finance data bank

/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?