1. The difference between the expected (or required) return for the market portfolio and the risk-free rate of return is referred to as:

A) beta.

B) the market risk premium.

C) the competition’s risk premium.

D) None of the above.

2. If a company accurately predict it's cost of equity, then:

A) the firm's wacc will also be inaccurate.

B) the firm may not be using the proper interest rate to estimate NPV.

C) the firm may correctly accept projects based on decisions made using the cost of capital computed with a correct cost of equity.

D) All of the above are true.

3. Which of the following statements is NOT true regarding beta?

A) Beta will have a value of less than 1.0 if the firm's returns are less volatile than the market.

B) Beta will have a value of greater than 1.0 if the firm's returns are more volatile than the market.

C) Beta will have a value of equal to 1.0 if the firm's returns are of equal volatility to the market.

D) All of the statements above are true.

4. A fully diversified domestic portfolio has a beta of:

A) 0.0.

B) 2.0.

C) -1.0.

D) None of the above.

5. Which of the following is NOT a key variable in the equation for the capital asset pricing model?

A) the risk-free rate of interest

B) the expected rate of return on the market portfolio

C) the market risk premium

D) All are important components of the CAPM.