Question 1

Netflicks, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and the risk-free rate is 7 percent, what is Netflicks' risk premium?

Accepted Answer

A) 20.91 percent 
B) 22.38 percent 
C) 25.72 percent 
D) 29.38 percent 
A) 20.91 percent 
B) 22.38 percent 
C) 25.72 percent 
D) 29.38 percent

Question 2

The study of the cognitive processes and biases associated with making financial and economic decisions is known as:

Accepted Answer

A) asset pricing model. 
B) behavioral finance. 
C) efficient market hypothesis. 
D) stock market bubble. 
A) asset pricing model. 
B) behavioral finance. 
C) efficient market hypothesis. 
D) stock market bubble.

Question 3

A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?

Accepted Answer

A) 11.64 percent 
B) 12.00 percent 
C) 22.91 percent 
D) 34.92 percent 
A) 11.64 percent 
B) 12.00 percent 
C) 22.91 percent 
D) 34.92 percent

Question 4

A company has a beta of 4.5. If the market return is expected to be 14 percent and the risk-free rate is 7 percent, what is the company's risk premium?

Accepted Answer

A) 7.0 percent 
B) 25.5 percent 
C) 31.5 percent 
D) 38.5 percent 
A) 7.0 percent 
B) 25.5 percent 
C) 31.5 percent 
D) 38.5 percent

Question 5

You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different. Which of the following would not be a correct explanation for the difference?

Accepted Answer

A) One source used weekly data and another used monthly data. 
B) One source used the S&P 500 for a market proxy and the other used the Dow Jones Industrial Average. 
C) One used regression analysis and the other used geometric analysis. 
D) All of these are correct explanations for the difference. 
A) One source used weekly data and another used monthly data. 
B) One source used the S&P 500 for a market proxy and the other used the Dow Jones Industrial Average. 
C) One used regression analysis and the other used geometric analysis. 
D) All of these are correct explanations for the difference.

Question 6

Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation?

Accepted Answer

A) Market risk line 
B) Probability market line 
C) Security market line 
D) Stock market line 
A) Market risk line 
B) Probability market line 
C) Security market line 
D) Stock market line

Question 7

A manager believes his firm will earn a 7.5 percent return next year. His firm has a beta of 2, the expected return on the market is 5 percent, and the risk-free rate is 2 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is undervalued or overvalued.

Accepted Answer

A) 8 percent, undervalued 
B) 8 percent, overvalued 
C) 12 percent, undervalued 
D) 12 percent, overvalued 
A) 8 percent, undervalued 
B) 8 percent, overvalued 
C) 12 percent, undervalued 
D) 12 percent, overvalued

Question 8

The annual return on the S&P 500 Index was 12.4 percent. The annual T-bill yield during the same period was 5.7 percent. What was the market risk premium during that year?

Accepted Answer

A) 5.7 percent 
B) 6.7 percent 
C) 12.4 percent 
D) 18.1 percent 
A) 5.7 percent 
B) 6.7 percent 
C) 12.4 percent 
D) 18.1 percent

Question 9

In 2000, the S&P 500 Index earned 11 percent while the T-bill yield was 4.4 percent. Given this information, which of the following statements is correct with respect to the market risk premium?

Accepted Answer

A) The market risk premium must have been negative. 
B) The market risk premium must have been positive. 
C) The market risk premium must have been zero. 
D) Unable to answer without more information. 
A) The market risk premium must have been negative. 
B) The market risk premium must have been positive. 
C) The market risk premium must have been zero. 
D) Unable to answer without more information.

Question 10

You have a portfolio with a beta of 0.9. What will be the new portfolio beta if you keep 40 percent of your money in the old portfolio and 60 percent in a stock with a beta of 1.5?

Accepted Answer

A) 1.00 
B) 1.20 
C) 1.26 
D) 2.40 
A) 1.00 
B) 1.20 
C) 1.26 
D) 2.40

Question 11

You own $2,000 of City Steel stock that has a beta of 2.5. You also own $8,000 of Rent-N-Co (beta = 1.9) and $4,000 of Lincoln Corporation (beta = 0.25). What is the beta of your portfolio?

Accepted Answer

A) 1.51 
B) 1.55 
C) 4.65 
D) 14.00 
A) 1.51 
B) 1.55 
C) 4.65 
D) 14.00

Question 12

Paccar's current stock price is $75.10 and it is likely to pay a $3.29 dividend next year. Since analysts estimate Paccar will have a 14.2 percent growth rate, what is its required return?

