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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.







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