1. You are holding a stock, which has beta of 1.4. What will be the debt-equity ratio of an equivalent-risk portfolio on the CML?

1. 0
2. 2/7
3. 1/5
4. 2/5
5. None of the above

2. You are holding a CML portfolio with 16% expected return. The risk premium included in your CML portfolios expected return is twice the risk premium included in the market portfolios expected return of 12%.

What must be the risk-free interest rate?

1. 5%
2. 6%
3. 7%
4. 8%
5. None of the above

3. You currently hold an investment portfolio of stocks worth $30,000. It has 9% expected return and 30% volatility. A market index fund is available with 10% expected return and 12.5 volatility. T-bills currently provide 5% risk-free interest rate.

Based on the CAPM, how could you switch to another investment portfolio with the same expected return but one-third the volatility of your current portfolio?

1. Invest $15,000 in the market index fund and $15,000 in the T-bills
2. Invest $24,000 in the market index fund and $6,000 in the T-bills
3. Invest $27,000 in the market index fund and $3,000 in the T-bills
4. Invest $30,000 in the market index fund and nothing in the T-Bill
5. None of the above

4. A no-growth all-equity firm expects constant annual perpetual future cashflows. It has an equity Beta of 1.2. It is considering changing its capital structure to a mix of risk-free debt and equity with debt-equity ratio of . The risk-free interest rate is 5% and the market return is expected to be 10%. Based on the CAPM, what risk premium would investors in the firms shares require after the change the firms capital structure?

1. 0%
2. 8%
3. 12%
4. 7.5%

none of the above