Accepted Answer

A) 15.39 percent 
B) 17.94 percent 
C) 18.58 percent 
D) 19.62 percent 
A) 15.39 percent 
B) 17.94 percent 
C) 18.58 percent 
D) 19.62 percent

Question 13

Which of the following is a concern regarding beta?

Accepted Answer

A) Using different market proxies will result in different estimates of beta. 
B) A company can alter its risk level which may make the beta estimate obsolete. 
C) Research indicates that a company's beta does not appear to predict its future return very well. 
D) All of these statements are valid concerns regarding beta. 
A) Using different market proxies will result in different estimates of beta. 
B) A company can alter its risk level which may make the beta estimate obsolete. 
C) Research indicates that a company's beta does not appear to predict its future return very well. 
D) All of these statements are valid concerns regarding beta.

Question 14

Special rights given to some employees to buy a specific number of shares of the company stock at a fixed price during a specific period of time are known as:

Accepted Answer

A) executive stock options. 
B) privately held information. 
C) restricted stock. 
D) stock market bubble. 
A) executive stock options. 
B) privately held information. 
C) restricted stock. 
D) stock market bubble.

Question 15

How might a small market risk premium impact people's desire to buy stocks?

Accepted Answer

A) Investors with high risk aversion will be less willing to invest in stocks. 
B) Investors with high risk aversion will be more willing to invest in stocks. 
C) It will only impact the share prices. 
D) None of these statements are correct. 
A) Investors with high risk aversion will be less willing to invest in stocks. 
B) Investors with high risk aversion will be more willing to invest in stocks. 
C) It will only impact the share prices. 
D) None of these statements are correct.

Question 16

Compute the standard deviation given these four economic states, their likelihoods, and the potential returns: $$\begin{array} { | l | c | r | } 
\hline \begin{array} { l } 
\text { Economic } \
\text { State }
\end{array} & \text { Probability } & \text { Return } \
\hline \text { Fast Growth } & 0.40 & 50 \% \
\hline \text { Slow Growth } & 0.40 & 10 \% \
\hline \text { Recession } & 0.10 & - 10 \% \
\hline \text { Depression } & 0.10 & - 5 \% \
\hline
\end{array}$$

Accepted Answer

A) 6.71 percent 
B) 22.5 percent 
C) 23.37 percent 
D) 52.20 percent 
A) 6.71 percent 
B) 22.5 percent 
C) 23.37 percent 
D) 52.20 percent

Question 17

If the Japanese stock market bubble peaked at 37,500, and two and a half years later it had fallen to 25,900, what was the percentage decline?

Accepted Answer

A) -10.31 percent 
B) -27.63 percent 
C) -30.93 percent 
D) -69.07 percent 
A) -10.31 percent 
B) -27.63 percent 
C) -30.93 percent 
D) -69.07 percent

Question 18

The constant growth model assumes which of the following?

Accepted Answer

A) That there is privately held information 
B) That the stock is efficiently priced 
C) That there are executive stock options available to managers 
D) That there is no restricted stock 
A) That there is privately held information 
B) That the stock is efficiently priced 
C) That there are executive stock options available to managers 
D) That there is no restricted stock

Question 19

Estee Lauder's upcoming dividend is expected to be $0.65 and its stock is selling at $45. The firm has a beta of 1.1 and is expected to grow at 10 percent for the foreseeable future. Compute Estee Lauder's required return using both CAPM and the constant growth model. Assume that the market portfolio will earn 11 percent and the risk-free rate is 4 percent.

Accepted Answer

A) CAPM: 11.2 percent; Constant Growth Model: 10.97 percent 
B) CAPM: 11.7 percent; Constant Growth Model: 11.44 percent 
C) CAPM: 10.1 percent; Constant Growth Model: 11.46 percent 
D) CAPM: 9.2 percent; Constant Growth Model: 9.56 percent 
A) CAPM: 11.2 percent; Constant Growth Model: 10.97 percent 
B) CAPM: 11.7 percent; Constant Growth Model: 11.44 percent 
C) CAPM: 10.1 percent; Constant Growth Model: 11.46 percent 
D) CAPM: 9.2 percent; Constant Growth Model: 9.56 percent

Question 20

Which of the following statements is incorrect?

