25. Beta of
Treasury bills is: a. +1.0 b. +0.5 c. -1.0 D. 026. Beta of the market portfolio is:a. Zero b. +0.5 c. -1.0 D.
+1.0 27. The
capital asset pricing model (CAPM) states that: A. The expected risk premium on an investment is
proportional to its beta b. The
expected rate of return on an investment is proportional to its beta c. The
expected rate of return on an investment depends on the risk-free rate and the
market rate of return d. The
expected rate of return on an investment is dependent on the risk-free rate 28. The
graphical representation of CAPM (Capital Asset Pricing Model) is called: a. Capital
Market Line b. Characteristic
Line C. Security Market Lined. None of
the above 29. Beta
measure indicates: a. The
ability to diversify risk B. The change in the rate of return on an investment for a
given change in the market returnc. The
actual return on an asset d. A and C 62 Junjie Liu – Econ 282 Practice
Multiple Choice30. The
security market line (SML) is the graph of: a. Expected
rate on investment (Y-axis) vs. variance of return b. Expected
return on investment vs. standard deviation of return C. Expected rate of
return on investment vs. beta d. A and B 31. If the
beta of Microsoft is 1.13, risk-free rate is 3% and the market risk premium is
8%, calculate the expected return for Microsoft. A. 12.04% b. 15.66% c. 13.94% d. 8.65% 32. If the
beta of Amazon.com is 2.2, risk-free rate is 5.5% and the market risk premium
is 8%, calculate the expected rate of return for Amazon.com stock: a. 15.8% B. 14.3%c. 35.2% d. 23.1% 33. If the
beta of Exxon Mobil is 0.65, risk-free rate is 4% and the market rate of return
is 14%, calculate the expected rate of return from Exxon: a. 12.6% B. 10.5%c. 13.1% d. 6.5% 34. A stock
with a beta of zero would be expected to: a. Have a
rate of return equal to zero b. Have a
rate of return equal to the market risk premium C. Have a rate of return equal
to the risk-free rate d. Have a
rate of return equal to the market rate of return 35. A stock
with a beta of 1. 25 would be expected to: A. Increase in returns 25% faster than the market in up
markets b. Increase
in returns 25% faster than the market in down markets c. Increase
in returns 125% faster than the market in up markets d. Increase
in returns 125% faster than the market in down markets 36. If the
market risk premium is (rm – rf) is 8%, then according to the CAPM, the risk
premium of a stock with beta value of 1.7 must be: a. Less than
12% b. 12% C. Greater than 12%d. Cannot be determined63 Junjie Liu – Econ 282 Practice
Multiple Choice37. The main
shortcoming of CAPM is that it a. Ignores
the return on the market portfolio b. Uses too
many factors C. Requires a single risk measure of systematic riskd. Ignores risk-free rate of return 38. If a stock
is overpriced it would plot: a. Above the
security market line B. Below the security market line c. On the
security market line d. On the
Y-axis 39. If a stock
is underpriced it would plot: A. Above the security market line b. Below the
security market line c. On the
security market line d. On the
Y-axis 40. Given the
following data for a stock: beta = 1.5; risk-free rate = 4%; market rate of
return = 12%; and Expected rate of return on the stock = 15%. Then the stock
is: A. Overpriced b. Underpriced
c. Correctly
priced d. Cannot be
determined 41. Given the
following data for a stock: beta = 0.5; risk-free rate = 4%; market rate of
return = 12%; and Expected rate of return on the stock = 10%. Then the stock
is: a. Overpriced
B. Under pricedc. Correctly
priced d. Cannot be
determined 42. Given the
following data for a stock: beta = 0.9; risk-free rate = 4%; market rate of
return = 14%; and Expected rate of return on the stock = 13%. Then the stock
is: a. Overpriced
b. Under
priced C. Correctly pricedd. Cannot be
determined 43. A
“factor” in APT is a variable that: a. Is pure
“noise” b. Correlates
with risky asset returns in an unsystematic manner C. Affects the return of
risky assets in a systematic manner d. Affects
the return of a risky asset in a random manner 64 Junjie Liu – Econ 282 Practice
Multiple Choice44. Given the
following data for a stock: risk-free rate = 4%; factor-1 beta = 1.5; factor-2
beta = 0.5 factor-1 risk-premium = 8%; factor-2 risk-premium = 2%. Calculate
the expected rate of return on the stock using the two-factor APT model. a. 13% B. 17% c. 10% d. None of the above 45. The three
factors in the Three-Factor Model are: I) Market factor II) Size factor III)
Book-to-market factor a. I only b. I and II only C. I, II, and III d. III only 46. Given the
following data for the a stock: risk-free rate = 5%; beta (market) = 1.5; beta
(size) = 0.3; beta (book-to-market) = 1.1; market risk premium = 7%; size risk
premium = 3.7%; and book-to-market risk premium = 5.2%. Calculate the expected
return on the stock using the Fama-French three-factor model. A. 22.3% b. 7.8% c. 11.5% d. None of the above 47. Given the
following data for the a stock: risk-free rate = 5%; beta (market) = 1.4; beta
(size) = 0.4; beta (book-to-market) = -1.1; market risk premium = 7%; size risk
premium = 3.7%; and book-to-market risk premium = 5.2%. Calculate the expected
return on the stock using the Fama-French three-factor model. a. 22.3% b. 7.8% C. 10.6% d. None of the above 65

Overconfidence does not quickly dissipate via learning because of the existence of contributing biases. Explain.

 

The following table tracks the main components of working capital over the life of a four-year project.

   2010 2011 2012 2013 2014   Accounts receivable 0     152,000    227,000    192,000    0        Inventory 76,000     131,000    131,000    96,000    0        Accounts payable 25,500     50,500    51,000    35,500    0     

  

Calculate net working capital and the cash inflows and outflows due to investment in working capital. (Leave no cells blank – be certain to enter 0 wherever required. Negative amounts should be indicated by a minus sign.)

   2010 2011 2012 2013 2014   Working capital   Cash flows   

ToddAc€?cs Dilemma: Common Stocks, Mutual Funds, or ETFs?

Todd OAc€?cHanlon has worked in the management services division of Focus Consultants for the past five years. He currently earns an annual salary of about $120,000. At 33, heAc€?cs still a bachelor and has accumulated about $100,000 in savings over the past few years. He keeps his savings in a money market account, where it earns about 3 percent interest. Todd wants to get Ac€A?a bigger bang for his buck,Ac€?? so he has considered withdrawing $50,000 from his money market account and investing it in the stock market. He feels that such an investment can easily earn more than 3 percent. Heidi Jackson, a close friend, suggests that he invest in mutual fund shares. Todd has approached you, his broker, for advice.

Critical Thinking Questions

Explain to Todd the key reasons for purchasing mutual fund or ETF shares.

What special fund features might help Todd achieve his investment objectives?

What types of mutual funds or ETFs would you recommend to Todd?

What recommendations would you make regarding ToddAc€?cs dilemma about whether to go into stocks, mutual funds, or ETFs? Explain.

Explain to Todd the rationale for choosing ETFs over mutual funds