Investment Risk and Portfolio Management Paper 3


The benefits of diversification decline to near zero when the number of securities held increases beyond


Based on the following information about stock price increases and decreases, make an estimate of the stock’s beta: July = Stock +1.5%, Market +1.1%; August = Stock +2.0%, Market +1.4%; September = Stock –2.5%, Market – 2.0%.


DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment.
? Issue $15 million of 20-year bonds at a price of $101, with a coupon rate of 8%, and flotation costs of 2% of par.
? Use $35 million of funds generated from earnings.
? The equity market is expected to earn 12%. U.S. Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%.
The capital asset pricing model (CAPM) computes the expected return on a security by adding the risk-free rate of return to the incremental yield of the expected market return, which is adjusted by the company’s beta. Compute DQZ’s expected rate of return.


Using the capital asset pricing model (CAPM), the required rate of return for a firm with a beta of 1.25 when the market return is 14% and the risk-free rate is 6% is


Which of the following is the major difference between the capital asset pricing model (CAPM) and arbitrage pricing theory (APT)?


Stock J has a beta of 1.2 and an expected return of 15.6%, and stock K has a beta of 0.8 and an expected return of 12.4%. What is the expected return on the market and the risk-free rate of return, consistent with the capital asset pricing model?


The difference between the required rate of return on a given risky investment and that on a riskless investment with the same expected utility is the


The systematic risk of an individual security is measured by the


Which one of the following would have the least impact on a firm’s beta value?


If Dexter Industries has a beta value of 1.0, then its


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