53

Question 7

Which of the following is the asset pricing theory based on a beta, a measure of market risk?

Accepted Answer

A) Behavioral asset pricing model 
B) Capital asset pricing model 
C) Efficient markets asset pricing model 
D) Efficient market hypothesis 
A) Behavioral asset pricing model 
B) Capital asset pricing model 
C) Efficient markets asset pricing model 
D) Efficient market hypothesis

Question 8

Which of the following is the use of debt to increase an investment position?

Accepted Answer

A) Behavioral finance 
B) Financial leverage 
C) Probability 
D) Stock market bubble 
A) Behavioral finance 
B) Financial leverage 
C) Probability 
D) Stock market bubble

Question 9

In theory, which of these is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate?

Accepted Answer

A) Efficient market 
B) Market portfolio 
C) Probability distribution 
D) Stock market bubble 
A) Efficient market 
B) Market portfolio 
C) Probability distribution 
D) Stock market bubble

Question 10

You hold a diversified portfolio consisting of $1,000 investment in each of 10 different stocks. The portfolio has a beta of 0.8. You have decided to sell one of your stocks that has a beta equal to 1.1 for $1,000. You will purchase $1,000 of a new stock with a beta of 2.5. After these two transactions (sell and buy), what will be the beta of the new portfolio?

Accepted Answer

A) 1.1 
B) 0.99 
C) 0.87 
D) 0.94 
A) 1.1 
B) 0.99 
C) 0.87 
D) 0.94

Question 11

A manager believes his firm will earn an 18 percent return next year. His firm has a beta of 1.75, the expected return on the market is 13 percent, and the risk-free rate is 5 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.

Accepted Answer

A) 19 percent, overvalued 
B) 19 percent, undervalued 
C) 16.7 percent, overvalued 
D) 16.7 percent, undervalued 
A) 19 percent, overvalued 
B) 19 percent, undervalued 
C) 16.7 percent, overvalued 
D) 16.7 percent, undervalued

Question 12

You hold the positions in the following table. What is the beta of your portfolio? $$\begin{array} { | l | c | c | c | } 
\hline & \text { Price } & \text { Shares } & \text { Beta } \
\hline \text { TechNo Comp } & \$ 15.25 & 2000 & 4.0 \
\hline \text { Delivery Corp } & \$ 105.00 & 500 & 1.4 \
\hline \text { Computer Corp } & \$ 35.40 & 300 & 0.9 \
\hline \text { Food Corp } & \$ 18.75 & 200 & - 0.7 \
\hline
\end{array}$$

Accepted Answer

A) 1.4 
B) 2.08 
C) 2.13 
D) 5.6 
A) 1.4 
B) 2.08 
C) 2.13 
D) 5.6

Question 13

If the NASDAQ stock market bubble peaked at 3,750, and two and a half years later it had fallen to 2,200, what would be the percentage decline?

Accepted Answer

A) -15.87 percent 
B) -17.05 percent 
C) -41.33 percent 
D) -58.67 percent 
A) -15.87 percent 
B) -17.05 percent 
C) -41.33 percent 
D) -58.67 percent

Question 14

Which of these is a measure of the sensitivity of a stock or portfolio to market risk?

Accepted Answer

A) Behavioral finance 
B) Beta 
C) Efficient market 
D) Hedge 
A) Behavioral finance 
B) Beta 
C) Efficient market 
D) Hedge

Question 15

Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call a(n):

Accepted Answer

A) financial meltdown. 
B) irrational behavior. 
C) stock market bubble. 
D) none of these. 
A) financial meltdown. 
B) irrational behavior. 
C) stock market bubble. 
D) none of these.

Question 16

Which of the following is a true statement?

Accepted Answer

A) The risk and return that a firm experienced in the past is also the risk level for its future. 
B) Firms can quite possibly change their stocks' risk level by substantially changing their business. 
C) If a firm takes on riskier new projects over time, the firm itself will become less risky. 
D) If a firm takes on less risky new projects over time, the firm itself will become more risky. 
A) The risk and return that a firm experienced in the past is also the risk level for its future. 
B) Firms can quite possibly change their stocks' risk level by substantially changing their business. 
C) If a firm takes on riskier new projects over time, the firm itself will become less risky. 
D) If a firm takes on less risky new projects over time, the firm itself will become more risky.

Question 17

Compute the expected return given these three economic states, their likelihoods, and the potential returns: $$\begin{array} { | l | l | l | } 
\hline \begin{array} { l } 
\text { Economic } \
\text { State }
\end{array} & \text { Probability } & \text { Return } \
\hline \text { Fast Growth } & 0.2 & 23 \% \
\hline \text { Slow Growth } & 0.6 & 14 \% \
\hline \text { Recession } & 0.2 & - 30 \% \
\hline
\end{array}$$

Accepted Answer

A) 3.5 percent 
B) 7.0 percent 
C) 7.5 percent 
D) 12.5 percent 
A) 3.5 percent 
B) 7.0 percent 
C) 7.5 percent 
D) 12.5 percent

Question 18

All of the following are necessary conditions for an efficient market EXCEPT:

Accepted Answer

A) low trading or transaction costs. 
B) many buyers and sellers. 
C) free and readily available information to market participants. 
D) low stock prices. 
A) low trading or transaction costs. 
B) many buyers and sellers. 
C) free and readily available information to market participants. 
D) low stock prices.

