Saint MBA570 module 6 quiz

1. Which of the following investments offered the highest overall return over the past eighty years? (Points : 10) Treasury Bills
S&P 500
Small stocks
Corporate bonds

Question 2. 2. Which of the following statements is false? (Points : 10) The standard error provides an indication of how far the sample average might deviate from the expected return. The 95% confidence interval for the expected return is defined as the historical average return plus or minus ten standard errors. We can use a security's historical average return to estimate its actual expected return. The standard error is the standard deviation of the average return.

Question 3. 3. Which of the following statements is false? (Points : 10) Because investors are risk averse, they will demand a risk premium to hold unsystematic risk. Over any given period, the risk of holding a stock is that the dividends plus the final stock price will be higher or lower than expected, which makes the realized return risky. The risk premium for diversifiable risk is zero, so investors are not compensated for holding firm-specific risk. Because investors can eliminate firm-specific risk "for free" by diversifying their portfolios, they will not require a reward or risk premium for holding it.

Question 4. 4. 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. What is the Beta for a type S firm? (Points : 10) 1.5 0.0 1.0 0.75

Question 5. 5. 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 __________. (Points : 10) 8.0% 16.0% 13.5% 10.0%

Question 6. 6. If the market risk premium is 7%, the risk-free rate is 4% and IBM’s beta is 0.73, then the expected return of investing in IBM is closest to __________. (Points : 10) 9.1% 10.3% 11.0% 12.0%

Question 7. 7. Wal-Mart has a price per share of $47.90 and 4.17 billion shares outstanding. The market capitalization for Wal-Mart is closest to __________. (Points : 10) $415 billion $276 billion $479 billion $200 billion

Question 8. 8. Which of the following statements is false? (Points : 10) A market index reports the value of a particular portfolio of securities. The S&P 500 is the standard portfolio used to represent "the market" when using the CAPM in practice. Even though the S&P 500 includes only 500 of the more than 7,000 individual U.S. stocks in existence, it represents more than 70% of the U.S. stock market in terms of market capitalization. The S&P 500 is an equal-weighted portfolio of 500 of the largest U.S. stocks.

Question 9. 9. Your firm is planning to invest in a new power generation system. Galt Industries is an all equity firm that specializes in this business. Suppose Galt's equity beta is 0.75, the risk-free rate is 3%, and the market risk premium is 6%. If your firm's project is all equity financed, then your estimate of your cost of capital is closest to __________. (Points : 10) 5.25% 6.00% 6.75% 7.50%

Question 10. 10. If a project has a higher proportion of fixed to variable costs, holding the risk of its revenues constant: (Points : 10)

its beta will be lower, hence its cost of capital will be lower.
its beta will be higher, hence its cost of capital will be higher.
its beta will be unaffected, since beta does not measure the sensitivity of the project's cash flows to market risk.
its financial leverage will be higher.