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Question;/Use the;information for the question(s) below.;Suppose the;market portfolio's excess return tends to increase by 30% when the economy is;strong and decline by 20% when the economy is weak. A type S firm has excess returns increase by;45% when the economy is strong and decrease by 30% when the economy is;weak. A type I firm will also have;excess returns of either 45% or -30%, but the type I firm's excess returns will;depend only upon firm-specific events and will be completely independent of the;state of the economy.;15) What is the;Beta for a type I firm?;A) 1.0;B) 0.75;C) 0.0;D) 1.5;16) What is the;Beta for a type S firm?;A) 1.5;B) 0.0;C) 1.0;D) 0.75;10.8 Beta and the Cost of Capital;Use the;following information to answer the question(s) below.;Company;Ticker;Beta;Ford Motor;Company;F;2.77;International Business Machines;IBM;0.73;Merck;MRK;0.90;1) If the market;risk premium is 6% and the risk-free rate is 4%, then the expected return of;investing in Ford Motor Company is closest to;A) 10.0%;B) 16.2%;C) 17.1%;D) 20.6%;2) If the market;risk premium is 6% and the risk-free rate is 4%, then the expected return of;investing in Merck is closest to;A) 5.4%;B) 9.4%;C) 10.0%;D) 10.4%;3) If the;expected return on the market risk 11% and the risk-free rate is 4%, then the;expected return of investing in IBM is closest to;A) 9.1%;B) 10.3%;C) 11.0%;D) 12.0%;4) If the;expected return on the market is 11% and the expected return of investing in;Merck is 10.35%, then the risk-free rate must be;A) 3.0%;B) 4.0%;C) 4.5%;D) 5.0%;5) If the;risk-free rate is 5% and the expected return of investing in Merck is 11.3%;then the expected return on the market must be;A) 8.0%;B) 10.0%;C) 10.4%;D) 12.0%;6) Suppose that;Luther's beta is 0.9. If the market risk;premium is 8% and the risk-free interest rate is 4%, then then expected return;for Luther stock is?;A) 7.6%;B) 11.6%;C) 11.2%;D) 12.9%;7) Suppose that;KAN's beta is 1.5. If the market risk;premium is 8% and the risk-free interest rate is 4%, then then expected return;for KAN stock is?;A) 8.0%;B) 16.0%;C) 13.5%;D) 10.0%;8) Suppose that;Gold Digger's beta is -0.8. If the;market risk premium is 8% and the risk-free interest rate is 4%, then the expected;return for Gold Digger's stock is?;A) -2.4%;B) 4.8%;C) 2.4%;D) 10.4%;9) Which of the;following statements is false?;A) The Capital;Asset Pricing Model is the most important method for estimating the cost of;capital that is used in practice.;B) Because the;risk that determines expected returns is unsystematic risk, which is measured;by beta, the cost of capital for an investment is the expected return available;on securities with the same beta.;C) A common;assumption is that the project has the same risk as the firm.;D) To determine;a project's cost of capital we need to estimate its beta.;Use the;information for the question(s) below.;Suppose that in;the coming year, you expect Exxon-Mobil stick to have a volatility of 42% and a;beta of 0.9, and Merck's stock to have a volatility of 24% and a beta of;1.1. The risk free interest rate is 4%;and the markets expected return is 12%.;10) Which stock;has the highest total risk?;A) Merck since it;has a lower volatility;B) Merck since;it has a higher Beta;C) Exxon-Mobil;since it has a higher volatility;D) Exxon-Mobil;since it has a lower beta;11) Which stock;has the highest systematic risk?;A) Merck since;it has a higher Beta;B) Exxon-Mobil;since it has a lower beta;C) Exxon-Mobil;since it has a higher volatility;D) Merck since;it has a lower volatility;12) The cost of;capital for a project with the same beta as Exxon Mobil's stock is closest to;A) 11.6%;B) 11.2%;C) 12.8%;D) 7.6%;13) The cost of;capital for a project with the same beta as Merck's stock is closest to;A) 11.2%;B) 12.8%;C) 12.4%;D) 11.6%;14);Which of the following is consistent with the CAPM and;efficient capital markets?;A) A security;with a beta of 1 has a return last year of 8% when the market has a return of;12%.;B) Small stocks;with a beta of 1.5 tend to have higher returns on average than large stocks;with a beta of 1.5.;C) A security;with only diversifiable risk has an expected return that exceeds the risk-free;interest rate.;D) A security;with only systematic risk has an expected return that exceeds the risk-free;interest rate.;15) Which of the;following statements is false?;A) If the market;portfolio were not efficient, investors could find strategies that would;beat the market" with higher average returns and lower risk.;B) The CAPM;states that the cost of capital depends only on systematic risk.;C) Efficient;capital markets is a much stronger hypothesis than the CAPM.;D) The market;portfolio is an efficient portfolio.;16) What is the;market portfolio?

Paper#51041 | Written in 18-Jul-2015

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