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Exam 13: Cost of Capital

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Question 1

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Which of the following statements are correct concerning diversifiable risks? I.Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities. II.There is no reward for accepting diversifiable risks. III.Diversifiable risks are generally associated with an individual firm or industry. IV.Beta measures diversifiable risk.

A) I and III only
B) II and IV only
C) I and IV only
D) I, II and III only
E) I, II, III, and IV

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Question 2

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The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent.The risk-free rate of return is 3.7 percent.What is the expected market risk premium?

A) 7.02 percent
B) 7.90 percent
C) 10.63 percent
D) 11.22 percent
E) 11.60 percent

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Question 3

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The expected return on a portfolio considers which of the following factors? I.percentage of the portfolio invested in each individual security II.projected states of the economy III.the performance of each security given various economic states IV.probability of occurrence for each state of the economy

The standard deviation of a portfolio:

Which one of the following is an example of unsystematic risk?

Which one of the following is an example of systematic risk?

What is the expected return and standard deviation for the following stock?

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

Which one of the following statements related to unexpected returns is correct?

Thayer Farms stock has a beta of 1.12.The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent.What is the expected rate of return on this stock?

Which one of the following statements is correct concerning a portfolio beta?

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total.Which one of the following terms most applies to Suzie's investments?

Which one of the following indicates a portfolio is being effectively diversified?

You want your portfolio beta to be 0.90.Currently, your portfolio consists of $4,000 invested in stock A with a beta of 1.47 and $3,000 in stock B with a beta of 0.54.You have another $9,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset.How much should you invest in the risk-free asset?

The capital asset pricing model (CAPM) assumes which of the following? I.a risk-free asset has no systematic risk. II.beta is a reliable estimate of total risk. III.the reward-to-risk ratio is constant. IV.the market rate of return can be approximated.

Which one of the following should earn the most risk premium based on CAPM?

What is the standard deviation of the returns on a portfolio that is invested 52 percent in stock Q and 48 percent in stock R?

The market rate of return is 11 percent and the risk-free rate of return is 3 percent.Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent.This stock: