Finance Chapter 12 2 Stock With Beta 14 Expected Return

61.

If a stock with a beta of 1.4 is expected to return 18% when Treasury bills yield 6%, what is the expected return on the

market portfolio?

62.

When Treasury bills yield 7% and the expected return on the market is 16%, then the risk premium on an asset is equal to:

63.

Calculate the risk premium on stock C given the following information: risk–free rate = 5%, market return = 13%, stock C’s

beta = 1.3.

64.

If the interest rate on Treasury bills is 6% and the market risk premium is 9%, then a stock with a beta of 1.5 would be

expected to return:

65.

An investor expects a return of 18% on his portfolio with a beta of 1.25. If the expected market risk premium increases from

8% to 10%, what return should he now expect on the portfolio?

66.

An investor expects a return of 14.7% on her portfolio with a beta of 1.13. If the expected market risk premium decreases

from 8% to 7%, what return should she now expect on the portfolio?

67.

What rate of return should an investor expect for a stock that has a beta of 0.8 when the market is expected to yield 14% and

Treasury bills offer 6%?

68.

You believe that Alpha stock which has a beta of 1.32 will return 16.0% this coming year. The market is expected to return

11.4% and T-bills return 3.8%. According to CAPM, which one of these statements is correct given this information?

69.

Why should stock market investors ignore specific risks when calculating required rates of return?

70.

If a two-stock portfolio is equally invested in stocks with betas of 1.4 and 0.7, then the portfolio beta is:

71.

A portfolio consists of an index mutual fund which represents the overall market and Treasury bills. The fund has a portfolio

weight of 60%. The risk-free rate is 3.2% and the market risk premium is 7.6%. What is your best estimate of the portfolio

expected rate of return?

72.

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

73.

The slope of the security market line equals:

74.

A stock has a beta of 1.4 and an expected return of 13.53%. What is the risk–free rate if the market rate of return is 10.6%?

75.

The market portfolio has an expected return of 18% and the risk-free rate is 6%. An investor borrows $100 at the risk-free

rate and invests this and a further $100 of his own in the market portfolio. What is his expected return?

76.

If Stock A has a higher expected return than Stock B, which of the following statements is most likely?

77.

A stock’s risk premium is equal to the:

78.

Investing borrowed funds in a stock portfolio will generally:

79.

A stock is expected to pay a year-end dividend of $8 and then to sell at a price of $109. The risk-free interest rate is 4%, the

expected market return is 12% and the stock has a beta of 0.8. What is the stock price today?

80.

Which one of these statements is correct?

81.

What happens to the expected portfolio return if the portfolio beta increases from 1.0 to 1.5, the risk-free rate decreases from

5 to 4%, and the market risk premium increases from 8 to 9%?

82.

What would you recommend to an investor who is considering an investment that plots below the security market line?

83.

Investment projects that plot above the security market line have:

84.

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

85.

A proposed investment must earn at least as much as the ______ if it is to be deemed acceptable.

86.

A project with higher than average risk offers an expected return of 14%. Which statement is correct if the company’s

opportunity cost of capital is 12% and the project’s opportunity cost of capital is 15%?

87.

The project cost of capital is:

88.

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

89.

If changing discount rates from the company cost of capital to the project cost of capital changes NPV from negative to

positive, then the project should use the:

90.

Which one of the following statements best explains the fact that cyclical firms tend to have high betas?

91.

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

92.

Last month a stock with a beta of 1.0 lost 20% while the S&P 500 had a 10% gain. Given this, it is most likely that the:

93.

The slope of the fitted line that shows the relationship between a stock‘s return and the market’s return is the:

94.

Which one of the following is most likely correct for a diversified stock portfolio that exhibits a higher standard deviation

than the market index?

95.

An investor divides her portfolio into three equal parts, with one part in Treasury bills, one part in a market index, and one

part in a mutual fund with beta of 1.50. What is the beta of the investor‘s overall portfolio?

96.

If the market portfolio is expected to return 16%, then a portfolio that is expected to return 13%:

97.

The basic tenet of the CAPM is that a stock’s expected risk premium should be:

98.

If the company cost of capital is 20% and a proposed project’s cost of capital is 15%, then discounting the projects’ cash

flows at 20% would:

99.

Over the long run value stocks have:

100.

If a project could have a bad outcome:

101.

A project costs $3 million, and is expected to generate $1 million in cash flows for the next 4. If the opportunity cost of

capital is 15%, the project’s return would plot:

102.

An investor prefers to invest in companies that have high operating leverage. How can this be accomplished if the investor

also requires a portfolio beta of 1.0?

103.

Which one of the following portfolios might be expected to exhibit less specific risk?

104.

If the plot of a portfolio’s returns against returns on the market index produces a tight pattern, then the portfolio:

105.

If an investor’s portfolio is allocated 75% to the market portfolio and 25% to Treasury bills, then the investor should expect

to receive:

106.

Which statement is correct?

Chapter 12 Test bank – Static Summary