15) Marjen stock has a required return of 20%. The expected market return is 15%, and the
beta of Marjen’s stock is 1.5. Calculate the risk-free rate.
A) 4%
B) 5%
C) 6%
D) 7%
Question Status: Previous edition
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: CAPM
Principles: Principle 2: There Is a Risk-Return Tradeof
16) You are thinking about purchasing 1,000 shares of stock in the following irms:
Number of Shares Firm’s Beta
Firm A 100 0.75
Firm B 200 1.47
Firm C 200 0.82
Firm D 600 1.60
If you purchase the number of shares speciied, then the beta of your portfolio will be:
A) 1.16.
B) 1.35.
C) 1.00.
D) Cannot be determined without knowing the stock prices.
Question Status: Previous edition
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: beta
Principles: Principle 2: There Is a Risk-Return Tradeof
28
Use the following information to answer the following question(s).
Beta
Market 1
Firm A 1.25
Firm B 0.6
Market Return 10% Risk Free Rate 2%
17) The market risk premium is
A) 2%.
B) 4%.
C) 6%.
D) 8%.
Question Status: Previous edition
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: risk, return
Principles: Principle 2: There Is a Risk–Return Tradeof
18) Firm A’s risk premium is
A) 4%.
B) 6%.
C) 8%.
D) 10%.
Question Status: Revised
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: risk, return
Principles: Principle 2: There Is a Risk–Return Tradeof
19) Firm B’s risk premium is
A) 2.66%.
B) 4.8%.
C) 6.3%.
D) 8.1%.
Question Status: Previous edition
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: risk, return
Principles: Principle 2: There Is a Risk–Return Tradeof
29
20) The required rate of return for Firm A is
A) 8%.
B) 12%.
C) 16%.
D) Cannot be determined with information given.
Question Status: Revised
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: expected return
Principles: Principle 2: There Is a Risk–Return Tradeof
21) U. S. Treasury bills can be used to approximate the risk-free rate.
Question Status: New question
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: beta
Principles: Principle 2: There Is a Risk–Return Tradeof
22) Long-term bonds issued by large, established corporations are commonly used to
estimate the risk-free rate.
Question Status: New question
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: CAPM
Principles: Principle 2: There Is a Risk–Return Tradeof
23) The market beta changes frequently with economic conditions.
Question Status: New question
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: beta
Principles: Principle 2: There Is a Risk–Return Tradeof
24) The S&P 500 Index is commonly used to estimate the market rate of return.
Question Status: New question
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: CAPM
Principles: Principle 2: There Is a Risk–Return Tradeof
30
25) The security market line (SML) intercepts the Y axis at the risk-free rate.
Question Status: New question
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: CAPM
Principles: Principle 2: There Is a Risk–Return Tradeof
26) The security market line can drawn by connecting the risk-free rate and the expected
return on the market portfolio.
Question Status: New question
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: CAPM
Principles: Principle 2: There Is a Risk–Return Tradeof
27) If investors expected inlation to increase in the future, the SML would shift up, but the
slope would remain the same.
Question Status: Revised
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: security market line
Principles: Principle 2: There Is a Risk–Return Tradeof
28) If investors became more risk averse The SML would shift downward and the slope of
the SML would fall.
Question Status: Revised
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: security market line
Principles: Principle 2: There Is a Risk–Return Tradeof
29) A security with a beta of zero has a required rate of return equal to the overall market
rate of return.
Question Status: Previous edition
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: security market line
Principles: Principle 2: There Is a Risk–Return Tradeof
31
30) The return for the market during the next period is expected to be 11.5%; the risk–free
rate is 2.5%. Calculate the required rate of return for a stock with a beta of 1.5.
Question Status: Revised
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: CAPM
Principles: Principle 2: There Is a Risk–Return Tradeof
31) Asset A has a required return of 18% and a beta of 1.4. The expected market return is
14%. What is the risk-free rate? Plot the security market line.
Question Status: Previous edition
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: security market line
Principles: Principle 2: There Is a Risk–Return Tradeof
32) Security A has an expected rate of return of 22% and a beta of 2.5. Security B has a
beta of 1.20. If the Treasury bill rate is 2.0%, what is the expected rate of return for
security B?
Question Status: Revised
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: CAPM
Principles: Principle 2: There Is a Risk–Return Tradeof
32
33) AA & Co. has a beta of .656. If the expected market return is 13.2% and the risk-free
rate is 5.7%, what is the appropriate required return of AA & Co. using the CAPM model?
Question Status: Previous edition
Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.
Keywords: CAPM
Principles: Principle 2: There Is a Risk–Return Tradeof
33