Multiple Choice Quiz
Multiple Choice Quiz
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 1 When the overall market is up by 15%, an investor with a portfolio of defensive stocks will probably have: A) positive portfolio returns greater than 15% B) positive portfolio returns less than 15% C) negative portfolio returns greater than 15% D) negative portfolio returns less than 15% 2 What is the beta of a three-stock portfolio including 20% of Stock A with a beta of 1.25, 30% Stock B with a beta of 1.15, and 50% with a beta of 1.20? A) 1.195 B) 1.020 C) 1.200 D) 1.895 3 What is the expected yield on the market portfolio at a time when Treasury bills yield 5% and a stock with a beta of 1.20 is expected to yield 18%? A) 6.12% B) 15.83% C) 18.53% D) 21.50% 4 An investor was expecting a 10% return on his portfolio with a beta of 1.15 before the market risk premium increased from 5% to 7.5%. Based on this change, what return will now be expected on the portfolio? A) 10.000% B) 12.875% C) 14.975% D) 16.245% 5 What is the beta of a portfolio with an expected return of 15% if Treasury bills yield 7% and the market risk premium is 7%? A) 1.00 B) 1.14 C) 1.86 D) 2.00 6 What happens to an expected portfolio return if the portfolio beta increases from 1.2 to 2.0, the risk-free rate decreases from 7.5% to 5% and the market risk premium remains at 9%? A) It decreases from 23% to 18.3% B) It decreases from 28% to 13.3% C) It increases from 18.3% to 23% D) It increases from 13.3% to 28% 7 An investor divides his/her portfolio evenly between Treasury bills, a market index and a diversified portfolio with a beta of 1.25. What is the beta of the investor's overall portfolio? A) .25 B) .50 C) .75 D) 1.00 8 A project is determined to have equal probability of generating \$1 million annually or \$250,000 annually for four years. The initial outlay is \$2 million. The expected return on Treasury bills is 6% and the market risk premium is 7%. What is the highest project beta that will justify acceptance of the project? A) 0.42 B) 0.51 C) 0.71 D) 1.42 9 The CAPM provides a model of determining expected security returns that is: A) excellent for high beta stocks B) excellent for well-diversified stocks C) imprecise, but generally an acceptable guideline D) precise in its calculation of risk premiums 10 If the line measuring a stock's historic returns against the market's historic returns has a slope greater than 1.0, then the: A) stock is currently under priced. B) market risk premium is increasing. C) stock has a significant amount of unique risk. D) stock has a beta exceeding 1.0. 11 If you were willing to bet that the overall stock market was heading up on a sustained basis, it would be logical to invest in: A) high beta stocks. B) low beta stocks. C) stocks with large amounts of unique risk. D) stocks that plot below the security market line. 12 What is the beta of a three-stock portfolio including 25% of Stock A with a beta of .90, 40% Stock B with a beta of 1.05, and 35% Stock C with a beta of 1.73? A) 1.05 B) 1.17 C) 1.22 D) 1.25 13 What will happen to the expected return on a stock with a beta of 1.5 and a market risk premium of 9% if the Treasury bill yield increases from 3% to 5%? A) The expected return will remain unchanged. B) The expected return will increase by 1.0%. C) The expected return will increase by 2.0%. D) The expected return will increase by 3.0%. 14 An investor was expecting an 18% return on his portfolio with beta of 1.25 before the market risk premium increased from 8% to 10%. Based on this change, what return will now be expected on the portfolio? A) 20.0% B) 20.5% C) 22.5% D) 26.0% 15 The company cost of capital may be an inappropriate discount rate for a capital budgeting proposal if: A) it calculates a negative NPV for the proposal. B) the proposal has a different degree of risk. C) the company has unique risk. D) the company expects to earn more than the risk-free rate.