In the Capital Asset Pricing Model, the risk-free rate:
links the CAPM to current market conditions.
is the historic long-term average rate of government bonds.
can be approximated by using yields on high-rated corporate bonds.
is always the current yield on 30-year US government Treasury bonds.
Question 2.2. Which of the following is beta is used for?
estimating a regression line
estimating a firm's total risk to be used in the WACC
estimating a firm's market risk and used with the CAPM
estimating the amount of leverage used by the firm
Question 3.3. In the Capital Asset Pricing Model, the market risk premium is estimated over a long period of time because:
more data is always better than less.
a longer holding period gives a more reliable estimate because it is, in effect, a larger sample size.
almost all investors hold stocks for many years, so it matches their investment horizon.
historical returns are the best indicators of future returns.
Question 4.4. Which of the following statements regarding the cost of equity is true?
It can be estimated in three different ways.
It is always estimated using the present value of future dividends approach.
It is estimated by solving for the discount rate for a perpetuity.
It is generally lower than the cost of debt because equity holders are paid after taxes are paid.
Question 5.5. Total risk is measured by:
the standard deviation of returns.
the firm's beta.
Moody's, Standard & Poor's, and Fitch ratings.
the variability of EBIT.
Question 6.6. In order to find the cost of equity using the firm's cost of debt, the rule of thumb is to:
multiply Kd by one plus the tax rate.
multiply Kd by one minus the tax rate.
add 3% to 6% to Kd.
multiply Kd by the firm's beta.
Question 7.7. One way to think about the required rate of return is:
as the highest return a risk-averse investor wants from an investment.
as the risk-free rate of return plus a risk premium.
as the historical rate of return plus a risk premium.
as a comparison between the expected and historical rates of return.
Question 8.8. 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?
12.11%
8.30%
8.00%
15.33%
Question 9.9. In the Capital Asset Pricing Model, the market risk premium can be thought of as:
the return investors expect to earn for each unit of risk as measured by beta.
the risk premium that any asset must pay above the risk-free rate.
the expected return on the market portfolio (or a broad market index).
a measure of risk of an asset.
Question 10.10. 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.