Question 19

A stock has an expected return of 14.5 percent, the risk-free rate is 4 percent and the return on the market is 11 percent. What is this stock's beta?

Accepted Answer

A) 1.5 
B) 3.0 
C) 1.05 
D) 0.94 
A) 1.5 
B) 3.0 
C) 1.05 
D) 0.94

Question 20

You hold the positions in the following table. What is the beta of your portfolio? If you expect the market to earn 10 percent and the risk-free rate is 4 percent, what is the required return of the portfolio? $$\begin{array} { | l | l | l | l | } 
\hline & \text { Price } & \text { Shares } & \text { Beta } \
\hline \begin{array} { l } 
\text { Advanced Micro } \
\text { Devices }
\end{array} & \$ 10 & 200 & 4.2 \
\hline \text { FedEx Corp } & \$ 100 & 50 & 1.1 \
\hline \text { Microsoft } & \$ 30 & 150 & 0.7 \
\hline \text { Sara Lee Corp } & \$ 15 & 200 & 0.5 \
\hline
\end{array}$$

Accepted Answer

A) 12.37 percent 
B) 9.73 percent 
C) 10.17 percent 
D) 11.68 percent 
A) 12.37 percent 
B) 9.73 percent 
C) 10.17 percent 
D) 11.68 percent

If the risk-free rate is 10 percent and the market risk premium is 4 percent, what is the required return for the market?

Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset?

Stock A has a required return of 19 percent. Stock B has a required return of 11 percent. Assume a risk-free rate of 4.75 percent. By how much does Stock A's risk premium exceed the risk premium of Stock B?

You own $1,000 of City Steel stock that has a beta of 1.5. You also own $5,000 of Rent-N-Co (beta = 1.8) and $4,000 of Lincoln Corporation (beta = 0.9). What is the beta of your portfolio?

You own $9,000 of Olympic Steel stock that has a beta of 2.5. You also own $7,000 of Rent-a-Center (beta = 1.2) and $8,000 of Lincoln Educational (beta = 0.4). What is the beta of your portfolio?

Which of the following is the asset pricing theory based on a beta, a measure of market risk?

Which of the following is the use of debt to increase an investment position?

In theory, which of these is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate?

You hold the positions in the following table. What is the beta of your portfolio? Price Shares Beta TechNo Comp \ 15.25 2000 4.0 Delivery Corp \ 105.00 500 1.4 Computer Corp \ 35.40 300 0.9 Food Corp \ 18.75 200 -0.7

If the NASDAQ stock market bubble peaked at 3,750, and two and a half years later it had fallen to 2,200, what would be the percentage decline?

Which of these is a measure of the sensitivity of a stock or portfolio to market risk?

Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call a(n):

Which of the following is a true statement?

Compute the expected return given these three economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.2 23\% Slow Growth 0.6 14\% Recession 0.2 -30\%

All of the following are necessary conditions for an efficient market EXCEPT:

A stock has an expected return of 14.5 percent, the risk-free rate is 4 percent and the return on the market is 11 percent. What is this stock's beta?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Filters

Exam 10: Estimating Risk and Return

If the risk-free rate is 10 percent and the market risk premium is 4 percent, what is the required return for the market?

Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset?

Stock A has a required return of 19 percent. Stock B has a required return of 11 percent. Assume a risk-free rate of 4.75 percent. By how much does Stock A's risk premium exceed the risk premium of Stock B?

You own $1,000 of City Steel stock that has a beta of 1.5. You also own $5,000 of Rent-N-Co (beta = 1.8) and $4,000 of Lincoln Corporation (beta = 0.9). What is the beta of your portfolio?

You own $9,000 of Olympic Steel stock that has a beta of 2.5. You also own $7,000 of Rent-a-Center (beta = 1.2) and $8,000 of Lincoln Educational (beta = 0.4). What is the beta of your portfolio?

Which of the following is the asset pricing theory based on a beta, a measure of market risk?

Which of the following is the use of debt to increase an investment position?

In theory, which of these is a combination of securities that places the portfolio on the efficient frontier and on a line tangent from the risk-free rate?

You hold the positions in the following table. What is the beta of your portfolio? Price Shares Beta TechNo Comp \ 15.25 2000 4.0 Delivery Corp \ 105.00 500 1.4 Computer Corp \ 35.40 300 0.9 Food Corp \ 18.75 200 -0.7

If the NASDAQ stock market bubble peaked at 3,750, and two and a half years later it had fallen to 2,200, what would be the percentage decline?

Which of these is a measure of the sensitivity of a stock or portfolio to market risk?

Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call a(n):

Which of the following is a true statement?

Compute the expected return given these three economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.2 23\% Slow Growth 0.6 14\% Recession 0.2 -30\%

All of the following are necessary conditions for an efficient market EXCEPT:

A stock has an expected return of 14.5 percent, the risk-free rate is 4 percent and the return on the market is 11 percent. What is this stock's beta?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Filters