1)Financial risk is best defined as:

a.Uncertainty

b.The likelihood of financial loss

c.The chance that the actual return is different from the expected return

d.The inability to quantify the value of a prospective outcome

2)An example of a non-diversifiable risk for an investor holding BP stock is that the company experienced a catastrophic oil spill in their Gulf of Mexico platform due to human errors. True or False?

3)You are a risk averse individual. How much would you (most likely) be willing to pay to enter a gamble with the following outcomes: 40% of winning $400, 40% of winning $300, and $20% of winning $200?

a.$350

b.$300

c.$250

d.You will not play for any amount

The following data apply to Questions 3-6:

Stock Portfolio

Expected Return

Standard Deviation

Beta

A

7.1%

3.2%

0.55

B

9.3%

4.5%

0.75

C

13.5%

5.5%

1.12

D

18.2%

9.2%

1.35

Market

10.2%

3.7%

1.00

Risk Free Rate

3%

4)What is the beta for a portfolio consisting of 20% each of the 4 stock portfolios and the market portfolio?

5)Which portfolio is most under-valued based on the Capital Asset Pricing Model (CAPM)? [Use the expected market return and the Risk Free Rate given to compute the market risk premium or MRP (r_m-r_RF)]

6)Which portfolio will have the most volatility due to changes in market conditions?

7)Firm A expects its dividend to grow at the following rates: Year 1 - 5%, Year 2 - 7%, Year 3 - 10%, and from Year 4 forward a constant rate of 6%. It just paid its dividend at $3 per share (Year 0). Its cost of equity is 12%. What should its stock be selling at?