Question 1

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM - rRF, is positive.Which of the following statements is CORRECT?

Accepted Answer

A)  Stock B's required rate of return is twice that of Stock A. 
B)  If Stock A's required return is 11%, then the market risk premium is 5%. 
C)  If Stock B's required return is 11%, then the market risk premium is 5%. 
D)  If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's. 
E)  If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's. 
A)  Stock B's required rate of return is twice that of Stock A. 
B)  If Stock A's required return is 11%, then the market risk premium is 5%. 
C)  If Stock B's required return is 11%, then the market risk premium is 5%. 
D)  If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's. 
E)  If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  Lower beta stocks have higher required returns. 
B)  A stock's beta indicates its diversifiable risk. 
C)  Diversifiable risk cannot be completely diversified away. 
D)  Two securities with the same stand-alone risk must have the same betas. 
E)  The slope of the security market line is equal to the market risk premium. 
A)  Lower beta stocks have higher required returns. 
B)  A stock's beta indicates its diversifiable risk. 
C)  Diversifiable risk cannot be completely diversified away. 
D)  Two securities with the same stand-alone risk must have the same betas. 
E)  The slope of the security market line is equal to the market risk premium.

Question 3

In portfolio analysis, we often use ex post (historical)returns and standard deviations, despite the fact that we are really interested in ex ante (future)data.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following are the factors for the Fama-French model?

Accepted Answer

A)  The excess market return, a debt factor, and a book-to-market factor. 
B)  The excess market return, a size factor, and a debt. 
C)  A debt factor, a size factor, and a book-to-market factor. 
D)  The excess market return, an industrial production factor, and a book-to-market factor. 
E)  The excess market return, a size factor, and a book-to-market factor. 
A)  The excess market return, a debt factor, and a book-to-market factor. 
B)  The excess market return, a size factor, and a debt. 
C)  A debt factor, a size factor, and a book-to-market factor. 
D)  The excess market return, an industrial production factor, and a book-to-market factor. 
E)  The excess market return, a size factor, and a book-to-market factor.

Question 5

Consider the following average annual returns for Stocks A and B and the Market.Which of the possible answers best describes the historical betas for A and B?

Accepted Answer

A)  bA > +1; bB = 0. 
B)  bA = 0; bB = -1. 
C)  bA  0; bB = 1. 
A)  bA > +1; bB = 0. 
B)  bA = 0; bB = -1. 
C)  bA  0; bB = 1.

Question 6

A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Accepted Answer

A) True 
 B)False

Question 7

Calculate the required rate of return for Everest Expeditions Inc., assuming that (1)investors expect a 4.0% rate of inflation in the future, (2)the real risk-free rate is 3.0%, (3)the market risk premium is 5.0%, (4)the firm has a beta of 1.00, and (5)its realized rate of return has averaged 15.0% over the last 5 years.

Accepted Answer

A)  10.29% 
B)  10.83% 
C)  11.40% 
D)  12.00% 
E)  12.60% 
A)  10.29% 
B)  10.83% 
C)  11.40% 
D)  12.00% 
E)  12.60%

Question 8

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information, which of the following statements is CORRECT?

Accepted Answer

A)  If a stock has a negative beta, its required return must also be negative. 
B)  An index fund with beta = 1.0 should have a required return less than 11%. 
C)  If a stock's beta doubles, its required return must also double. 
D)  An index fund with beta = 1.0 should have a required return greater than 11%. 
E)  An index fund with beta = 1.0 should have a required return of 11%. 
A)  If a stock has a negative beta, its required return must also be negative. 
B)  An index fund with beta = 1.0 should have a required return less than 11%. 
C)  If a stock's beta doubles, its required return must also double. 
D)  An index fund with beta = 1.0 should have a required return greater than 11%. 
E)  An index fund with beta = 1.0 should have a required return of 11%.

Question 9

Assume that investors have recently become more risk averse, so the market risk premium has increased.Also, assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur?

Accepted Answer

A)  The required rate of return will decline for stocks whose betas are less than 1.0. 
B)  The required rate of return on the market, rM, will not change as a result of these changes. 
C)  The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk 
D)  The required rate of return on a riskless bond will decline. 
E)  The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium. 
A)  The required rate of return will decline for stocks whose betas are less than 1.0. 
B)  The required rate of return on the market, rM, will not change as a result of these changes. 
C)  The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk 
D)  The required rate of return on a riskless bond will decline. 
E)  The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.

Question 10

Returns for the Alcoff Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.)

Accepted Answer

A)  20.08% 
B)  20.59% 
C)  21.11% 
D)  21.64% 
E)  22.18% 
A)  20.08% 
B)  20.59% 
C)  21.11% 
D)  21.64% 
E)  22.18%

Question 11

The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by a manager's actions.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  Logically, it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks, especially if the projects are closely associated with research and development activities. 
B)  The beta of an "average stock, " which is also "the market beta, " can change over time, sometimes drastically. 
C)  If a newly issued stock does not have a past history that can be used for calculating beta, then we should always estimate that its beta will turn out to be 1.0.This is especially true if the company finances with more debt than the average firm. 
D)  During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects, the calculated historical beta may be drastically different from the beta that will exist in the future. 
E)  If a company with a high beta merges with a low-beta company, the best estimate of the new merged company's beta is 1.0. 
A)  Logically, it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks, especially if the projects are closely associated with research and development activities. 
B)  The beta of an "average stock, " which is also "the market beta, " can change over time, sometimes drastically. 
C)  If a newly issued stock does not have a past history that can be used for calculating beta, then we should always estimate that its beta will turn out to be 1.0.This is especially true if the company finances with more debt than the average firm. 
D)  During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects, the calculated historical beta may be drastically different from the beta that will exist in the future. 
E)  If a company with a high beta merges with a low-beta company, the best estimate of the new merged company's beta is 1.0.

