Question 1

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 2

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.Which of the following is a correct statement about the two stocks?

Accepted Answer

A)  Stock A is riskier. 
B)  Stock B is riskier. 
C)  The stocks have the same risk. 
D)  We would need to know if the markets are efficient to answer this question. 
A)  Stock A is riskier. 
B)  Stock B is riskier. 
C)  The stocks have the same risk. 
D)  We would need to know if the markets are efficient to answer this question.

Question 3

IBM's stock price is $22,it is expected to pay a $2 dividend,and analysts expect the firm to grow at 10 percent per year for the next five years.TDI's stock price is $10,it is expected to pay a $1 dividend,and analysts expect the firm to grow at 12 percent per year for the next five years.What is the difference in the two firms' required rates of return?

Accepted Answer

A)  2.91 percent 
B)  1.82 percent 
C)  2.03 percent 
D)  3.23 percent 
A)  2.91 percent 
B)  1.82 percent 
C)  2.03 percent 
D)  3.23 percent

Question 4

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 5

You hold the positions in the following table.If you expect the market to earn 10 percent and the risk-free rate is 3 percent,what is the required return of the portfolio?

Accepted Answer

A)  14.83 percent 
B)  15.81 percent 
C)  28.67 percent 
D)  32.83 percent 
A)  14.83 percent 
B)  15.81 percent 
C)  28.67 percent 
D)  32.83 percent

Question 6

ABC Inc.has a dividend yield equal to 5 percent and is expected to grow at a 12 percent rate for the next seven years.What is ABC's required return?

Accepted Answer

A)  17.0 percent 
B)  7.0 percent 
C)  6.7 percent 
D)  2.4 percent 
A)  17.0 percent 
B)  7.0 percent 
C)  6.7 percent 
D)  2.4 percent

Question 7

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 8

If the risk-free rate is 8 percent and the market risk premium is 2 percent,what is the required return for the market?

Accepted Answer

A)  2 percent 
B)  6 percent 
C)  8 percent 
D)  10 percent 
A)  2 percent 
B)  6 percent 
C)  8 percent 
D)  10 percent

Question 9

Which of the following statements is correct?

Accepted Answer

A)  If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient. 
B)  There is evidence to suggest that the market is strong-form efficient because corporate insiders have made extraordinary profits by trading on inside information. 
C)  The Efficient Market Hypothesis states that security prices will be based on their expected return. 
D)  none of these choices are complete. 
A)  If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient. 
B)  There is evidence to suggest that the market is strong-form efficient because corporate insiders have made extraordinary profits by trading on inside information. 
C)  The Efficient Market Hypothesis states that security prices will be based on their expected return. 
D)  none of these choices are complete.

Question 10

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

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?

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.Which of the following is a correct statement about the two stocks?

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 hold the positions in the following table.If you expect the market to earn 10 percent and the risk-free rate is 3 percent,what is the required return of the portfolio?

ABC Inc.has a dividend yield equal to 5 percent and is expected to grow at a 12 percent rate for the next seven years.What is ABC's required return?

If the risk-free rate is 8 percent and the market risk premium is 2 percent,what is the required return for the market?

Which of the following statements is correct?

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?

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

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?

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.Which of the following is a correct statement about the two stocks?

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 hold the positions in the following table.If you expect the market to earn 10 percent and the risk-free rate is 3 percent,what is the required return of the portfolio?

ABC Inc.has a dividend yield equal to 5 percent and is expected to grow at a 12 percent rate for the next seven years.What is ABC's required return?

If the risk-free rate is 8 percent and the market risk premium is 2 percent,what is the required return for the market?

Which of the following statements is correct?

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?

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