Practice test 2 Answers

Practice test 2 - Practice problems for Test 2 1 If a stock is overpriced it would plot A Above the security market line B On the security market

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Practice problems for Test 2 1. If a stock is overpriced it would plot: A) Above the security market line B) On the security market line C) Below the security market line D) On the Y-axis Answer: C 2. If a firm uses the same company cost of capital for evaluating all projects, which of the following is likely? A) Rejecting good low risk projects B) Accepting poor high risk projects C) Both A and B D) Neither A nor B Answer: C 3. A project has an expected 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. r = rf + beta*(rm – rf) = 0.06 + 1.5*(.16 - .06) = 0.21; 200/(1+0.21) = CEQ/(1+0.06); CEQ = 175.21 4. The expected return on the market is estimated to be 12% and the risk-free rate is 4%. a)If the expected return on stock A is 14%, what is stock A’s beta? 0.14 = 0.04 + beta A *[0.12 – 0.04] 0.1 = 0.08*beta A beta A = 1.25 b)If the beta of stock B is 0.9, what is its expected return? r B = 0.04 + 0.9*[0.12 – 0.04] = 0.04 + 0.072 = 0.112 c) What is the beta and the expected return of a portfolio with 30% invested in stock A and the rest in stock B? beta
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This note was uploaded on 02/27/2008 for the course FNCE 3010 taught by Professor Donchez,ro during the Spring '07 term at Colorado.

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Practice test 2 - Practice problems for Test 2 1 If a stock is overpriced it would plot A Above the security market line B On the security market

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