Question 1

The first step in the risk-based approach to estimating a security's expected return is to:

Accepted Answer

A)  define what is meant by "risk" and to measure it. 
B)  quantify how much return we should expect on an asset with a given amount of risk. 
C)  estimate the risk-free rate. 
D)  define what is meant by return. 
A)  define what is meant by "risk" and to measure it. 
B)  quantify how much return we should expect on an asset with a given amount of risk. 
C)  estimate the risk-free rate. 
D)  define what is meant by return.

Question 2

NARRBEGIN: Exhibit 7-6
Exhibit 7-6
  
-Given Exhibit 7-6,what is the portfolio beta?

Accepted Answer

A)  0.4987 
B)  0.9273 
C)  0.3791 
D)  1.2367 
A)  0.4987 
B)  0.9273 
C)  0.3791 
D)  1.2367

Question 3

NARRBEGIN: Exhibit 7-4
Exhibit 7-4
  
-Given Exhibit 7-4,if the expected return on the portfolio is 9.7%,what is the expected return for Security 3?

Accepted Answer

A)  10% 
B)  11% 
C)  12% 
D)  13% 
A)  10% 
B)  11% 
C)  12% 
D)  13%

Question 4

Suppose Sarah can borrow and lend at the risk free-rate of 3%.Which of the following four risky portfolios should she hold in combination with a position in the risk-free asset?

Accepted Answer

A)  portfolio with a standard deviation of 15% and an expected return of 12% 
B)  portfolio with a standard deviation of 19% and an expected return of 15% 
C)  portfolio with a standard deviation of 25% and an expected return of 18% 
D)  portfolio with a standard deviation of 12% and an expected return of 9% 
A)  portfolio with a standard deviation of 15% and an expected return of 12% 
B)  portfolio with a standard deviation of 19% and an expected return of 15% 
C)  portfolio with a standard deviation of 25% and an expected return of 18% 
D)  portfolio with a standard deviation of 12% and an expected return of 9%

Question 5

Asset 1 has a beta of 1.2 and Asset 2 has a beta of 0.6.Which of the following statements is correct?

Accepted Answer

A)  Asset 1 is more volatile than Asset 2. 
B)  Asset 1 has a higher expected return than Asset 2. 
C)  In a regression with individual asset's return as the dependent variable and the market's return as the independent variable,the R-squared value is higher for Asset 1 than it is for Asset 2. 
D)  All of the above statements are correct. 
A)  Asset 1 is more volatile than Asset 2. 
B)  Asset 1 has a higher expected return than Asset 2. 
C)  In a regression with individual asset's return as the dependent variable and the market's return as the independent variable,the R-squared value is higher for Asset 1 than it is for Asset 2. 
D)  All of the above statements are correct.

Question 6

Which of the following statements is true?

Accepted Answer

A)  Because expected returns on stocks exceeds expected returns on bonds,stocks should actually outperform bonds in any given year. 
B)  Because expected returns on stocks exceeds expected returns on bonds,it is more reasonable to expect that stocks will outperform bonds in any given year. 
C)  Expected return is the return one will actually receive. 
D)  Both (a)and (c) 
E)  All of the above statements are true. 
A)  Because expected returns on stocks exceeds expected returns on bonds,stocks should actually outperform bonds in any given year. 
B)  Because expected returns on stocks exceeds expected returns on bonds,it is more reasonable to expect that stocks will outperform bonds in any given year. 
C)  Expected return is the return one will actually receive. 
D)  Both (a)and (c) 
E)  All of the above statements are true.

