d. The geomenrie ww.aipDA 14. Suppose that the CAPM holds, and we have the following relationship between beta and expected return: Veaion Expected Return M=012 He0.02 beta What is the expected return of the market portfeliet hint think the bets of the matket portfolio, and then find the expected return either with the CAPM formds, or wing the sve figure a 0.12 b. 0.14 0,145 d. 0.155 0,16 11. Which of the following statement about portfolio beta is correct? a. If two portfolios have the same portfolio weights, but different dollar values, their betas are different. b. Portfolio beta is larger than the beta of each individual stock in the portfolio. c. Portfolio beta should always be smaller than 1 d. If the return of an asset has zero correlation with the market portfolio returns, then the beta of this asset is zero. 12. You have $1,000. A bank pays 10% interest with certainty. Alternatively, you can take a gamble that costs $1,000 today with the chance to receive either $2,200 or So with equal probability. If you choose to take the gamble, which of the following is true. a. You are risk loving b. You have a lower expected return in the gamble than in the bank deposit. c. You have a higher expected return in the gamble than in the bank deposit. d. You are risk averse You are going to lose money for sure e. 13. Suppose you invested in an asset that started with $100 two years ago. Then the asset value declined to $50 in the last year, but bounced back to $100 in this year. Which statement below about the return of this asset is correct? a. The arithmetic average of this asset return is 0%. b. The geometric average of this asset return is 25%. c. The arithmetic average is less reasonable than the geometric average. d. The geometric average measures the average compounded returns during the last two years. 14. Suppose that the CAPM holds, and we have the following relationship between beta and expected return: Version A Expected Return ER]=0.12 R-0.02 beta 0 B-0.8 What is the expected return of the market portfolio? (hint: think about the beta of the market portfolio, and then find the expected return either with the CAPM formula, or using the above figure) a. 0.12 b. 0.14 c. 0.145 d. 0.155 e. 0.16 (For the next three questions) Johnson Inc. is going to replace its old machine at the end of current year (year 0) with new machines. The old machine was purchased 2 years ago for S100,000. The old machines follow straight-line depreciation and depreciates $10,000 a year. The company expects to sell the old machines for $86,000 in the current market at the end of year 0. The new machine costs $200,000 and saves $50,000 a year. The new machine follows a straight-line depreciation and depreciates $20,000 per year. The marginal tax rate of the firm is 40%. Assume zero change in the net working capital 15. What is the after-tax salvage for the old machine at year 0? a. 87,600 b. 86,000 c. 83,600 d. 80,000 16. What is the incremental net capital spending for the replacement project in year 0? a. 200,000 b. 120,000 c. 116,400 d. 114,000 17. What is the incremental cash flow from assets at year 1? a. 50,000 b. 40,000 c. 38,000 O C
