Question 1

Which of the following statements is false?

Accepted Answer

A)  The expected return of a portfolio should correspond to the portfolio's beta. 
B)  Graphically the line through the risk-free investment and the market portfolio is called the capital market line (CML). 
C)  The beta of a portfolio is the weighted average beta of the securities in the portfolio. 
D)  By holding a negative beta security, an investor can reduce the overall market risk of his or her portfolio. 
A)  The expected return of a portfolio should correspond to the portfolio's beta. 
B)  Graphically the line through the risk-free investment and the market portfolio is called the capital market line (CML). 
C)  The beta of a portfolio is the weighted average beta of the securities in the portfolio. 
D)  By holding a negative beta security, an investor can reduce the overall market risk of his or her portfolio.

Question 2

Which of the following statements is false?

Accepted Answer

A)  If investors have homogeneous expectations, then each investor will identify the same portfolio as having the highest Sharpe ratio in the economy. 
B)  Homogeneous expectations are when all investors have the same estimates concerning future investments and returns. 
C)  There are many investors in the world, and each must have identical estimates of the volatilities, correlations, and expected returns of the available securities. 
D)  The combined portfolio of risky securities of all investors must equal the efficient portfolio. 
A)  If investors have homogeneous expectations, then each investor will identify the same portfolio as having the highest Sharpe ratio in the economy. 
B)  Homogeneous expectations are when all investors have the same estimates concerning future investments and returns. 
C)  There are many investors in the world, and each must have identical estimates of the volatilities, correlations, and expected returns of the available securities. 
D)  The combined portfolio of risky securities of all investors must equal the efficient portfolio.

Question 3

Which of the following statements is NOT a difference between an exchange traded fund (ETF)and an index fund?

Accepted Answer

A)  An ETF is structured to track a market index using a diversified basket of securities while an IMF focuses on tracking a market index using a portfolio comprising a defined group of securities within the index. 
B)  The structure of an ETF provides greater liquidity than an IMF since its market prices change throughout the day while an IMF is valued only one a day. 
C)  An ETF offers a daily disclosure of holdings while an IMF typically discloses through quarterly reports. 
D)  An IMF will distribute realized capital gains and losses more frequently than an IMF. 
A)  An ETF is structured to track a market index using a diversified basket of securities while an IMF focuses on tracking a market index using a portfolio comprising a defined group of securities within the index. 
B)  The structure of an ETF provides greater liquidity than an IMF since its market prices change throughout the day while an IMF is valued only one a day. 
C)  An ETF offers a daily disclosure of holdings while an IMF typically discloses through quarterly reports. 
D)  An IMF will distribute realized capital gains and losses more frequently than an IMF.

Question 4

Use the table for the question(s) below.
Consider the following three individuals' portfolios consisting of investments in four stocks:
  
-The beta on Paul's portfolio is closest to:

Accepted Answer

A)  1.5 
B)  1.8 
C)  1.3 
D)  1.0 
A)  1.5 
B)  1.8 
C)  1.3 
D)  1.0

Question 5

Debt betas tend to be ________,though they can be significantly higher for risky debt with a ________ credit rating and a ________ maturity.

Accepted Answer

A)  low; high; long 
B)  low; low; long 
C)  high; low; long 
D)  high; high; long 
A)  low; high; long 
B)  low; low; long 
C)  high; low; long 
D)  high; high; long

Question 6

Use the equation for the question(s) below.
Consider the following linear regression model:
(RS1U1B1iS1U1B0 - rS1U1B1fS1U1B0) = aS1U1B1iS1U1B0 + bS1U1B1iS1U1B0(RS1U1B1MktS1U1B0 - rS1U1B1fS1U1B0) + eS1U1B1iS1U1B0
-The ei in the regression

Accepted Answer

A)  measures the market risk in returns. 
B)  measures the deviation from the best fitting line and is zero on average. 
C)  measures the sensitivity of the security to market risk. 
D)  measures the historical performance of the security relative to the expected return predicted by the SML. 
A)  measures the market risk in returns. 
B)  measures the deviation from the best fitting line and is zero on average. 
C)  measures the sensitivity of the security to market risk. 
D)  measures the historical performance of the security relative to the expected return predicted by the SML.