Question 7

A stock that pays no dividends is currently priced at $40 and is expected to increase in price to $45 by year end.The expected risk premium on the market portfolio is 6% and the risk-free is 5%.If the stock has a beta of 0.6,the stock is

Accepted Answer

A)  overpriced 
B)  underpriced 
C)  appropriately priced 
D)  Cannot tell from the given information 
A)  overpriced 
B)  underpriced 
C)  appropriately priced 
D)  Cannot tell from the given information

Question 8

A disadvantage of the probabilistic approach to estimating an asset's returns is:

Accepted Answer

A)  history always repeats itself. 
B)  it does not require one to assume that the future will look like the past. 
C)  recent history is more important than future risk. 
D)  that the range of possible outcomes is often broader than the scenarios used. 
A)  history always repeats itself. 
B)  it does not require one to assume that the future will look like the past. 
C)  recent history is more important than future risk. 
D)  that the range of possible outcomes is often broader than the scenarios used.

Question 9

Suppose that over the last 25 years,company DEF has averaged a return of 7.5%.Over the same period,the Treasury bond rate has averaged 1.5%.The current estimate of the Treasury bond rate is 4%.Using the historical approach,what is the estimate of DEF's expected return.

Accepted Answer

A)  13.0% 
B)  12.5% 
C)  12.0% 
D)  10.0% 
A)  13.0% 
B)  12.5% 
C)  12.0% 
D)  10.0%

Question 10

Which type of risk affects many different securities?

Accepted Answer

A)  return risk 
B)  variance risk 
C)  unsystematic risk 
D)  systematic risk 
A)  return risk 
B)  variance risk 
C)  unsystematic risk 
D)  systematic risk

Question 11

Which of the following is not a method used by analysts to estimate an asset's expected return?

Accepted Answer

A)  historical approach 
B)  probabilistic approach 
C)  risk-based approach 
D)  estimation approach 
A)  historical approach 
B)  probabilistic approach 
C)  risk-based approach 
D)  estimation approach

Question 12

The expected possible outcomes for Roxy Stock are below; what is the expected variance of Roxy Stock?

Accepted Answer

A)  2.308% 
B)  0.053% 
C)  2.362% 
D)  0.056% 
A)  2.308% 
B)  0.053% 
C)  2.362% 
D)  0.056%

Question 13

A portfolio consists 20% of a risk-free asset and 80% of a stock.The risk-free return is 4%.The stock has an expected return of 15% and a standard deviation of 30%.What's the expected return

Accepted Answer

A)  12.8% 
B)  9.5% 
C)  15.0% 
D)  4.0% 
A)  12.8% 
B)  9.5% 
C)  15.0% 
D)  4.0%

Question 14

A drawback to the historical approach of estimating an asset's expected return is:

Accepted Answer

A)  the risk of the firm may have changed over time. 
B)  history always repeats itself. 
C)  that the range of potential outcomes is often very broad. 
D)  all of the above are drawbacks to the historical approach. 
A)  the risk of the firm may have changed over time. 
B)  history always repeats itself. 
C)  that the range of potential outcomes is often very broad. 
D)  all of the above are drawbacks to the historical approach.

Question 15

An advantage of the probabilistic approach to estimating an asset's returns is:

Accepted Answer

A)  history always repeats itself. 
B)  it does not require one to assume that the future will look like the past. 
C)  recent history is more important than future risk. 
D)  exact probabilities are easy to estimate. 
A)  history always repeats itself. 
B)  it does not require one to assume that the future will look like the past. 
C)  recent history is more important than future risk. 
D)  exact probabilities are easy to estimate.

Question 16

NARRBEGIN: Exhibit 7-5
Exhibit 7-5
  
-Given Exhibit 7-5,what is the weight of Security 1?

Accepted Answer

A)  42.9% 
B)  33.3% 
C)  23.8% 
D)  Cannot be determined with the data given 
A)  42.9% 
B)  33.3% 
C)  23.8% 
D)  Cannot be determined with the data given

Question 17

A buy-and-hold strategy:

Accepted Answer

A)  typically earns higher returns,after expenses,than an active stock picking strategy. 
B)  always earns the lowest returns. 
C)  always have the lowest risk. 
D)  typically outperforms most market indexes. 
A)  typically earns higher returns,after expenses,than an active stock picking strategy. 
B)  always earns the lowest returns. 
C)  always have the lowest risk. 
D)  typically outperforms most market indexes.

