1.What kind of portfolios will have their expected rates of returns (versus their betas) located on the Security Market Line?

2. Consider the following claims. Answer them with True or False and your explanation. No credit will be given if no explanation is shown.

All firms can issue debts if their asset values are sufficient enough. In particular,

the values of the firms will always increase as they raise more debts since interests on corporate debts are tax-deductible.

b) If the capital market is so efficient that all essential information for the firms values is disclosed in the public, then there is no chance for any investor to make a profit.

c) One of the drawback of Net Present Value principle is that one will easily tend to accept the project(s) that have less years of cash flows - if other things being equal.

d) The expected rate of return for a stock when determined by the Capital Asset Pricing Model (CAPM) is the goal (or target) of the rate of return for the firms equity. Hence, if the stock returns actually reach this rate, it is good enough already.

e) Capital budgeting is to determine the best capital structure for the firm in raising capital from the capital market.

f) To calculate the weighted average cost of capital is to assume that expected rates of return from different sources are evaluated according to relative contributed proportions on entire capitalization without references to where and who contributed the fund.

g) The yield to maturity of the corporate bond is always the expected rate for return for bondholders, regardless of their intended holding horizons of the bonds.