Question 1

Calculate the risk premium on stock C given the following information: risk-free rate = 5%,market return = 13%,stock C's beta = 1.3.

Accepted Answer

A)  8.0% 
B)  10.4% 
C)  15.4% 
D)  16.9%

Question 2

If the market portfolio is expected to return 16%,then a portfolio that is expected to return 13%:

Accepted Answer

A)  plots above the security market line. 
B)  plots to the right of the market on an SML graph. 
C)  is not diversified. 
D)  has a beta that is less than 1.0.

Question 3

Defensive stocks typically provide better returns during periods of economic downturn since they are not very sensitive to market fluctuations.

Accepted Answer

A) True 
 B)False

Question 4

A stock's total risk depends on the stock's _________ and __________.

Accepted Answer

A)  beta; specific risk 
B)  beta; market risk 
C)  specific risk; firm-specific risk 
D)  aggressive risk; defensive risk

Question 5

A stock is expected to pay a year-end dividend of $8 and then to sell at a price of $109.The risk-free interest rate is 4%,the expected market return is 12% and the stock has a beta of 0.8.What is the stock price today?

Accepted Answer

A)  $102.99. 
B)  $98.73. 
C)  $105.98. 
D)  $109.00.

Question 6

If the interest rate on Treasury bills is 6% and the market risk premium is 9%,then a stock with a beta of 1.5 would be expected to return:

Accepted Answer

A)  12.0%. 
B)  17.0%. 
C)  19.5%. 
D)  21.5%.

Question 7

An investor expects a return of 14.7% on her portfolio with a beta of 1.13.If the expected market risk premium decreases from 8% to 7%,what return should she now expect on the portfolio?

Accepted Answer

A)  13.57% 
B)  13.89% 
C)  14.67% 
D)  15.87%

Question 8

If the plot of a portfolio's returns against returns on the market index produces a tight pattern,then the portfolio:

Accepted Answer

A)  appears to be well diversified. 
B)  has a beta of 0. 
C)  has very little systematic risk. 
D)  has a risk premium lower than the market.

Question 9

What is the most likely explanation for a +20.0% return on a stock with a beta of 1.0 in a month when the market returned +10.0%?

Accepted Answer

A)  The stock is aggressive. 
B)  The market is undervalued. 
C)  Favorable firm-specific news was reported. 
D)  The beta is really less than 1.0.

Question 10

Which one of these statements is correct?

Accepted Answer

A)  Betas can be measured exactly. 
B)  If a stock has a very low beta, it is likely to have a high beta in the future. 
C)  The expected future risk premium is easy to accurately determine. 
D)  CAPM is widely used as a means of estimating expected returns.

Question 11

The slope of the fitted line that shows the relationship between a stock's return and the market's return is the:

Accepted Answer

A)  market's beta. 
B)  stock's beta. 
C)  market risk premium. 
D)  stock's standard deviation.

Question 12

A project costs $3 million,and is expected to generate $1 million in cash flows for the next 4.If the opportunity cost of capital is 15%,the project's return would plot:

Accepted Answer

A)  above the security market line. 
B)  below the security market line. 
C)  on the security market line. 
D)  on the security market line, with a beta of 1.0.

Question 13

You want to construct a portfolio containing equal amounts of U.S.Treasury bills and two stocks.If the beta of the first stock is 1.23 and the beta of the portfolio is 1.0,what does the beta of the second stock have to be?

Accepted Answer

A)  0.77 
B)  1.23 
C)  0.23 
D)  1.77

Question 14

A stock's risk premium is equal to the:

Accepted Answer

A)  expected market return times beta. 
B)  Treasury bill yield plus the expected market return. 
C)  risk-free rate plus the expected market risk premium. 
D)  expected market risk premium times beta.

Question 15

The security market line provides a standard that can be used to make project acceptance/rejection decisions.

Accepted Answer

A) True 
 B)False

Question 16

The project cost of capital depends on the use to which that capital is put.Therefore,it depends on both the risk of the project and also on the risk of the company.

Accepted Answer

A) True 
 B)False

Question 17

Why should stock market investors ignore specific risks when calculating required rates of return?

Accepted Answer

A)  There is no method for quantifying specific risks. 
B)  Specific can be diversified away. 
C)  Specific risks are compensated by the risk-free rate. 
D)  Beta includes a component to compensate for specific risk.

Question 18

The basic tenet of the CAPM is that a stock's expected risk premium should be:

Accepted Answer

A)  greater than the expected market return. 
B)  proportionate to the market return. 
C)  proportionate to the stock's beta. 
D)  greater than the risk-free rate of return.

Question 19

The market portfolio has an expected return of 18% and the risk-free rate is 6%.An investor borrows $100 at the risk-free rate and invests this and a further $100 of his own in the market portfolio.What is his expected return?

Accepted Answer

A)  18.6% 
B)  19.6% 
C)  21.6% 
D)  30.0%

Question 20

An investor wishes to invest equal amounts in three stocks and to achieve a portfolio beta of 1.2.If stock A has a beta of 0.9 and stock B has a beta of 1.1,what must be the beta of stock C?

Accepted Answer

A)  0.7 
B)  1.6 
C)  1.2 
D)  1.8

Exam 12: Risk,Return,and Capital Budgeting

Calculate the risk premium on stock C given the following information: risk-free rate = 5%,market return = 13%,stock C's beta = 1.3.

If the market portfolio is expected to return 16%,then a portfolio that is expected to return 13%:

Defensive stocks typically provide better returns during periods of economic downturn since they are not very sensitive to market fluctuations.

A stock's total risk depends on the stock's _ and __.

A stock is expected to pay a year-end dividend of $8 and then to sell at a price of $109.The risk-free interest rate is 4%,the expected market return is 12% and the stock has a beta of 0.8.What is the stock price today?

If the interest rate on Treasury bills is 6% and the market risk premium is 9%,then a stock with a beta of 1.5 would be expected to return:

An investor expects a return of 14.7% on her portfolio with a beta of 1.13.If the expected market risk premium decreases from 8% to 7%,what return should she now expect on the portfolio?

If the plot of a portfolio's returns against returns on the market index produces a tight pattern,then the portfolio:

What is the most likely explanation for a +20.0% return on a stock with a beta of 1.0 in a month when the market returned +10.0%?

Which one of these statements is correct?

The slope of the fitted line that shows the relationship between a stock's return and the market's return is the:

A project costs $3 million,and is expected to generate $1 million in cash flows for the next 4.If the opportunity cost of capital is 15%,the project's return would plot:

You want to construct a portfolio containing equal amounts of U.S.Treasury bills and two stocks.If the beta of the first stock is 1.23 and the beta of the portfolio is 1.0,what does the beta of the second stock have to be?

A stock's risk premium is equal to the:

The security market line provides a standard that can be used to make project acceptance/rejection decisions.

The project cost of capital depends on the use to which that capital is put.Therefore,it depends on both the risk of the project and also on the risk of the company.

Why should stock market investors ignore specific risks when calculating required rates of return?

The basic tenet of the CAPM is that a stock's expected risk premium should be:

The market portfolio has an expected return of 18% and the risk-free rate is 6%.An investor borrows $100 at the risk-free rate and invests this and a further $100 of his own in the market portfolio.What is his expected return?

An investor wishes to invest equal amounts in three stocks and to achieve a portfolio beta of 1.2.If stock A has a beta of 0.9 and stock B has a beta of 1.1,what must be the beta of stock C?