Saint MAB570 module 6 quiz 37146

| November 13, 2015

Question

 Question 1.1.Which of the following statements is false? (Points : 10)

The variance increases with the magnitude of the deviations from the mean.

The variance is the expected squared deviation from the mean.

Two common measures of the risk of a probability distribution are its variance and standard deviation.

If the return is riskless and never deviates from its mean, the variance is equal to one.

 Question 2.2.Which of the following statements is false? (Points : 10)

The expected return is the return that actually occurs over a particular time period.

If you hold the stock beyond the date of the first dividend, then to compute your return you must specify how you invest any dividends you receive in the interim.

The average annual return of an investment during some historical period is simply the average of the realized returns for each year.

The realized return is the total return we earn from dividends and capital gains, expressed as a percentage of the initial stock price.

 Question 3.3.A firm has a 70% probability of a 20% return and a 30% probability of a -30% return. What is the expected return for the firm? (Points : 10)

14%

3%

5%

-5%

 Question 4.4.Suppose the market portfolio’s excess return tends to increase by 30% when the economy is strong and decline by 20% when the economy is weak. A type S firm has excess returns increase by 45% when the economy is strong and decrease by 30% when the economy is weak. What is the Beta for a type S firm? (Points : 10)

1.5

0.0

1.0

0.75

 Question 5.5.If the market risk premium is 6%, the risk-free rate is 4% and Fordâ€™s beta is 2.77, then the expected return of investing in Ford Motor Company is closest to __________. (Points : 10)

10.0%

16.2%

17.1%

20.6%

 Question 6.6.Suppose that Luther’s beta is 0.9. If the market risk premium is 8% and the risk-free interest rate is 4%, then then expected return for Luther stock is __________. (Points : 10)

7.6%

11.6%

11.2%

12.9%

 Question 7.7.Suppose that Merck (MRK) stock is trading for \$36.70 per share with 2.11 billion shares outstanding . Merck’s market capitalization is closest to __________. (Points : 10)

\$38.2 billion

\$77.4 billion

\$89.4 billion

\$115.6 billion

 Question 8.8.Assume that the risk-free rate of interest is 3% and you estimate the market’s expected return to be 9%. Miney Inc. has a beta of 1.05 and a volatility of 35%. The equity cost of capital for Miney is closest to __________. (Points : 10)

6.30%

7.50%

9.30%

9.75%

 Question 9.9.Your firm is planning to invest in a new power generation system. Galt Industries is an all equity firm that specializes in this business. Suppose Galt’s equity beta is 0.75, the risk-free rate is 3%, and the market risk premium is 6%. If your firm’s project is all equity financed, then your estimate of your cost of capital is closest to __________. (Points : 10)

5.25%

6.00%

6.75%

7.50%

 Question 10.10.Firms should adjust for execution risk by: (Points : 10)

assigning a higher cost of capital to new projects.

ignoring execution risk since it is diversifiable.

capturing this risk in the expected cash flows generated by the project.

noticing missteps in the firm’s execution of new projects.

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