Question 1

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

Accepted Answer

A)  1.5 
B)  3.0 
C)  1.05 
D)  .94 
A)  1.5 
B)  3.0 
C)  1.05 
D)  .94

Question 2

Which of the following statements is incorrect regarding how beta is calculated?

Accepted Answer

A)  The company return is the independent variable. 
B)  The market portfolio return is the dependent variable. 
C)  Using the oldest data possible will yield the most accurate results. 
D)  All of these statements are incorrect. 
A)  The company return is the independent variable. 
B)  The market portfolio return is the dependent variable. 
C)  Using the oldest data possible will yield the most accurate results. 
D)  All of these statements are incorrect.

Question 3

The study of the cognitive processes and biases associated with making financial and economic decisions.

Accepted Answer

A)  asset pricing model 
B)  behavioral finance 
C)  efficient market hypothesis 
D)  stock market bubble 
A)  asset pricing model 
B)  behavioral finance 
C)  efficient market hypothesis 
D)  stock market bubble

Question 4

How might a small market risk premium impact people's desire to buy stocks?

Accepted Answer

A)  Investors with high risk aversion will be less willing to invest in stocks. 
B)  Investors with high risk aversion will be more willing to invest in stocks. 
C)  It will only impact the share prices. 
D)  None of these statements is correct. 
A)  Investors with high risk aversion will be less willing to invest in stocks. 
B)  Investors with high risk aversion will be more willing to invest in stocks. 
C)  It will only impact the share prices. 
D)  None of these statements is correct.

Question 5

You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different. Which of the following would not be a correct explanation for the difference?

Accepted Answer

A)  One source used weekly data and another used monthly data. 
B)  One source used the S&P500 for a market proxy and the other used the Dow Jones Industrial Average. 
C)  One used regression analysis and the other used geometric analysis. 
D)  All of these are correct explanations for the difference. 
A)  One source used weekly data and another used monthly data. 
B)  One source used the S&P500 for a market proxy and the other used the Dow Jones Industrial Average. 
C)  One used regression analysis and the other used geometric analysis. 
D)  All of these are correct explanations for the difference.

Question 6

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

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 
A)  Financial meltdown 
B)  Irrational behavior 
C)  Stock market bubble 
D)  None of these

Question 8

Which of the following statements is correct?

Accepted Answer

A)  If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient. 
B)  There is evidence to suggest that the market is strong-form efficient because corporate insiders have made extraordinary profits by trading on inside information. 
C)  The Efficient Market Hypothesis states that security prices will be based on their expected return. 
D)  None of these statements is correct. 
A)  If the market is strong-form efficient it must also be weak-form efficient and semi-strong efficient. 
B)  There is evidence to suggest that the market is strong-form efficient because corporate insiders have made extraordinary profits by trading on inside information. 
C)  The Efficient Market Hypothesis states that security prices will be based on their expected return. 
D)  None of these statements is correct.

Question 9

Required Return If the risk-free rate is 10 percent and the market risk premium is 4 percent, what is the required return for the market?

Accepted Answer

A)  4% 
B)  7% 
C)  10% 
D)  14% 
A)  4% 
B)  7% 
C)  10% 
D)  14%

Question 10

IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the following statements must be correct?

Accepted Answer

A)  The market risk premium for Apple must be larger than the market risk premium of IBM. 
B)  If investors become more risk averse, the expected return of Apple will increase more than the expected return on IBM. 
C)  Apple's expected rate of return must be three times as large as IBM's. 
D)  None of these statements is correct. 
A)  The market risk premium for Apple must be larger than the market risk premium of IBM. 
B)  If investors become more risk averse, the expected return of Apple will increase more than the expected return on IBM. 
C)  Apple's expected rate of return must be three times as large as IBM's. 
D)  None of these statements is correct.

Question 11

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

Accepted Answer

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

Question 12

CAPM Required Return A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return?

Accepted Answer

A)  33.250% 
B)  39.375% 
C)  48.875% 
D)  55.625% 
A)  33.250% 
B)  39.375% 
C)  48.875% 
D)  55.625%

Question 13

CAPM Required Return A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company's required return?

Accepted Answer

A)  6.0% 
B)  8.5% 
C)  11.0% 
D)  13.5% 
A)  6.0% 
B)  8.5% 
C)  11.0% 
D)  13.5%

Question 14

Company Risk Premium A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?

Accepted Answer

A)  11.64% 
B)  12.00% 
C)  22.91% 
D)  34.92% 
A)  11.64% 
B)  12.00% 
C)  22.91% 
D)  34.92%

Question 15

Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset?