Accepted Answer

A) The security market line shows the relationship between risk and return for any stock or portfolio. 
B) The y-intercept of the security market line represents the return on the risk-free asset. 
C) The measure of risk used in creating the security market line is the standard deviation. 
D) None of these statements are incorrect. 
A) The security market line shows the relationship between risk and return for any stock or portfolio. 
B) The y-intercept of the security market line represents the return on the risk-free asset. 
C) The measure of risk used in creating the security market line is the standard deviation. 
D) None of these statements are incorrect.

Netflicks, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and the risk-free rate is 7 percent, what is Netflicks' risk premium?

The study of the cognitive processes and biases associated with making financial and economic decisions is known as:

A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?

A company has a beta of 4.5. If the market return is expected to be 14 percent and the risk-free rate is 7 percent, what is the company's risk premium?

You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different. Which of the following would not be a correct explanation for the difference?

Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation?

The annual return on the S&P 500 Index was 12.4 percent. The annual T-bill yield during the same period was 5.7 percent. What was the market risk premium during that year?

In 2000, the S&P 500 Index earned 11 percent while the T-bill yield was 4.4 percent. Given this information, which of the following statements is correct with respect to the market risk premium?

You have a portfolio with a beta of 0.9. What will be the new portfolio beta if you keep 40 percent of your money in the old portfolio and 60 percent in a stock with a beta of 1.5?

You own $2,000 of City Steel stock that has a beta of 2.5. You also own $8,000 of Rent-N-Co (beta = 1.9) and $4,000 of Lincoln Corporation (beta = 0.25). What is the beta of your portfolio?

Paccar's current stock price is $75.10 and it is likely to pay a $3.29 dividend next year. Since analysts estimate Paccar will have a 14.2 percent growth rate, what is its required return?

Which of the following is a concern regarding beta?

Special rights given to some employees to buy a specific number of shares of the company stock at a fixed price during a specific period of time are known as:

How might a small market risk premium impact people's desire to buy stocks?

Compute the standard deviation given these four economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.40 50\% Slow Growth 0.40 10\% Recession 0.10 -10\% Depression 0.10 -5\%

If the Japanese stock market bubble peaked at 37,500, and two and a half years later it had fallen to 25,900, what was the percentage decline?

The constant growth model assumes which of the following?

Which of the following statements is incorrect?

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

Netflicks, Inc. has a beta of 3.61. If the market return is expected to be 13.2 percent and the risk-free rate is 7 percent, what is Netflicks' risk premium?

The study of the cognitive processes and biases associated with making financial and economic decisions is known as:

A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?

A company has a beta of 4.5. If the market return is expected to be 14 percent and the risk-free rate is 7 percent, what is the company's risk premium?

You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different. Which of the following would not be a correct explanation for the difference?

Which of these is similar to the Capital Market Line, except that risk is characterized by beta instead of standard deviation?

The annual return on the S&P 500 Index was 12.4 percent. The annual T-bill yield during the same period was 5.7 percent. What was the market risk premium during that year?

In 2000, the S&P 500 Index earned 11 percent while the T-bill yield was 4.4 percent. Given this information, which of the following statements is correct with respect to the market risk premium?

You have a portfolio with a beta of 0.9. What will be the new portfolio beta if you keep 40 percent of your money in the old portfolio and 60 percent in a stock with a beta of 1.5?

You own $2,000 of City Steel stock that has a beta of 2.5. You also own $8,000 of Rent-N-Co (beta = 1.9) and $4,000 of Lincoln Corporation (beta = 0.25). What is the beta of your portfolio?

Paccar's current stock price is $75.10 and it is likely to pay a $3.29 dividend next year. Since analysts estimate Paccar will have a 14.2 percent growth rate, what is its required return?

Which of the following is a concern regarding beta?

Special rights given to some employees to buy a specific number of shares of the company stock at a fixed price during a specific period of time are known as:

How might a small market risk premium impact people's desire to buy stocks?

Compute the standard deviation given these four economic states, their likelihoods, and the potential returns: Economic State Probability Return Fast Growth 0.40 50\% Slow Growth 0.40 10\% Recession 0.10 -10\% Depression 0.10 -5\%

If the Japanese stock market bubble peaked at 37,500, and two and a half years later it had fallen to 25,900, what was the percentage decline?

The constant growth model assumes which of the following?

Which of the following statements is incorrect?

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