1. The risk free rate is 3% and the market risk premium is 4%. Stock A has a beta of 1.5. What is the required rate of return on stock A.

A. 9.0%

B. 7.8%

C. 4.8%

D. 7%

E. None of above is correct.

2. An individual has $40,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4, what is her portfolio’s beta?

A. 0.9

B. 1.10

C. 2.2

D. 1.12

3. Capital Asset Pricing Model (CAPM) reflects the risk before diversification.

A. True B. False

4. A $1,000 face value bond currently has a yield to maturity of 8.22 percent. The bond matures in five years and pays interest semiannually. The coupon rate is 7.5 percent. What is the current price of this bond? [Match time period and interest rate]

A. $948.01

B. $989.60

C. $1,005.26

D. $970.96

E. $1,010.13

5. Which of following is incorrect?

A. Systematic risk can be eliminated by proper diversification.

B. Market risk is the risk remains after diversification.

C. Market risk is also known as systematic risk.

D. All of above are correct.

6. If g=6%, ??1 = 2, and ???? = 13%, what is the stock’s value?

A. 25.89

B. 28.57

C. 30.29

D. 50.22

E. None of the above

7. If g=6%, ??1 = 2, and ???? = 13%, what is the stock’s value two years from now?

A. 25.89

B. 32.10

C. 30.29

D. 34.02

E. None of the above