Multiple choice

1. The historical returns data for the past four years for Stock C and the stock market portfolio returns are: Stock C: 10%, 30%, 20%,20%; Market Portfolio: 5%, 15%, 25%, 15%. Calculate the beta for the stock:  

a. 0.86 

b. 0.5 

c. 1.5 

d. None of the above 

2. The historical returns data for the past four years for Stock C and the stock market portfolio returns are: Stock C: 10%, 30%, 20%,20%; Market Portfolio: 5%, 15%, 25%, 15%. If the risk-free rate of return is 5%, calculate the required rate of return on the Stock C using CAPM.  

a. 5% 

b. 10% 

c. 15% 

d. None of the above 

3. The beta of the computer company is 1.7 and the standard error of the estimate is 0.3. What is the range of values for beta, that has 95% chance of being right?  

a. 1.1 - 2.3 

b. 1.4 - 2.0 

c. 1.5 - 2.0 

d. None of the above 

4. Generally, the value to use for the risk-free interest rate is:  

a. Short-term Treasury bill rate 

b. Long-term Corporate bond rate 

c. Medium-term Corporate bond rate 

d. None of the above 

5. A project has an expected risky cash flow of $200, in year 1. The risk-free rate is 6%, the market rate of return is 16%, and the project's beta is 1.5. Calculate the certainty equivalent cash flow for year 1.  

a. $175.21 

b. $164.29 

c. $228.30 

d. None of the above 

6. A project has an expected risky cash flow of $500, in year 2. The risk-free rate is 4%, the market rate of return is 14%, and the project's beta is 1.2. Calculate the certainty equivalent cash flow for year 2.  

a. $622.04 

b. $164.29 

c. $401.90 

d. None of the above 

7. A project has an expected risky cash flow of $500, in year 3. The risk-free rate is 4%, the market rate of return is 14%, and the project's beta is 1.2. Calculate the certainty equivalent cash flow for year 3.  

a. $622.04 

b. $360.33 

c. $401.90 

d. None of the above 

8. A project has an expected cash flow of $300 in year 3. The risk-free rate is 5%, the market risk premium is 8% and the project's beta is 1.25. Calculate the certainty equivalent cash flow for year 3.  

a. $228.35 

b. $197.25 

c. $300 

d. None of the above 

9. The historical returns data for the past three years for Stock B and the stock market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. Calculate the covariance of returns between Stock B and the market portfolio.  

a. 24 

b. 28 

c. 292 

d. None of the above 

10. Cost of equity can be estimated using:  

a. The Fama-French three-factor model 

b. Capital Asset Pricing Model (CAPM) 

c. Arbitrage Pricing Theory (APT) 

d. All of the above