THE CAPITAL ASSET PRICING MODEL ASSUMES INVESTORS ARE REWARDED FOR BEARING _____
ID: 2623287 • Letter: T
Question
THE CAPITAL ASSET PRICING MODEL ASSUMES INVESTORS ARE REWARDED FOR BEARING _________ RISK.
UNDIVERSIFIABLE
FIRM-SPECIFIC
DIVERSIFIABLE
UNSYSTEMATIC
CONSIDER THE CASH FLOWS FOR PROJECT Y SHOWN IN THE FOLLOWING TABLE:
GIVEN A REQUIRED RETURN (AKA DISCOUNT RATE) OF 10%, THE PROFITABILITY INDEX FOR PROJECT Y IS ______. ACCORDING TO THE PROFITABILITY INDEX DECISION RULE THE PROJECT _________ BE ACCEPTED.
.75; SHOULD NOT
2.15; SHOULD
.58; SHOULD NOT
1.15; SHOULD
CONSIDER THE FOLLOWING INFORMATION FOR THE FIN 301 CORPORATION:
.10
-25%
.80
12%
.10
30%
10.1%; 13.85%; 1.37%
10.1%; 165.64%; 16.4%
10.1%; 12.87%; 1.27
10.1%; 11.29%; 1.12%
CONSIDER THE FOLLOWING STOCK RETURN INFORMATION FOR THE MARKET PORTFOLIO AND FOR THE FIN 301 CORPORATION:
CHANGE IN
MARKET RETURN
CHANGE IN
FIN 301 STOCK RETURN
2013
10
12
2012
8
12
2011
2
6
2010
-7
-12
2009
5
2
2008
19
30
2007
4
-2
2006
23
36
2005
-15
-28
2004
-6
-1
IF THE RISK-FREE RATE IS 4% AND THE MARKET RISK PREMIUM IS 6%, THEN THE REQUIRED RETURN ON FIN 301 COMMON STOCK WOULD BE _________.
13.30%
11.95%
10.35%
12.75%
THE SLOPE OF THE SECURITY MARKET LINE JUST ROSE. THIS MUST MEAN________
SYSTEMATIC RISK JUST ROSE
INVESTORS JUST BECOME MORE RISK-AVERSE.
UNSYSTEMATIC RISK JUST ROSE.
INVESTORS EXPECT THE INFLATION RATE TO INCREASE.
CAPITAL BUDGETING PROJECTS A AND B ARE MUTUALLY EXCLUSIVE. AT A DISCOUNT RATE OF 0%, THE NPV OF PROJECT A EXCEEDS THAT OF PROJECT B. HOWEVER, THE IRR OF PROJECT B EXCEEDS THAT OF PROJECT A. USING ONLY THIS INFORMATION, WE CAN CONCLUDE _________.
I. PROJECT A SHOULD BE SELECTED
II. PROJECT B SHOULD BE SELECTED
III. THE NPV PROFILES OF PROJECTS A AND B CROSS
IV. THE NPV PROFILES OF PROJECTS A AND B DO NOT CROSS
II AND IV
IV ONLY
I AND III
III ONLY
CONSIDER THE FOLLOWING INFORMATION:
0
4%
1
10%
1.5
?
ACCORDING TO THE CAPITAL ASSET PRICING MODEL, THE REQUIRED RETURN FOR FIN 301 IS ________
10%
14.5%
16%
13%
BETA MEASURES A SECURITY'S _________
SYSTEMATIC RISK
FIRM-SPECIFIC RISK
UNSYSTEMATIC RISK
DIVERSIFIABLE RISK
THE JSU CORPORATION HAS A BETA OF 1.5. THIS MEANS THAT IF THE MARKET RETURN FALLS BY 6%, JSU'S RETURN SHOULD ______.
FALL BY 9%
FALL BY 10.5%
RISE BY 12%
RISE BY 9%
YOU LEARN THE H1N1 VIRUS HAS MUTATED INTO A FAR MORE VIRULENT FORM AND THERE IS NO KNOWN VACCINE OR CURE. ONE THIRD FOR THE WORLD'S POPULATION IS EXPECTED TO DIE FROM THE VIRUS. BASED ON THIS INFORMATION WE WOULD EXPECT _____________.
NO CHANGE IN THE SECURITY MARKET LINE.
THE SECURITY MARKET LINE TO SHIFT UP AND TO THE LEFT.
THE SLOPE OF THE SECURITY MARKET LINE TO STEEPEN.
THE SECURITY MARKET LINE TO SHIFT DOWN AND TO THE RIGHT.
YOU OBSERVE A SECURITY'S TOTAL RISK INCREASED BUT ITS BETA IS UNCHANGED. THIS MUST MEAN ITS ________ RISK JUST ROSE.
UNSYSTEMATIC
SYSTEMATIC
MARKET
UNDIVERSIFIABLE
THE STANDARD DEVIATION OF A SECURITY'S RETURNS IS A MEASURE OF ITS
TOTAL RISK
SYSTEMATIC RISK
UNSYSTEMATIC RISK
MARKET RISK
CONSIDER THE CASH FLOWS FOR PROJECT Y SHOWN IN THE FOLLOWING TABLE:
THE PAYBACK PERIOD FOR PROJECT Y IS _________. IF MANAGEMENT'S MAXIMUM ALLOWABLE PAYBACK PERIOD IS 3 YEARS, THEN ACCORDING TO THE PAYBACK DECISION RULE THE PROJECT _______ BE ACCEPTED.
