The correct answer for each question is indicated by a .

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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