Question 7

Assuming that the risk-free rate is 4% and the expected return on the market is 12%,then calculate the required return on Mary's portfolio.

Accepted Answer

βp_ortfolio = Σx_ib_i r_i = r_f + b(E

Question 8

Which of the following statements is false?

Accepted Answer

A)  The S&P/TSX Composite Index and the S&P/TSX 60 Index are both well-diversified indexes that roughly correspond to the market of Canadian stocks. 
B)  Practitioners commonly use the S&P 500 as the market portfolio in the CAPM with the belief that this index is the Canada market portfolio. 
C)  The S&PO/TSX 60 Index covers about 73% of the market value of Canadian equities traded. 
D)  The S&P/TSX Composite Index was the first widely publicized value-weighted U.S. index and it has become a benchmark for professional investors. 
A)  The S&P/TSX Composite Index and the S&P/TSX 60 Index are both well-diversified indexes that roughly correspond to the market of Canadian stocks. 
B)  Practitioners commonly use the S&P 500 as the market portfolio in the CAPM with the belief that this index is the Canada market portfolio. 
C)  The S&PO/TSX 60 Index covers about 73% of the market value of Canadian equities traded. 
D)  The S&P/TSX Composite Index was the first widely publicized value-weighted U.S. index and it has become a benchmark for professional investors.

Question 9

Use the information for the question(s) below.
KT Enterprises is considering undertaking a new project. Based upon analysis of firms with similar projects, KT has determined that an unlevered cost of equity of 12% is suitable for their project. KT's marginal tax rate is 35%, its borrowing rate is 7%, and KT does not believe that its borrowing rate will change if the new project is accepted.
-If KT expects to maintain a debt-to-equity ratio for this project of 1,then KT's equity cost of capital,rE,for this project is closest to:

Accepted Answer

A)  17.0% 
B)  5.0% 
C)  15.0% 
D)  12% 
A)  17.0% 
B)  5.0% 
C)  15.0% 
D)  12%

Question 10

Which of the following is NOT considered to be an important choice when estimating beta?

Accepted Answer

A)  The choice of the time horizon to use for estimation 
B)  The choice of method used to extrapolate beta 
C)  The choice between weekly and monthly returns 
D)  The choice of index used as the market portfolio 
A)  The choice of the time horizon to use for estimation 
B)  The choice of method used to extrapolate beta 
C)  The choice between weekly and monthly returns 
D)  The choice of index used as the market portfolio

Question 11

Assume that the S&P/TSX Composite Index currently has a dividend yield of 2% and that on average,the dividends of S&P/TSX Composite Index firms have increased by about 7% per year.If the risk-free interest rate is 4%,then your estimate for the future market risk premium is:

Accepted Answer

A)  4% 
B)  7% 
C)  8% 
D)  5% 
A)  4% 
B)  7% 
C)  8% 
D)  5%

Question 12

Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)?

Accepted Answer

A)  Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. 
B)  Investors have homogeneous risk averse preferences toward taking on risk. 
C)  Investors hold only efficient portfolios of traded securities; that is, portfolios that yield the maximum expected return for the given level of volatility. 
D)  Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions costs and can borrow and lend at the risk-free interest rate. 
A)  Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. 
B)  Investors have homogeneous risk averse preferences toward taking on risk. 
C)  Investors hold only efficient portfolios of traded securities; that is, portfolios that yield the maximum expected return for the given level of volatility. 
D)  Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions costs and can borrow and lend at the risk-free interest rate.

