Investment Risk and Portfolio Management Paper 3

1

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






2

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%.






3

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.






4

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






5

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






6

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?






7

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






8

The systematic risk of an individual security is measured by the






9

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






10

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






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