Marks: 10
NOTE: 1. ATTEMPT ALL QUESTIONS
2. HIGHLIGHT THE CORRECT ANSWER OUT OF THE GIVEN FOUR
CHOICES FOR EACH QUESTION:
1
The greater the beta, the_________of the security involved.
a
b
c
d
2
According to the capital-asset pricing model (CAPM), a security’s expected
(required) return is equal to the risk-free rate plus a premium
a
b
c
d
3
Market Risk
Liquidation Value
Diversifiable Risk
Book Value
The SML (security market line) equation shows the relationship between a
security’s market risk and its ____________.
a
b
c
d
5
Equal to the security’s beta.
Based on the unsystematic risk of the security.
Based on the total risk of the security.
Based on the systematic risk of the security.
In Efficient Markets, Price of Stocks is based on ____________.
a
b
c
d
4
Greater the unavoidable risk
Greater the avoidable risk
Less the unavoidable risk
Less the avoidable risk
Intrinsic value
Required rate of return
Face Value
Book Value
The risk-free security has a beta equal to____________, while the market
portfolio’s beta is equal to ____________.
a
b
c
d
One; more than one.
One; less than one.
Zero; One.
Less than zero; more than zero.
6
Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite
Company common stock has a beta of 1.80. The expected return on the market is
10 percent, and the risk-free rate is 6 percent. According to the capital-asset
pricing model (CAPM) and making use of the information above, the required
return on Plaid Pants’ common stock should be ____________, and the required
return on Acme’s common stock should be ____________ .
a
b
c
d
7
3.6 percent; 7.2 percent
9.6 percent; 13.2 percent
9.0 percent; 18.0 percent
14.0 percent; 23.0 percent
Following are the possible one year returns estimates for common stocks of a
corporation.
Possibility of occurrence
Possible returns
0.1
-10%
0.2
5%
0.4
20%
0.2
35%
0.1
50%
The expected return on this common stock would be
a
b
c
d
8
An "aggressive" common stock would have a "beta"
a
b
c
d
9
10.45%
16.43%
20.75%
25%
Equal to zero.
Greater than one.
Equal to one.
Less than one.
—————— describes the relationship between an individual security’s returns
and returns on the market portfolio.
a
b
c
d
Characteristic line
Security market line
Capital market line
Beta
10 Because investors dislike uncertainty, they will require _________ rates of return
from risky investments.
a Higher
b
c
d
Lower
The same
None of the above