Question 18

NARRBEGIN: Exhibit 7-5
Exhibit 7-5
  
-Given Exhibit 7-5,what is the weight of Security 2?

Accepted Answer

A)  42.9% 
B)  33.3% 
C)  23.8% 
D)  Cannot be determined with the data given 
A)  42.9% 
B)  33.3% 
C)  23.8% 
D)  Cannot be determined with the data given

Question 19

A particular stock has a beta of 1.4 and an expected return of 13%.If the expected risk premium on the market portfolio is 6%,what's the expected return on the market portfolio?

Accepted Answer

A)  10.6% 
B)  4.6% 
C)  8.4% 
D)  9.3% 
A)  10.6% 
B)  4.6% 
C)  8.4% 
D)  9.3%

Question 20

A standardized measure of risk is:

Accepted Answer

A)  alpha 
B)  beta 
C)  gamma 
D)  omega 
A)  alpha 
B)  beta 
C)  gamma 
D)  omega

Exam 7: Risk,return,and the Capital Asset Pricing Model

The first step in the risk-based approach to estimating a security's expected return is to:

NARRBEGIN: Exhibit 7-6 Exhibit 7-6 -Given Exhibit 7-6,what is the portfolio beta?

NARRBEGIN: Exhibit 7-4 Exhibit 7-4 -Given Exhibit 7-4,if the expected return on the portfolio is 9.7%,what is the expected return for Security 3?

Suppose Sarah can borrow and lend at the risk free-rate of 3%.Which of the following four risky portfolios should she hold in combination with a position in the risk-free asset?

Asset 1 has a beta of 1.2 and Asset 2 has a beta of 0.6.Which of the following statements is correct?

Which of the following statements is true?

A stock that pays no dividends is currently priced at $40 and is expected to increase in price to $45 by year end.The expected risk premium on the market portfolio is 6% and the risk-free is 5%.If the stock has a beta of 0.6,the stock is

A disadvantage of the probabilistic approach to estimating an asset's returns is:

Suppose that over the last 25 years,company DEF has averaged a return of 7.5%.Over the same period,the Treasury bond rate has averaged 1.5%.The current estimate of the Treasury bond rate is 4%.Using the historical approach,what is the estimate of DEF's expected return.

Which type of risk affects many different securities?

Which of the following is not a method used by analysts to estimate an asset's expected return?

The expected possible outcomes for Roxy Stock are below; what is the expected variance of Roxy Stock?

A portfolio consists 20% of a risk-free asset and 80% of a stock.The risk-free return is 4%.The stock has an expected return of 15% and a standard deviation of 30%.What's the expected return

A drawback to the historical approach of estimating an asset's expected return is:

An advantage of the probabilistic approach to estimating an asset's returns is:

NARRBEGIN: Exhibit 7-5 Exhibit 7-5 -Given Exhibit 7-5,what is the weight of Security 1?

A buy-and-hold strategy:

NARRBEGIN: Exhibit 7-5 Exhibit 7-5 -Given Exhibit 7-5,what is the weight of Security 2?

A particular stock has a beta of 1.4 and an expected return of 13%.If the expected risk premium on the market portfolio is 6%,what's the expected return on the market portfolio?

A standardized measure of risk is:

The Scope of Corporate Finance

Financial Statement and Cash Flow Analysis

The Time Value of Money

Valuing Bonds

Valuing Stocks

The Trade-Off Between Risk and Return

Capital Budgeting Process and Decision Criteria

Cash Flow and Capital Budgeting

Risk and Capital Budgeting

Raising Long-Term Financing

Capital Structure

Long-Term Debt and Leasing

Payout Policy

Financial Planning

Cash Conversion, inventory, and Receivables Management

Cash, payables, and Liquidity Management

International Financial Management

Options

Entrepreneurial Finance and Venture Capital

Mergers, acquisitions, and Corporate Control

Bankruptcy and Financial Distress

Risk Management

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