2.35; SHOULD
3.50; SHOULD NOT
3.72; SHOULD NOT
1.67; SHOULD
UNDIVERSIFIABLE
FIRM-SPECIFIC
DIVERSIFIABLE
UNSYSTEMATIC
Explanation / Answer
1. THE CAPITAL ASSET PRICING MODEL ASSUMES INVESTORS ARE REWARDED FOR BEARING _________ RISK.
UNDIVERSIFIABLE
1. CONSIDER THE CASH FLOWS FOR PROJECT Y SHOWN IN THE FOLLOWING TABLE:
TIME
PROJECT Y
0
-$500,000
1
$300,000
2
$300,000
3
$300,000
4
$300,000
5
$200,000
2. GIVEN A REQUIRED RETURN (AKA DISCOUNT RATE) OF 10%, THE PROFITABILITY INDEX FOR PROJECT Y IS ______. ACCORDING TO THE PROFITABILITY INDEX DECISION RULE THE PROJECT _________ BE ACCEPTED.
PROFITABILITY INDEX FOR PROJECT Y = (300/1.1 + 300/1.1^2 + 300/1.1^3 + 300/1.1^4 +200/1.1^5)/500 = 2.15
2.15; SHOULD
1. CONSIDER THE FOLLOWING INFORMATION FOR THE FIN 301 CORPORATION:
STATE OF ECONOMY
PROBABILITY
RETURN
DEPRESSION
.10
-25%
AVERAGE
.80
12%
BOOM
.10
30%
2. FIN 301'S EXPECTED RETURN IS _______ AND ITS STANDARD DEVATION IS _______ AND ITS COEFFICIENT OF VARIATION IS ________.
EXPECTED RETURN = -25%*0.1 + 12%*0.8 +30%*.1= 10.1%
STANDARD DEVATION =sqrt ((-25%-10.1%)^2*0.1 + (12%-10.1%)^2*0.8 +(30%-10.1%)^2*.1) = 12.87%
10.1%; 12.87%; 1.27
1. CONSIDER THE FOLLOWING STOCK RETURN INFORMATION FOR THE MARKET PORTFOLIO AND FOR THE FIN 301 CORPORATION:
YEAR
CHANGE IN
MARKET RETURN
CHANGE IN
FIN 301 STOCK RETURN
2013
10
12
2012
8
12
2011
2
6
2010
-7
-12
2009
5
2
2008
19
30
2007
4
-2
2006
23
36
2005
-15
-28
2004
-6
-1
2. IF THE RISK-FREE RATE IS 4% AND THE MARKET RISK PREMIUM IS 6%, THEN THE REQUIRED RETURN ON FIN 301 COMMON STOCK WOULD BE _________.
13.30%
THE SLOPE OF THE SECURITY MARKET LINE JUST ROSE. THIS MUST MEAN________
INVESTORS JUST BECOME MORE RISK-AVERSE
1. CAPITAL BUDGETING PROJECTS A AND B ARE MUTUALLY EXCLUSIVE. AT A DISCOUNT RATE OF 0%, THE NPV OF PROJECT A EXCEEDS THAT OF PROJECT B. HOWEVER, THE IRR OF PROJECT B EXCEEDS THAT OF PROJECT A. USING ONLY THIS INFORMATION, WE CAN CONCLUDE _________.
I. PROJECT A SHOULD BE SELECTED
II. PROJECT B SHOULD BE SELECTED
III. THE NPV PROFILES OF PROJECTS A AND B CROSS
IV. THE NPV PROFILES OF PROJECTS A AND B DO NOT CROSS
I AND III
1. CONSIDER THE FOLLOWING INFORMATION:
SECURITY
BETA
REQUIRED RETURN
RISK-FREE RATE
0
4%
MARKET PORTFOLIO
1
10%
FIN 301
1.5
?
2. ACCORDING TO THE CAPITAL ASSET PRICING MODEL, THE REQUIRED RETURN FOR FIN 301 IS
REQUIRED RETURN = 4% +1.5*(10%-4%) = 13.00%
13%
1. BETA MEASURES A SECURITY'S _________
SYSTEMATIC RISK
1. THE JSU CORPORATION HAS A BETA OF 1.5. THIS MEANS THAT IF THE MARKET RETURN FALLS BY 6%, JSU'S RETURN SHOULD ______.
FALL BY 9%
1. YOU LEARN THE H1N1 VIRUS HAS MUTATED INTO A FAR MORE VIRULENT FORM AND THERE IS NO KNOWN VACCINE OR CURE. ONE THIRD FOR THE WORLD'S POPULATION IS EXPECTED TO DIE FROM THE VIRUS. BASED ON THIS INFORMATION WE WOULD EXPECT _____________.
THE SECURITY MARKET LINE TO SHIFT UP AND TO THE LEFT.
1. YOU OBSERVE A SECURITY'S TOTAL RISK INCREASED BUT ITS BETA IS UNCHANGED. THIS MUST MEAN ITS ________ RISK JUST ROSE.
UNSYSTEMATIC
1. THE STANDARD DEVIATION OF A SECURITY'S RETURNS IS A MEASURE OF ITS
TOTAL RISK
1. CONSIDER THE CASH FLOWS FOR PROJECT Y SHOWN IN THE FOLLOWING TABLE:
TIME
PROJECT Y
0
-$500,000
1
$300,000
2
$300,000
3
$300,000
4
$300,000
5
$200,000
2. THE PAYBACK PERIOD FOR PROJECT Y IS _________. IF MANAGEMENT'S MAXIMUM ALLOWABLE PAYBACK PERIOD IS 3 YEARS, THEN ACCORDING TO THE PAYBACK DECISION RULE THE PROJECT _______ BE ACCEPTED.
Payback period = 1+(500-500)/300 = 1.67 years
1.67; SHOULD
TIME
PROJECT Y
0
-$500,000
1
$300,000
2
$300,000
3
$300,000
4
$300,000
5
$200,000
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