Question 13

Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.Luther Industries has a volatility of 24% and a correlation with the market of .5.If you assume that the CAPM assumptions hold,then what is the expected return on Luther stock?

Accepted Answer

β_Luther = @#IMG-DLM& = @#IMG-DLM& = .66667 r_i =

Question 14

Which of the following statements is false?

Accepted Answer

A)  We can improve the performance of our portfolio by selling stocks with negative alphas. 
B)  The market portfolio is on the SML, and according to the CAPM, since all other portfolios are inefficient they will not fall on the SML. 
C)  The difference between a stock's expected return and its required return according to the security market line is called the stock's alpha. 
D)  The risk premium for any security is proportional to its beta with the market. 
A)  We can improve the performance of our portfolio by selling stocks with negative alphas. 
B)  The market portfolio is on the SML, and according to the CAPM, since all other portfolios are inefficient they will not fall on the SML. 
C)  The difference between a stock's expected return and its required return according to the security market line is called the stock's alpha. 
D)  The risk premium for any security is proportional to its beta with the market.

Question 15

Important choices in estimating beta include all of the following EXCEPT:

Accepted Answer

A)  The time horizon used 
B)  The index used as the market portfolio 
C)  The price of the stock 
D)  The method used to extrapolate from past betas to future betas 
A)  The time horizon used 
B)  The index used as the market portfolio 
C)  The price of the stock 
D)  The method used to extrapolate from past betas to future betas

Question 16

Use the information for the question(s) below.
The Aardvark Corporation is considering launching a new product and is trying to determine an appropriate discount rate for evaluating this new product. Aardvark has identified the following information for three single division firms that offer products similar to the one Aardvark is interested in launching:
  
-The unlevered cost of capital for Armadillo Industries is closest to:

Accepted Answer

A)  10.3% 
B)  10.1% 
C)  9.5% 
D)  9.9% 
A)  10.3% 
B)  10.1% 
C)  9.5% 
D)  9.9%

Question 17

Which of the following statements is false?

Accepted Answer

A)  A combination of portfolios on the efficient frontier of risky investments is also on the efficient frontier of risky investments. 
B)  The conclusion of the CAPM that investors should hold the market portfolio combined with the risk-free investment depends on the quality of an investor's information. 
C)  The SML holds with some rate r* between rs and rb in place of rf, where r* depends on the proportion of savers and borrowers in the economy. 
D)  In reality, investors have different information and spend varying amounts of effort on research for assorted stocks. 
A)  A combination of portfolios on the efficient frontier of risky investments is also on the efficient frontier of risky investments. 
B)  The conclusion of the CAPM that investors should hold the market portfolio combined with the risk-free investment depends on the quality of an investor's information. 
C)  The SML holds with some rate r* between rs and rb in place of rf, where r* depends on the proportion of savers and borrowers in the economy. 
D)  In reality, investors have different information and spend varying amounts of effort on research for assorted stocks.

Question 18

Which of the following statements is false?

Accepted Answer

A)  A value-weighted portfolio is an equal-ownership portfolio: we hold an equal fraction of the total number of shares outstanding of each security in the portfolio. 
B)  When buying a value-weighted portfolio, we end up purchasing the same percentage of shares of each firm. 
C)  To maintain a value-weighted portfolio, we do not need to trade securities and rebalance the portfolio unless the number of shares outstanding of some security changes. 
D)  In a value-weighted portfolio the fraction of money invested in any security corresponds to its share of the total number of shares outstanding of all securities in the portfolio. 
A)  A value-weighted portfolio is an equal-ownership portfolio: we hold an equal fraction of the total number of shares outstanding of each security in the portfolio. 
B)  When buying a value-weighted portfolio, we end up purchasing the same percentage of shares of each firm. 
C)  To maintain a value-weighted portfolio, we do not need to trade securities and rebalance the portfolio unless the number of shares outstanding of some security changes. 
D)  In a value-weighted portfolio the fraction of money invested in any security corresponds to its share of the total number of shares outstanding of all securities in the portfolio.

