MODULE 1 – Weeks 1 & 2

Risk and Return: Lessons from Market History

Risk, Cost of Capital, and Capital Budgeting

Perform Step 1 of Team Project : Capital Asset Pricing Model (CAPM)

1.The cost of equity for the Stevo Corporation is 8.4%. If the expected return on the market is 10% and the risk-free rate is 5%, then the equity beta is __.

A. 0.48

B. 0.68

C. 1.25

D. 1.68

E. Impossible to calculate with information given.

2. The cost of capital for Stevo Corporation is 12.4%. If the expected return on the market is 10% and the beta is 1.10 , Could we use a different cost of capital for a safe project like an upgrade to an existing product line?

A. No, we need to cover the cost of capital for any project.

B. Yes, but not below the required market return and beta adjustment which would be 11%.

C. Yes, but another project would need to compensate for the lost return.

D. No, the board would not approve a lower return.

E. Impossible to say with information given.

3. If Suzie Corp has a beta of 1.1, the market rate is 7%, the risk free rate is 2%. What is their cost of capital?

A. 5.7 %

B. 9%

C. 7.5%

D. 0.8%

E. Impossible to calculate with information given.

4. You've observed the following returns on Mary Ann Data Corporation's stock over the past five years: 27 percent, 13 percent, 18 percent, −14 percent, and 9 percent.

What was the arithmetic average return on Mary Ann's stock over this five-year period?

5. What was the variance of Mary Ann's returns over the period above in question 4? The standard deviation?

6. You bought a share of preferred stock for $94.89 last year that paid a $4 dividend. The market price for your stock is now $96.12. What was your total return for last year?

A. 5.7 %

B. 5.51%

C. 4.2%

D. 6.8%

E. Impossible to calculate with information given.

7. You own a portfolio that has $2,100 invested in Stock A and $3,200 invested in Stock B. If the expected returns on these stocks are 11 percent and 14 percent, respectively, what is the expected return on the portfolio?

A. 15.7 %

B. 12.5%

C. 14.2%

D. 12.81%

E. Impossible to calculate with information given.

8. A portfolio is invested 10 percent in Stock G, 65 percent in Stock J, and 25 percent in Stock K. The expected returns on these stocks are 9 percent, 11 percent, and 14 percent, respectively. What is the portfolio's expected return?

A. 11.33 %

B. 12.5%

C. 11.55%

D. 10.81%

E. Impossible to calculate with information given.

9. A stock has a beta of 1.15, the expected return on the market is 11 percent, and the risk-free rate is 5 percent. What must the expected return on this stock be?

A. 10.39 %

B. 11.90%

C. 11.55%

D. 12.65%

E. Impossible to calculate with information given.