Q.1
Given the information in the table below calculate the Beta of a portfolio that combines investments A, B, and C in the proportions given.
Investment Beta Weight
|
Investment
|
Beta
|
Weight
|
|
A
|
0.6
|
.3
|
|
B
|
1.2
|
.2
|
|
C
|
1.6
|
.5
|
Q.2
Given the following on 5 independent projects:
|
Project
|
IRR
|
Beta
|
RADR
|
Accept/Reject
|
|
A
|
7.01%
|
0.2
|
|
|
|
B
|
11.90%
|
1
|
|
|
|
C
|
14.50%
|
1.2
|
|
|
|
D
|
11.00%
|
0.8
|
|
|
|
E
|
18.00%
|
2
|
|
|
Calculate the risk adjusted discount rate for each project and determine whether each project should be accepted or rejected. Rm = 12% and Rf = 5%
Enter your answers for RADR as a percentage accurate to one decimal place and enter the % sign as well. eg 10.1 should be entered as 10.1%
For the accept/ reject decision enter the word accept or reject in lowercase.
Do not use commas.
Do not use leading zeros.
Q.3 The CAPM predicts that an asset with a beta of zero will offer a return equal to Rf.
True
False
Q.4 As a general rule firms should accept all positive NPV projects as long as they diversify risk at the same time.
True
False
Q.5
Refer to the diagram above from PBEHP 12th Ed, page 193.
Which of the following statements is correct. Note there may be more than one correct.
The expected return on risky assets consists of two components: the risk-free return plus a premium for risk
Positive NPV assets plot above the line and are considered to be underpriced
The risk-free asset has a beta of zero and the market portfolio has a beta of one
In equilibrium all financial assets will plot on the SML line and have an NPV of zero.
The market risk premium in this example is 5%
All assets, securities and portfolios which plot on the SML are efficient.
Negative NPV projects plot below the line and are considered to be underpriced
Q.6 Portfolio A has a covariance with Portfolio B of .09 and a covariance with the market of .06 while the standard deviation of the market is 20%. What is the expected return on Portfolio A if the risk free rate is .04 (4%) and the expected return on the market is 12%?
Do not enter the % sign. Give your answer as a percentage with accuracy to two decimal places, eg enter 11.00% as 11.00
Q.7
Refer to the diagram above from PBEHP 12th Ed, page 193.
Which of the following statements is correct. Note there may be more than one correct.
A risk averse investor would invest only in the riskfree asset as it has no risk
Aproject with a beta of 1.3 requires a return greater than 16.5% in order to add value
The slope of the SML can be calculated by referring to any two points on the SML, for example the points representing Assets 1 and 2.
Slope is equal to difference in return divided by difference in beta (.175 - .125)/(1.5 - .05).
If Asset 2 has an IRR greater than15% then it should be accepted (according to the SML and the firm objective of maximising value..
All projects plotting on the SML have an NPV of zero
Asset 2 is a better investment than Asset 1
If we combine asset 1 and asset 2 in equal proportions then the average beta would be one
Q.8
What is the beta of an asset with an expected return of 16%, if the risk-free rate of interest is 6% and the expected market portfolio risk premium is 6%? Accurate to two decimal places.
1.67
0
1.5
2
Cannot be calculated.
.75
Q.9
A well-diversified portfolio should have a beta significantly less than one.
True
False
Q.10
Two assets with a beta of one should have the same covariance with the market.
True
False
Q.11
Polycorp's existing assets (projects) have a average beta of 1.2. The market risk premium is 6% and the risk free rate is 3%. What is the risk adjusted rate of return RADR required for these assets (the cost of capital of the existing assets)? provide your answer as a percentage but do not enter the % sign. An answer of 10.456% should be entered as 10.46.
Q.12
The discount rate that should be used to calculate the NPV of a project depends on the business risk of the project, not on the business risk of the firm.
True
False
Q.13
A security market line [SML]:
gives the risk-return relationship for efficient portfolios only
is a graphical representation of the CML.
explains the co-variance between the returns on the risky asset and the market portfolio.
is a graphical representation of the CAPM.
explains the co-variance between the returns on the risky asset and a riskless asset.
Q.14
Polycorp is considering a new project. The project has beta (β) that is twice that of the firm's existing assets (projects). Polycorp's existing assets have a required return (cost of capital) of 9%, the market risk premium is 7% and the risk free rate is 3%. Calculate the beta for the new project. Provide your answer accurate to two decimal places.
Q.15
The annual nominal rate is jm = 0.17pa. What is the effective annual rate as a percentage to two decimal places? The number of compounding periods is 7. Enter your answer as a decimal eg 17.42% = .1742 to four decimal places. Accuracy of one basis point. Tip: use excel to get the required accuracy.