Question 19

Which of the following statements is false?

Accepted Answer

A)  There are two indexes that try to represent the performance of the Canadian stock market. 
B)  A market index reports the price of a particular portfolio of securities that make up the index. 
C)  Since 2002, Standard & Poor's Corporation of New York has managed the S&P/TSX Composite Index. 
D)  The S&P/TSX Composite Index is a popular portfolio used to represent the market index when applying the CAPM to Canadian stocks, as it represents about 95% of Canada's equity market capitalization. 
A)  There are two indexes that try to represent the performance of the Canadian stock market. 
B)  A market index reports the price of a particular portfolio of securities that make up the index. 
C)  Since 2002, Standard & Poor's Corporation of New York has managed the S&P/TSX Composite Index. 
D)  The S&P/TSX Composite Index is a popular portfolio used to represent the market index when applying the CAPM to Canadian stocks, as it represents about 95% of Canada's equity market capitalization.

Question 20

The reason that the Air Transportation Safety and System Stabilization Act,which established the Air Transportation Stabilization Board (ATSB)in the United States of America,gives the U.S.carriers an advantage over Canadian carriers is because

Accepted Answer

A)  the act enables the U.S. carriers to obtain loans at the same level of interest rate as Canadian air carriers. 
B)  the act enables the U.S. carriers to obtain loans at a lower interest rate than they would without the guarantee. 
C)  the act enables the U.S. carriers to obtain loans at the higher level of interest rate as Canadian air carriers. 
D)  the act breaks the advantages of interest rate that Canadian carriers have enjoyed for many years. 
A)  the act enables the U.S. carriers to obtain loans at the same level of interest rate as Canadian air carriers. 
B)  the act enables the U.S. carriers to obtain loans at a lower interest rate than they would without the guarantee. 
C)  the act enables the U.S. carriers to obtain loans at the higher level of interest rate as Canadian air carriers. 
D)  the act breaks the advantages of interest rate that Canadian carriers have enjoyed for many years.

Exam 12: Estimating the Cost of Capital

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is NOT a difference between an exchange traded fund (ETF)and an index fund?

Use the table for the question(s) below. Consider the following three individuals' portfolios consisting of investments in four stocks: -The beta on Paul's portfolio is closest to:

Debt betas tend to be ________,though they can be significantly higher for risky debt with a ________ credit rating and a ________ maturity.

Use the equation for the question(s) below. Consider the following linear regression model: (Ri - rf) = ai + bi(RMkt - rf) + ei -The ei in the regression

Assuming that the risk-free rate is 4% and the expected return on the market is 12%,then calculate the required return on Mary's portfolio.

Which of the following statements is false?

Which of the following is NOT considered to be an important choice when estimating beta?

Assume that the S&P/TSX Composite Index currently has a dividend yield of 2% and that on average,the dividends of S&P/TSX Composite Index firms have increased by about 7% per year.If the risk-free interest rate is 4%,then your estimate for the future market risk premium is:

Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)?

Suppose that the risk-free rate is 5% and the market portfolio has an expected return of 13% with a volatility of 18%.Luther Industries has a volatility of 24% and a correlation with the market of .5.If you assume that the CAPM assumptions hold,then what is the expected return on Luther stock?

Which of the following statements is false?

Important choices in estimating beta include all of the following EXCEPT:

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

The reason that the Air Transportation Safety and System Stabilization Act,which established the Air Transportation Stabilization Board (ATSB)in the United States of America,gives the U.S.carriers an advantage over Canadian carriers is because

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Debt betas tend to be ,though they can be significantly higher for risky debt with a credit rating and a maturity.

Use the equation for the question(s) below. Consider the following linear regression model: (R_i - r_f) = a_i + b_i(R_Mkt - r_f) + e_i -The e_i in the regression