Question 13

Bloome Co.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return.What is the firm's expected rate of return?

Accepted Answer

A)  7.72% 
B)  8.12% 
C)  8.55% 
D)  9.00% 
E)  9.50% 
A)  7.72% 
B)  8.12% 
C)  8.55% 
D)  9.00% 
E)  9.50%

Question 14

You observe the following information regarding Companies X and Y:
 
Given this information, which of the following statements is CORRECT?

Accepted Answer

A)  Company X has a lower coefficient of variation than Company Y. 
B)  Company X has less market risk than Company Y. 
C)  Company X's returns will be negative when Y's returns are positive. 
D)  Company X's stock is a better buy than Company Y's stock. 
E)  Company X has more diversifiable risk than Company Y. 
A)  Company X has a lower coefficient of variation than Company Y. 
B)  Company X has less market risk than Company Y. 
C)  Company X's returns will be negative when Y's returns are positive. 
D)  Company X's stock is a better buy than Company Y's stock. 
E)  Company X has more diversifiable risk than Company Y.

Question 15

You have a portfolio P that consists of 50% Stock X and 50% Stock Y.Stock X has a beta of 0.7 and Stock Y has a beta of 1.3.The standard deviation of each stock's returns is 20%.The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zero.Given this information, which of the following statements is CORRECT?

Accepted Answer

A)  The required return on Portfolio P is equal to the market risk premium (rM - rRF). 
B)  Portfolio P has a beta of 0.7. 
C)  Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF. 
D)  Portfolio P has the same required return as the market (rM). 
E)  Portfolio P has a standard deviation of 20%. 
A)  The required return on Portfolio P is equal to the market risk premium (rM - rRF). 
B)  Portfolio P has a beta of 0.7. 
C)  Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF. 
D)  Portfolio P has the same required return as the market (rM). 
E)  Portfolio P has a standard deviation of 20%.

Question 16

Market risk refers to the tendency of a stock to move with the general stock market.A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

Accepted Answer

A) True 
 B)False

Question 17

Consider the following information and then calculate the required rate of return for the Universal Investment Fund, which holds 4 stocks.The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

Accepted Answer

A)  9.58% 
B)  10.09% 
C)  10.62% 
D)  11.18% 
E)  11.77% 
A)  9.58% 
B)  10.09% 
C)  10.62% 
D)  11.18% 
E)  11.77%

Question 18

Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

Accepted Answer

A) True 
 B)False

Question 19

Two conditions are used to determine whether or not a stock is in equilibrium: (1)Does the stock's market price equal its intrinsic value as seen by the marginal investor, and (2)does the expected return on the stock as seen by the marginal investor equal this investor's required return? If either of these conditions, but not necessarily both, holds, then the stock is said to be in equilibrium.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)  If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change. 
B)  An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky.Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk. 
C)  There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML. 
D)  Assume that the required rate of return on the market, rM, is given and fixed at 10%.If the yield curve were upward sloping, then the Security Market Line (SML)would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF. 
E)  If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0.Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds. 
A)  If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change. 
B)  An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky.Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk. 
C)  There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML. 
D)  Assume that the required rate of return on the market, rM, is given and fixed at 10%.If the yield curve were upward sloping, then the Security Market Line (SML)would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF. 
E)  If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0.Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds.

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM - rRF, is positive.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

In portfolio analysis, we often use ex post (historical)returns and standard deviations, despite the fact that we are really interested in ex ante (future)data.

Which of the following are the factors for the Fama-French model?

Consider the following average annual returns for Stocks A and B and the Market.Which of the possible answers best describes the historical betas for A and B?

A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information, which of the following statements is CORRECT?

Assume that investors have recently become more risk averse, so the market risk premium has increased.Also, assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur?

Returns for the Alcoff Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.)

The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by a manager's actions.

Which of the following statements is CORRECT?

Bloome Co.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return.What is the firm's expected rate of return?

You observe the following information regarding Companies X and Y: Given this information, which of the following statements is CORRECT?

Market risk refers to the tendency of a stock to move with the general stock market.A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

Consider the following information and then calculate the required rate of return for the Universal Investment Fund, which holds 4 stocks.The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

Which of the following statements is CORRECT?

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Exam 6: Risk and return

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM - rRF, is positive.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

In portfolio analysis, we often use ex post (historical)returns and standard deviations, despite the fact that we are really interested in ex ante (future)data.

Which of the following are the factors for the Fama-French model?

Consider the following average annual returns for Stocks A and B and the Market.Which of the possible answers best describes the historical betas for A and B?

A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information, which of the following statements is CORRECT?

Assume that investors have recently become more risk averse, so the market risk premium has increased.Also, assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur?

Returns for the Alcoff Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.)

The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by a manager's actions.

Which of the following statements is CORRECT?

Bloome Co.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return.What is the firm's expected rate of return?

You observe the following information regarding Companies X and Y: Given this information, which of the following statements is CORRECT?

Market risk refers to the tendency of a stock to move with the general stock market.A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

Consider the following information and then calculate the required rate of return for the Universal Investment Fund, which holds 4 stocks.The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

Which of the following statements is CORRECT?

An overview of financial management and the financial environment

Financial statements, cash flow, and taxes

Analysis of financial statements

Time value of money

Bonds, bond valuation, and interest rates

Valuation of stocks and corporations

Financial options and applications in corporate finance

The cost of capital

The basics of capital budgeting: evaluating cash flows

Cash flow estimation and risk analysis

Corporate valuation and financial planning

Agency conflicts and corporate governance

Distributions to shareholders: dividends and repurchases

Capital structure decisions

Supply chains and working capital management

Multinational financial management

Filters