Stock a has a beta of 15 and stock b has a beta of 05

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15. Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.) A. When held in isolation, Stock A has greater risk than Stock B. B. Stock B would be a more desirable addition to a portfolio than Stock A. C. Stock A would be a more desirable addition to a portfolio than Stock B. D. The expected return on Stock A will be greater than that on Stock B. E. The expected return on Stock B will be greater than that on Stock A.
16. Currently, the risk-free rate is 5 percent and the market risk premium is 6 percent. You have your money invested in three assets: an index fund that has a beta of 1.0, a risk-free security that has a beta of 0, and an international fund that has a beta of 1.5. You want to have 20 percent of your portfolio invested in the risk-free asset, and you want your overall portfolio to have an expected return of 11 percent. What portion of your overall portfolio should you invest in the international fund?
17. Assume that CAPM holds. Is it possible for the situation in the table below to persist in an efficient market? Why or why not? Asset E[R], % , % Risk free 5 Market 12 Portfolio A 20 0 20 35
FIN 2200 FINAL EXAM Page 6 of 15 18. Assume MM world with corporate tax c =40%. Risk free rate r f = 4%, market risk premium = 10%. If a firm is unlevered, equity beta is 1.6. Assume that he firm issues debt and repurchases equity with the proceeds and that the new D/E = 0.25 and return on debt r D = 6%. Find new WACC.
19. Which of the following statements is most correct? A. If a company’s tax rate increases but the yield to maturity of its bonds remains the same, the company’s marginal cost of debt capital used to calculate its weighted average cost of capital will fall. B. All else equal, a decline in a company’s stock return will increase the weighted average cost of capital. C. All else equal, an increase in a company’s stock price will increase the marginal cost of issuing common equity. D. Statements a and b are correct. E. Statements b and c are correct.

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