Question 1

For markets to be in equilibrium (that is,for there to be no strong pressure for prices to depart from their current levels),

Accepted Answer

A)  The past realized rate of return must be equal to the expected rate of return; that is, . 
B)  The required rate of return must equal the realized rate of return; that is, r = . 
C)  All companies must pay dividends. 
D)  No companies can be in danger of declaring bankruptcy. 
E)  The expected rate of return must be equal to the required rate of return; that is, = r. 
A)  The past realized rate of return must be equal to the expected rate of return; that is, . 
B)  The required rate of return must equal the realized rate of return; that is, r = . 
C)  All companies must pay dividends. 
D)  No companies can be in danger of declaring bankruptcy. 
E)  The expected rate of return must be equal to the required rate of return; that is, = r.

Question 2

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns,and the factors are specified to be (1)market returns, (2)dividend yields,and (3)changes in inflation.

Accepted Answer

A) True 
 B)False

Question 3

The CAPM is a multi-period model which takes account of differences in securities' maturities,and it can be used to determine the required rate of return for any given level of systematic risk.

Accepted Answer

A) True 
 B)False

Question 4

You plan to invest in Stock X,Stock Y,or some combination of the two.The expected return for X is 10% and  $\sigma$X = 5%.The expected return for Y is 12% and  $\sigma$Y = 6%.The correlation coefficient,rXY,is 0.75.
a.
Calculate rp and  $\sigma$p for 100%, 75%, 50%, 25%, and 0% in Stock X.
b.
Use the values you calculated for rp and  $\sigma$p to graph the attainable set of portfolios. Which part of the attainable set is efficient? Also, draw in a set of hypothetical indifference curves to show how an investor might select a portfolio comprised of Stocks X and Y. Let an indifference curve be tangent to the efficient set at the point where rp = 11%.
c.
Now suppose we add a riskless asset to the investment possibilities. What effects will this have on the construction of portfolios?
d.
Suppose rM = 12%,  $\sigma$M = 4%, and rRF = 6%. What would be the required and expected return on a portfolio with  $\sigma$P = 10%?
e.
Suppose the correlation of Stock X with the market, rXM, is 0.8, while rYM = 0.9. Use this information, along with data given previously, to determine Stock X's and Stock Y's beta coefficients.
f. What is the required rate of return on Stocks X and Y? Do these stocks appear to be in equilibrium? If not, what would happen to bring about an equilibrium?

Accepted Answer

11ea42d0_c0ad_6074_9abf_5b20c3fb2dee_5b20

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)  Richard Roll has argued that it is possible to test the CAPM to see if it is correct. 
B)  Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM. 
C)  Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable. 
D)  The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller. 
E)  Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time. 
A)  Richard Roll has argued that it is possible to test the CAPM to see if it is correct. 
B)  Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM. 
C)  Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable. 
D)  The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller. 
E)  Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.

Question 6

If investors are risk averse and hold only one stock,we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10.However,if stocks are held in portfolios,it is possible that the required return could be higher on the low standard deviation stock.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  The slope of the CML is (S1U1B1MS1U1B0 -rS1U1B1RFS1U1B0)/bS1U1B1MS1U1B0. 
B)  All portfolios that lie on the CML to the right of -MS1U1B0 are inefficient. 
C)  All portfolios that lie on the CML to the left of -S1U1B1MS1U1B0 are inefficient. 
D)  The slope of the CML is (S1U1B1MS1U1B0 - rS1U1B1RFS1U1B0)/ $\sigma$S1U1B1MS1U1B0. 
E)  The Capital Market Line (CML) is a curved line that connects the risk-free rate and the market portfolio. 
A)  The slope of the CML is (S1U1B1MS1U1B0 -rS1U1B1RFS1U1B0)/bS1U1B1MS1U1B0. 
B)  All portfolios that lie on the CML to the right of -MS1U1B0 are inefficient. 
C)  All portfolios that lie on the CML to the left of -S1U1B1MS1U1B0 are inefficient. 
D)  The slope of the CML is (S1U1B1MS1U1B0 - rS1U1B1RFS1U1B0)/ $\sigma$S1U1B1MS1U1B0. 
E)  The Capital Market Line (CML) is a curved line that connects the risk-free rate and the market portfolio.