Accepted Answer

A)  Unable to answer since there is no data to calculate the standard deviation. 
B)  A very low number since it would have very low risk. 
C)  1 
D)  0 
A)  Unable to answer since there is no data to calculate the standard deviation. 
B)  A very low number since it would have very low risk. 
C)  1 
D)  0

Question 16

Land O Lakes Systems has a beta of 1.66. Does this mean that you should expect Land O Lakes to earn a return 88 percent higher than the S&P500 Index return? Explain.

Accepted Answer

No. A beta of 1.66 means that Land O Lak

Question 17

ABC Inc. has a dividend yield equal to 3% and is expected to grow at a 7% rate for the next 7 years. What is ABC's required return?

Accepted Answer

A)  10% 
B)  11% 
C)  4% 
D)  5% 
A)  10% 
B)  11% 
C)  4% 
D)  5%

Question 18

Stock Market Bubble If the Japanese stock market bubble peaked at 37,500, and two and a half years later it had fallen to 25,900, what was the percentage decline?

Accepted Answer

A)  -10.31% 
B)  -27.63% 
C)  -30.93% 
D)  -69.07% 
A)  -10.31% 
B)  -27.63% 
C)  -30.93% 
D)  -69.07%

Question 19

Expected Return A company's current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10% growth rate, what is its expected return?

Accepted Answer

A)  4.14% 
B)  4.26% 
C)  10.00% 
D)  14.14% 
A)  4.14% 
B)  4.26% 
C)  10.00% 
D)  14.14%

Question 20

Which of the following is a concern regarding beta?

Accepted Answer

A)  Using different market proxies will result in different estimates of beta. 
B)  A company can alter its risk level which may make the beta estimate obsolete. 
C)  Research indicates that a company's beta does not appear to predict its future return very well. 
D)  All of these statements are valid concerns regarding beta. 
A)  Using different market proxies will result in different estimates of beta. 
B)  A company can alter its risk level which may make the beta estimate obsolete. 
C)  Research indicates that a company's beta does not appear to predict its future return very well. 
D)  All of these statements are valid concerns regarding beta.

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

Which of the following statements is incorrect regarding how beta is calculated?

The study of the cognitive processes and biases associated with making financial and economic decisions.

How might a small market risk premium impact people's desire to buy stocks?

You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different. Which of the following would not be a correct explanation for the difference?

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?

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

Which of the following statements is correct?

Required Return If the risk-free rate is 10 percent and the market risk premium is 4 percent, what is the required return for the market?

IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the following statements must be correct?

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

CAPM Required Return A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return?

CAPM Required Return A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company's required return?

Company Risk Premium A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?

Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset?

Land O Lakes Systems has a beta of 1.66. Does this mean that you should expect Land O Lakes to earn a return 88 percent higher than the S&P500 Index return? Explain.

ABC Inc. has a dividend yield equal to 3% and is expected to grow at a 7% rate for the next 7 years. What is ABC's required return?

Stock Market Bubble If the Japanese stock market bubble peaked at 37,500, and two and a half years later it had fallen to 25,900, what was the percentage decline?

Expected Return A company's current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10% growth rate, what is its expected return?

Which of the following is a concern regarding beta?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 10: Estimating Risk and Return

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

Which of the following statements is incorrect regarding how beta is calculated?

The study of the cognitive processes and biases associated with making financial and economic decisions.

How might a small market risk premium impact people's desire to buy stocks?

You obtain beta estimates of General Electric from two different online sources and you are surprised to find that they are so different. Which of the following would not be a correct explanation for the difference?

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?

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

Which of the following statements is correct?

Required Return If the risk-free rate is 10 percent and the market risk premium is 4 percent, what is the required return for the market?

IBM has a beta of 1.0 and Apple Computer has a beta of 3.0. Which of the following statements must be correct?

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

CAPM Required Return A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return?

CAPM Required Return A company has a beta of 0.50. If the market return is expected to be 12 percent and the risk-free rate is 5 percent, what is the company's required return?

Company Risk Premium A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium?

Consider an asset that provides the same return no matter what economic state occurs. What would be the standard deviation of this asset?

Land O Lakes Systems has a beta of 1.66. Does this mean that you should expect Land O Lakes to earn a return 88 percent higher than the S&P500 Index return? Explain.

ABC Inc. has a dividend yield equal to 3% and is expected to grow at a 7% rate for the next 7 years. What is ABC's required return?

Stock Market Bubble If the Japanese stock market bubble peaked at 37,500, and two and a half years later it had fallen to 25,900, what was the percentage decline?

Expected Return A company's current stock price is $84.50 and it is likely to pay a $3.50 dividend next year. Since analysts estimate the company will have a 10% growth rate, what is its expected return?

Which of the following is a concern regarding beta?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters