Question 1

What effect might operating leverage be expected to have on a project's Beta?

Accepted Answer

A)  Beta will increase.
B)  Beta will decrease.
C)  Beta will not be affected.
D)  The effect depends on the market risk premium.E) B) and C)
F) A) and D)

Question 2

What type of risk is properly reflected in a project's discount rate?

Accepted Answer

A)  market risk
B)  unique risk
C)  total risk
D)  diversifiable riskE) A) and B)
F) None of the above

Question 3

The cost of capital for a project depends on the risk of the company.

Accepted Answer

A) True 
 B)False

Question 4

The Beta of an investment in Treasury bills is:

Accepted Answer

A)  0.0.
B)  0.5.
C)  1.0.
D)  meaningless; only common stocks have Betas.E) B) and D)
F) A) and C)

Question 5

The minimum acceptable expected rate of return on a project of a specific risk is the:

Accepted Answer

A)  project cost of capital.
B)  company cost of capital.
C)  risk-free rate of return.
D)  project Beta times market risk premium.E) B) and C)
F) All of the above

Question 6

Given recent evidence concerning the CAPM, which of the following portfolios might be expected to plot above the security market line?

Accepted Answer

A)  a portfolio of cyclical stocks.
B)  a portfolio that includes borrowed funds.
C)  a portfolio of smaller companies.
D)  a portfolio split between Treasury bills and the market index.E) A) and D)
F) C) and D)

Question 7

In practice, the market portfolio is often represented by:

Accepted Answer

A)  a portfolio of Canadian Treasury securities.
B)  a diversified stock market index.
C)  an investor's mutual fund portfolio.
D)  the historic record of stock market returns.E) All of the above
F) C) and D)

Question 8

The company cost of capital may be an inappropriate discount rate for a capital budgeting proposal if:

Accepted Answer

A)  it calculates a negative NPV for the proposal.
B)  the proposal has a different degree of risk.
C)  the company has unique risk.
D)  the company expects to earn more than the risk-free rate.E) B) and C)
F) A) and C)

Question 9

Investors expect aggressive stocks to outperform the market periods of strong economic activity.

Accepted Answer

A) True 
 B)False

Question 10

Decreases in the risk-free rate will reduce:

Accepted Answer

A)  the market risk premium.
B)  the stock's risk premium.
C)  the stock's Beta.
D)  the stock's expected return.E) A) and D)
F) A) and C)

Question 11

If Treasury bills are yielding 10% at a time when the market risk premium is 6%, then the:

Accepted Answer

A)  market portfolio should yield 4%.
B)  market portfolio should yield 6%.
C)  market portfolio should yield 16%.
D)  market portfolio should yield 22%.E) B) and C)
F) A) and B)

Question 12

The covariance of a particular stock within a portfolio is 0.35.The variance of the stock is 0.42.Calculate the stock's Beta.

Accepted Answer

A)  0.833
B)  1.20
C)  1.77
D)  1.50E) C) and D)
F) B) and C)

Question 13

What will happen to a stock that offers a lower risk premium than predicted by the CAPM?

Accepted Answer

A)  its Beta will increase.
B)  its Beta will decrease.
C)  its price will decrease until yield is increased.
D)  its price will increase until the yield is reduced.E) A) and B)
F) A) and C)

Question 14

What is the standard deviation of the market portfolio if the standard deviation of a diversified portfolio with a Beta of 1.25 equals 20%?

Accepted Answer

A)  16.00%
B)  18.75%
C)  25.00%
D)  32.505%E) A) and B)
F) All of the above

Question 15

Which of the following statements is more likely to be correct concerning the statement, "Stock A has a higher expected return than Stock B"?

Accepted Answer

A)  Stock A has more unique risk.
B)  Stock B plots below the security market line.
C)  Stock B is a cyclical stock.
D)  Stock A has a higher Beta.E) B) and C)
F) A) and D)

Question 16

A major benefit of investing in mutual funds is:

Accepted Answer

A)  reducing the Beta of the investment portfolio.
B)  increasing the Beta of the investment portfolio.
C)  low cost reduction of exposure to unique risks.
D)  the elimination of market risk.E) All of the above
F) A) and B)

Question 17

Determine the market risk premium if the risk free rate is 4%, the company's Beta is.85 and its expected return is 15%.

Accepted Answer

A)  11.64%
B)  12.94%
C)  13.54%
D)  14.44%E) B) and D)
F) A) and B)

Question 18

What two elements are represented in security returns?

Accepted Answer

A)  a premium for market risk and for unique risk
B)  a premium for unique risk and a premium for firm-specific risk
C)  a premium for diversification and a premium for portfolio risk
D)  a premium for time value of money and a premium for market riskE) B) and C)
F) All of the above

Question 19

What is the Beta of a portfolio with an expected return of 12% if Treasury bills yield 6% and the market risk premium is 8%?

Accepted Answer

A)  0.50
B)  0.75
C)  0.90
D)  1.50E) A) and B)
F) A) and C)

Question 20

Diversification decreases the variability of both unique and market risk.

Accepted Answer

A) True 
 B)False

Exam 12: Risk, Return, and Capital Budgeting

The minimum acceptable expected rate of return on a project of a specific risk is the:

Correct AnswerverifiedShow Answer

What two elements are represented in security returns?

Correct AnswerverifiedShow Answer

The covariance of a particular stock within a portfolio is 0.35.The variance of the stock is 0.42.Calculate the stock's Beta.

Correct AnswerverifiedShow Answer

Diversification decreases the variability of both unique and market risk.

Correct AnswerverifiedShow Answer

The company cost of capital may be an inappropriate discount rate for a capital budgeting proposal if:

Correct AnswerverifiedShow Answer

What is the Beta of a portfolio with an expected return of 12% if Treasury bills yield 6% and the market risk premium is 8%?

Correct AnswerverifiedShow Answer

Given recent evidence concerning the CAPM, which of the following portfolios might be expected to plot above the security market line?

Correct AnswerverifiedShow Answer

What type of risk is properly reflected in a project's discount rate?

Correct AnswerverifiedShow Answer

Investors expect aggressive stocks to outperform the market periods of strong economic activity.

Correct AnswerverifiedShow Answer

The cost of capital for a project depends on the risk of the company.

Correct AnswerverifiedShow Answer

Determine the market risk premium if the risk free rate is 4%, the company's Beta is.85 and its expected return is 15%.

Correct AnswerverifiedShow Answer

The Beta of an investment in Treasury bills is:

Correct AnswerverifiedShow Answer

A major benefit of investing in mutual funds is:

Correct AnswerverifiedShow Answer

In practice, the market portfolio is often represented by:

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What effect might operating leverage be expected to have on a project's Beta?

Correct AnswerverifiedShow Answer

What will happen to a stock that offers a lower risk premium than predicted by the CAPM?

Correct AnswerverifiedShow Answer

Decreases in the risk-free rate will reduce:

Correct AnswerverifiedShow Answer

Which of the following statements is more likely to be correct concerning the statement, "Stock A has a higher expected return than Stock B"?

Correct AnswerverifiedShow Answer

If Treasury bills are yielding 10% at a time when the market risk premium is 6%, then the:

Correct AnswerverifiedShow Answer

What is the standard deviation of the market portfolio if the standard deviation of a diversified portfolio with a Beta of 1.25 equals 20%?

Correct AnswerverifiedShow Answer

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