Question A1

The internal rate of return may be defined as:

A) the discount rate that makes the NPV of cash flows equal to zero

B) the difference between the market rate of interest and the NPV

C) the market rate of interest less the risk-free rate

D) the project acceptance rate set by management

Question A2

The beta of a security is equal to

A) the covariance between the securitys return and the market return divided by the variance of the markets returns.

B) the covariance between the security and the market returns divided by the standard deviation of the markets returns.

C) the variance of the securitys returns divided by the covariance between the security and the market returns.

D) the variance of the securitys returns divided by the variance of the markets returns.

Question A3

In a well-diversified portfolio

A) Market risk is negligible.

B) Systematic risk is negligible.

C) Unsystematic risk is negligible.

D) Total risk is negligible.

Question A4

A risk-averse investor is considering the addition of an asset to a well- diversified stock portfolio. The two securities under consideration both have an expected return of 15 percent and a standard deviation of 12 percent. The correlation of Asset A with the market is 0.75, while the correlation of Asset B with the market is 0.50. Which asset should the risk-averse investor add to his/her portfolio?

A) Asset A.

B) Asset B.

C) Cannot tell without more information.

Question A5

When estimating the cost of equity using the DDM, the factor that is the most apt to be misestimated and therefore add most to the error to the estimate of cost of equity is the:

A) value of the last dividend.

B) firm's tax rate.

C) historical beta.

D) dividend growth rate.

E) current stock price.