1.Which of the following is true regarding market risk? (Points

02 May 1.Which of the following is true regarding market risk? (Points

Posted at 11:24h in 2Past Paper by solutions

Question

1.Which of the following is true regarding market risk? (Points : 1)

It is measured by beta.
It is also called nondiversifiable risk.
It is also called systematic risk.
all of the above

2. If an investor purchases a share of stock for $300, collects a dividend during the year equal to $35 a share, and sells the stock at the end of the year for $289, what is the investor’s return for the year? (Points : 1)

12.11%
8.30%
8.00%
15.33%

3.One reason why we are not concerned with idiosyncratic risk (also called firm-specific risk) is that: (Points : 1)

most risk is not firm-specific, so we can ignore it.
through hedging and insurance, investors may now invest in stocks with almost no risk exposure of any kind.
it is easy and almost costless to diversify one’s portfolio and eliminate idiosyncratic risk.
investing in bonds can offset the idiosyncratic risks of shares of stock.

4.Beta is estimated as the slope of a regression line fit to pairs of periodic returns, (r_x, r_y), where: (Points : 1)

r_x is the return for a market index such as the S&P 500 Index.
r_xis the return for the stock being analyzed—for example, IBM’s return if we are estimating IBM’s beta.
the slope measures the average return for the market portfolio for each percentage change in the value of the security of interest.
r_yis the return for the market index such as the S&P 500 Index.

5.The financing mix reflected in the WACC should: (Points : 1)

reflect the desired mix and not necessarily the mix being used to finance a specific project.
vary from project to project, depending on how they are financed.
always reflect the firm’s current capital structure.
None of these answers is correct.

6.Which of the following best describes a pure-play? (Points : 1)

a private firm that is held in isolation in a one-company investment portfolio
a publicly traded firm that is similar to the company or project being analyzed
Both a and b are correct.
Neither a nor b is correct.

7.Which of the following is beta is used for? (Points : 1)

estimating a regression line
estimating a firm’s total risk to be used in the WACC
estimating a firm’s marketrisk and used with the CAPM
estimating the amount of leverage used by the firm

8.The Hamada Equation allows the firm to: (Points : 1)

solve for a company’s total risk.
adjust the beta of a pure-play firm for its use of debt financing.
estimate its asset beta.
Both b and c are correct.

9.Which of the following statements regarding the cost of debt is true? (Points : 1)

The cost of debt for bonds equals the coupon rate of outstanding bonds.
The cost of debt for bonds is found by dividing the price by the annual coupon.
The cost of debt for bonds is found by calculating their yield to maturity.
The cost of debt equals the flotation costs charged by investment bankers who advise the firm.

10.Chapter 9 discusses three different types of returns. Identify the item in the list below that is NOT one of those three types of returns. (Points : 1)

the actual rate of return
the expected rate of return
the risk-free rate of return
the required rate of return

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