Question 1

Which of the following statements is correct?

Accepted Answer

A)   Penny stocks are the stocks of small companies that are priced below $1 per share.
B)   Restricted stocks are shares of stock issued to executives that have limitations on voting rights.
C)   The Capital Market Line graphs the relationship between return and risk (beta) .
D)   All of these choices are correct. A

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.By how much does Stock A's risk premium exceed the risk premium of Stock B?

Accepted Answer

A)   3.25 percent
B)   6.25 percent
C)   8.00 percent
D)   7.00 percent C

Question 3

Which of the following is the reward investors require for taking risk?

Accepted Answer

A)   required return
B)   risk-free rate
C)   risk premium
D)   market risk premium C

Question 4

A stock has an expected return of 14.5 percent,the risk-free rate is 4 percent and the return on the market is 11 percent.What is this stock's beta?

Accepted Answer

A)   1.5
B)   3.0
C)   1.05
D)   0.94

Question 5

Which of the following statements is incorrect?

Accepted Answer

A)   The capital market line shows the relationship between return and risk as measured by the standard deviation.
B)   The Efficient Market Hypothesis states that security prices fully reflect all available information.
C)   The security market line shows the relationship between return and risk as measured by beta.
D)   none of these choices are complete.

Question 6

Compute the expected return given these three economic states,their likelihoods,and the potential returns:

Accepted Answer

A)   −4.3 percent
B)   14.1 percent
C)   19.1 percent
D)   29.0 percent

Question 7

Whenever a set of stock prices go unnaturally high and subsequently crash down,the market experiences what we call a(n)

Accepted Answer

A)   financial meltdown.
B)   irrational behavior.
C)   stock market bubble.
D)   none of these choices are complete.

Question 8

A company has a beta of 0.25.If the market return is expected to be 8 percent and the risk-free rate is 2 percent,what is the company's required return?

Accepted Answer

A)   1.50 percent
B)   3.50 percent
C)   4.00 percent
D)   13.50 percent

Question 9

You own $8,000 of City Steel stock that has a beta of 2.1.You also own $12,000 of Rent-N-Co (beta = 1.75)and $5,000 of Lincoln Corporation (beta = 0.50).What is the beta of your portfolio?

Accepted Answer

A)   1.45
B)   1.61
C)   2.10
D)   4.35

Question 10

If the NASDAQ stock market bubble peaked at 3,750,and two and a half years later it had fallen to 2,200,what would be the percentage decline?

Accepted Answer

A)   −15.87 percent
B)   −17.05 percent
C)   −41.33 percent
D)   −58.67 percent

Question 11

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

Question 12

U.S.Bancorp holds a press conference to announce a positive news event that was unexpected to the market.As soon as the announcement is made,the stock price increases $8 per share but then over the next hour the price continues to increase resulting in a total increase of $11.Given this information which of the following statements is correct?

Accepted Answer

A)   This is an example of a market overreaction.
B)   This is an example of a market underreaction.
C)   This is an example of a semi-strong efficient market.
D)   none of these choices are complete.

Question 13

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

Question 14

Which of the following is the asset pricing theory based on a beta,a measure of market risk?

Accepted Answer

A)   behavioral asset pricing model
B)   capital asset pricing model
C)   efficient markets asset pricing model
D)   efficient market hypothesis

Question 15

Compute the expected return given these three economic states,their likelihoods,and the potential returns:

Accepted Answer

A)   13.5 percent
B)   22.5 percent
C)   18.3 percent
D)   40.0 percent

Question 16

You hold the positions in the following table.What is the beta of your portfolio? If you expect the market to earn 10 percent and the risk-free rate is 4 percent,what is the required return of the portfolio?

Accepted Answer

A)   12.37 percent
B)   9.73 percent
C)   10.17 percent
D)   11.68 percent

Question 17

A company's current stock price is $65.40 and it is likely to pay a $2.25 dividend next year.Since analysts estimate the company will have an 11.25 percent growth rate,what is its expected return?

Accepted Answer

A)   3.44 percent
B)   3.61 percent
C)   11.25 percent
D)   14.69 percent

Question 18

Compute the expected return given these three economic states,their likelihoods,and the potential returns:

Accepted Answer

A)   6.8 percent
B)   12.8 percent
C)   16.0 percent
D)   22.7 percent

Question 19

You have a portfolio with a beta of 3.1.What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta of 4.5?

Accepted Answer

A)   3.31
B)   3.51
C)   3.61
D)   3.71

Question 20

Which of the following is a true statement?

Accepted Answer

A)   The risk and return that a firm experienced in the past is also the risk level for its future.
B)   Firms can quite possibly change their stocks' risk level by substantially changing their business.
C)   If a firm takes on riskier new projects over time, the firm itself will become less risky.
D)   If a firm takes on less risky new projects over time, the firm itself will become more risky.

Exam 10: Estimating Risk and Return

Which of the following statements is correct?

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.By how much does Stock A's risk premium exceed the risk premium of Stock B?

Which of the following is the reward investors require for taking risk?

A stock has an expected return of 14.5 percent,the risk-free rate is 4 percent and the return on the market is 11 percent.What is this stock's beta?

Which of the following statements is incorrect?

Compute the expected return given these three economic states,their likelihoods,and the potential returns:

Whenever a set of stock prices go unnaturally high and subsequently crash down,the market experiences what we call a(n)

A company has a beta of 0.25.If the market return is expected to be 8 percent and the risk-free rate is 2 percent,what is the company's required return?

You own $8,000 of City Steel stock that has a beta of 2.1.You also own $12,000 of Rent-N-Co (beta = 1.75) and $5,000 of Lincoln Corporation (beta = 0.50) .What is the beta of your portfolio?

If the NASDAQ stock market bubble peaked at 3,750,and two and a half years later it had fallen to 2,200,what would be the percentage decline?

The constant growth model assumes which of the following?

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?

Which of the following is the asset pricing theory based on a beta,a measure of market risk?

Compute the expected return given these three economic states,their likelihoods,and the potential returns:

You hold the positions in the following table.What is the beta of your portfolio? If you expect the market to earn 10 percent and the risk-free rate is 4 percent,what is the required return of the portfolio?

A company's current stock price is $65.40 and it is likely to pay a $2.25 dividend next year.Since analysts estimate the company will have an 11.25 percent growth rate,what is its expected return?

Compute the expected return given these three economic states,their likelihoods,and the potential returns:

You have a portfolio with a beta of 3.1.What will be the new portfolio beta if you keep 85 percent of your money in the old portfolio and 15 percent in a stock with a beta of 4.5?

Which of the following is a true statement?