Question 1

The relevant risk-free rate is 5%, and the equity premium has averaged 9% in recent years. Your project has an estimated beta of 1.12. What rate of return should you require on this project? Round your answer to the nearest tenth of a percent.

(A) 5.1%

(B) 9.5%

(C) 15.1%

(D) 14.6%

Question 2

Proponents of the bubble view believe that when using historical averages to estimate an equity premium,

(A) the equity premium will be higher after recent market surges

(B) the equity premium will be lower after recent market surges

(C) the average should be calculated using data from the earliest recorded point in time to ensure that any temporary bubbles are smoothed out

(D) the average should be based on the last 10 to 15 years of historical data only since earlier data is no longer descriptive of current conditions, e.g., bubbles

Question 3

Which of the following statements is true?

(A) Most corporate CFOs used alternative models to the CAPM when estimating their projects' costs of capital

(B) The CAPM will provide a reasonably good cost of capital estimate in many corporate scenarios

(C) The CAPM will provide a cost of capital that is accurate to the hundredth of a percent

(D) The CAPM provides the most accurate results when it is used to determine which financial investments are best to undertake at any given point in time

Question 4

A zero-coupon bond has a beta of 0.15 and promises to pay $5,000 next year with a probability of 96%, $1,000 with a probability of 2%, and there is a 2% probability of total default. One-year Treasury securities are yielding 4%, and the expected return on the market is 10%. What is the time premium for this bond investment?

(A) 4.0%

(B) 5.3%

(C) 5.4%

(D) 6.0%

Question 5

A zero-coupon bond has a beta of 0.1 and promises to pay $1,000 next year with a probability of 98%. If the bond defaults, it will pay nothing. One-year Treasury securities are yielding 5%, and the equity premium is 7%. What is the time premium for this bond investment?

(A) 0.7%

(B) 2.9%

(C) 5.0%

(D) 5.7%

Question 6

Which of the following statements is true?

(A) Assets with lower levels of market risk will sell for higher prices

(B) Assets with lower levels of market risk will have higher expected rates of return

(C) Assets with higher levels of market risk will sell for higher prices

(D) Assets with higher levels of market risk will have lower expected rates of return

Question 7

Which of the following is not an advantage of the certainty-equivalent approach to determining the NPV of a project?

(A) It separates the time value of money from the risk of the project

(B) It allows the decision maker to incorporate preferences for risk

(C) It is easier to interpret the net present value when the certainty equivalent method is used

(D) All of the above are advantages of the certainty-equivalent approach

Question 8

A project has a market beta of 1.4. The risk-free rate is 5%, and the equity premium is 7.6%. Your firm should undertake this project only if it returns

(A) 3.64%

(B) 8.64%

(C) 10.64%

(D) 15.64%

Question 9

When evaluating a project, the chance of default is captured by

(A) using the CAPM expected rate of return as the discount rate

(B) using the expected return on the market as the discount rate

(C) calculating the expected cash flows of the project

(D) discounting the expected cash flows of the project at the equity premium

Question 10

Which of the following statements is (are) false?

(A) All mean-variance efficient portfolios are combinations of the market portfolio and the risk-free asset

(B) If two mean-variance efficient portfolios are combined, the result is a mean-variance efficient portfolio

(C) If the market portfolio is the tangency portfolio, then the relationship between risk and return is best described as parabolic

(D) All of the above are true statements

Question 11

The risk-free rate is 4.2%, and the expected return on the market is 10%. A publicly-traded bond promises to return 8%. The expected return on the bond investment is 5.5%. What is the bond's implied beta?

(A) 0.45

(B) 0.22

(C) 0.73

(D) 1.38

Question 12

A project has an asset beta of 0.70. The expected return on the market is 18%, and the relevant risk-free rate is 7%. The project's required rate of return is

(A) 14.7%

(B) 24.5%

(C) 19.6%

(D) 10.5%

Question 13

The stock of the Delta Corporation has a beta of 1.9. The stock recently paid an annual dividend of $1.60, and dividends are expected to grow at a rate of 10% indefinitely. The equity premium has averaged 8% in recent years, and it is expected to remain at this level for the foreseeable future. The relevant risk-free rate is 5%. What is the maximum price you should pay for a share of the Delta Corporation, according to CAPM?

(A) $15.69

(B) $32.00

(C) $17.25

(D) none of the above

Question 14

The Security Market Line depicts the relationship between a security's

(A) price and standard deviation.

(B) price and market beta.

(C) expected return and total risk.

(D) expected return and market beta.

Question 15

In the CAPM world, investors measure the risk of a project that your firm chooses to undertake by its

(A) variance

(B) market beta

(C) standard deviation

(D) covariance with other projects in which your firm invests

Question 16

The slope of the security market line is indicative of

(A) the current, relevant risk-free rate

(B) the level of investor risk aversion

(C) the risk of the individual security or portfolio of securities being evaluated

(D) the current level of inflation

Question 17

Your firm is considering a project that is expected to produce a single cash flow of $2,000 next year. The market beta of the project is 2.2. The equity premium is expected to be 6%, and the risk-free rate is 3.8%. What is the maximum amount your firm should be willing to invest in this project? Round your answer to the nearest dollar.

(A) $1,639

(B) $1,709

(C) $1,841

(D) $2,000

Question 18

The most difficult CAPM input to estimate is the

(A) market beta of the project

(B) risk-free interest rate

(C) equity premium

(D) standard deviation

Question 19

In addition to perfect markets, what are the underlying assumptions of the Capital Asset Pricing Model (CAPM)?

All of the following assumptions are true or false?

1. Investors are risk-averse--that is, they like reward and dislike risk.

2. Investors hold well-diversified portfolios.

3. All investors have access to the same set of assets.

4. All investors face the same single-period time horizon.

(A) True

(B) False

Question 20

Which of the following is not one of the underlying assumptions of the Capital Asset Pricing Model (CAPM)?

(A) We live in a world of perfect capital markets

(B) All investors hold well-diversified portfolios

(C) All investors face the same, single-period, time horizon

(D) All of the above are assumptions underlying CAPM