Multiple choice

1. The historical returns data for the past three years for Company A's stock is -6.0%, 15%, 15% and that of the market portfolio is 10%, 10% and 16%. If the risk-free rate of return is 4%, what is the cost of equity capital (required rate of return of company A's common stock) using CAPM?  

a 18% 

b. 14% 

c. 12% 

d. None of the above 

2. The historical data for the past three years for the market portfolio are 10%, 10% and 16%. If the risk-free rate of return is 4%, what is the market risk premium?  

a. 4% 

b. 8% 

c. 16% 

d. None of the above 

3. The historical returns data for the past three years for Company A's stock is -6.0%, 15%, 15% and that of the market portfolio is 10%, 10% and 16%. According to the security market line (SML), the Stock A is:  

a. Over priced 

b. Under priced 

c. Correctly priced 

d. Need more information 

4. 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 expected return for Stock B and the market portfolio.  

a. Stock B 16%, Market Portfolio: 14% 

b. Stock B 14%, Market Portfolio: 16% 

c. Stock B 24%, Market Portfolio: 12% 

d. None of the above 

5. 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 variance of the market portfolio returns.  

a. 192 

b. 128 

c. 28 

d. None of the above 

6. 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 

7. 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 beta for Stock B.  

a. 0.86 

b. 1.0 

c. 0.125 

d. None of the above 

8. 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%. If the risk-free rate is 4%, calculate the market risk premium.  

a. 18.1% 

b. 14% 

c. 10% 

d. None of the above 

9. On a graph with common stock returns on the Y-axis and market returns on the X-axis, the slope of the regression line represents the:  

a. Alpha 

b. Beta 

c. R-squared 

d. Adjusted beta 

10. 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 required rate of return (cost of equity) for Stock B using CAPM. (The risk-free rate of return = 4%)  

a. 8.6% 

b. 12.6% 

c. 14.3% 

d. None of the above