Question 8

You are given the following returns on "the market" and Stock F during the last three years.We could calculate beta using data for Years 1 and 2 and then,after Year 3,calculate a new beta for Years 2 and 3.How different are those two betas,i.e.,what's the value of beta 2 - beta 1? (Hint: You can find betas using the Rise-Over-Run method,or using your calculator's regression function.) 
$\begin{array}{ccc}
\text { Year } &\text { Market }& {\text { Stock F }} \
1 & 6.10 \% & 6.50 \% \
2 & 12.90 \% & -3.70 \% \
3 & 1620 \% & 2171 \%
\end{array}$

Accepted Answer

A)  7.89 
B)  8.30 
C)  8.74 
D)  9.20 
E)  9.66 
A)  7.89 
B)  8.30 
C)  8.74 
D)  9.20 
E)  9.66

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry. 
B)  The slope of the characteristic line is the stock's standard deviation. 
C)  The distance of the plot points from the characteristic line is a measure of the stock's market risk. 
D)  The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk. 
E)  "Characteristic line" is another name for the Security Market Line. 
A)  The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry. 
B)  The slope of the characteristic line is the stock's standard deviation. 
C)  The distance of the plot points from the characteristic line is a measure of the stock's market risk. 
D)  The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk. 
E)  "Characteristic line" is another name for the Security Market Line.

Question 10

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm are negative.

Accepted Answer

A) True 
 B)False

Question 11

Your mother's well-diversified portfolio has an expected return of 12.0% and a beta of 1.20.She is in the process of buying 100 shares of Safety Corp.at $10 a share and adding it to her portfolio.Safety has an expected return of 15.0% and a beta of 2.00.The total value of your current portfolio is $9,000.What will the expected return and beta on the portfolio be after the purchase of the Safety stock? rp bp

Accepted Answer

A)  11.69%; 1.22 
B)  12.30%; 1.28 
C)  12.92%; 1.34 
D)  13.56%; 1.41 
E)  14.24%; 1.48 
A)  11.69%; 1.22 
B)  12.30%; 1.28 
C)  12.92%; 1.34 
D)  13.56%; 1.41 
E)  14.24%; 1.48

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

A stock you are holding has a beta of 2.0 and the stock is currently in equilibrium.The required rate of return on the stock is 15% versus a required return on an average stock of 10%.Now the required return on an average stock increases by 30.0% (not percentage points).The risk-free rate is unchanged.By what percentage (not percentage points)would the required return on your stock increase as a result of this event?

Accepted Answer

A)  36.10% 
B)  38.00% 
C)  40.00% 
D)  42.00% 
E)  44.10% 
A)  36.10% 
B)  38.00% 
C)  40.00% 
D)  42.00% 
E)  44.10%

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

You hold a portfolio consisting of a $5,000 investment in each of 20 different stocks.The portfolio beta is equal to 1.12.You have decided to sell a coal mining stock (b = 1.00)at $5,000 net and use the proceeds to buy a like amount of a mineral rights company stock (b = 2.00).What is the new beta of the portfolio?

Accepted Answer

A)  1.1139 
B)  1.1700 
C)  1.2311 
D)  1.2927 
E)  1.3573 
A)  1.1139 
B)  1.1700 
C)  1.2311 
D)  1.2927 
E)  1.3573

For markets to be in equilibrium (that is,for there to be no strong pressure for prices to depart from their current levels),

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns,and the factors are specified to be (1)market returns, (2)dividend yields,and (3)changes in inflation.

The CAPM is a multi-period model which takes account of differences in securities' maturities,and it can be used to determine the required rate of return for any given level of systematic risk.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm are negative.

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

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

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

Risk and Return

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

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

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Exam 25: Portfolio Theory and Asset Pricing Models

For markets to be in equilibrium (that is,for there to be no strong pressure for prices to depart from their current levels),

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns,and the factors are specified to be (1)market returns, (2)dividend yields,and (3)changes in inflation.

The CAPM is a multi-period model which takes account of differences in securities' maturities,and it can be used to determine the required rate of return for any given level of systematic risk.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm are negative.

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

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

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

Risk and Return

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

Public and Private Financing: Initial Offerings, seasoned Offerings, and Investment Banks

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not For Profit Businesses

Filters