Finance Final

Front 1

T/F
only MICRO events affect the value of the market portfolio, or a portfolio of all assets in the economy

Back 1

false - only macro events

Front 2

T/F
a broad market base, such as the Sand P Composite, is often used as a proxy for the market portfolio

Back 2

true

Front 3

T/F
Firm specific or unique risk are averaged out or diversified away when considering the market portfolio

Back 3

true

Front 4

The measure of a stock's risk is relative to the risk of the market portfolio is called the stocks ____

Back 4

beta

Front 5

t/f
investors with diversified portfolios are not concerned about the specfiic or unique risk of a stock, only the impact of the stock on the risk of the entire portfolio

Back 5

true

Front 6

The _____ risk of the stock compared to the portfolio risk or beta is the relevant risk to consider when a new stock is added to the portfolio

Back 6

relative

Front 7

_____ stocks historically tend to vary less than the market portfolio

Back 7

defensive

Front 8

_____ stocks have a history of more variation relative to the market portfolio

Back 8

aggressive

Front 9

_____ is the slope of the regression line of the individual stock returns relative to the market portfolio returns

Back 9

beta

Front 10

The slope of the line, ____, rleates the change in stock returns, given a change in market return.

Back 10

Beta

Front 11

T/f
Diversification INCREASES the variability from unique risk but not from market risks

Back 11

FALSE - DECREASES

Front 12

The beta of a portfolio is an avg. of the stock betas weighted by the _____ in each security

Back 12

investment

Front 13

When the beta is greater than one, the risk is higher than the ______ _____ _____

Back 13

market avg. portfolio

Front 14

When a portfolio with an average risk less than the market, the portfolio beta is ____ than one

Back 14

less

Front 15

A large portfolio of diversified stocks would approximate the market index and have a portfolio beta around ____

Back 15

one

Front 16

US treasury bills have very ___ risk and a beta of zero, or no relationship with the variations of the market stock portfolio which has a beta of 1.0.

Back 16

LOW

Front 17

The difference between the return on the market and the T-bill rate is called the ____ ____ ____, or the risk premium demanded by investors to hold the market portfolio rather than T-Bills

Back 17

market risk premium

Front 18

The ____ ____ ____ is the market return less the return on T-Bils

Back 18

market risk premium

Front 19

____ _____ = risk free rate + risk premium

Back 19

expected return on a stock

Front 20

The _____ assumes well-diversified investors, market risk is the only relevant risk.

Back 20

CAPM

Front 21

A plot of expected rates of return of varied risk (beta) porfolios is called the ____ ____ ____

Back 21

security market line

Front 22

The required risk premium for any investment is given by the ___ ___ ______

Back 22

security market line

Front 23

The estimated required rate of return of investors on a firms securities is called the _____ ____ ____ ____

Back 23

company cost of capital

Front 24

Macroeconomic risk _____ be elimanted by diversification

Back 24

cannot

Front 25

____ risk is measured by the sensitivity of an investmen'ts returns as related to fluctuations in the market

Back 25

market

Front 26

The sensitivity of a particular stock's return to the return from the market portfolio is measured by _____

Back 26

beta

Front 27

defensive stocks have ____ betas

Back 27

low

Front 28

the returns from aggressive stocks will vary __ than the market return

Back 28

more

Front 29

aggressive stocks will have betas that are ___ than 1

Back 29

more

Front 30

An attraction of ______ is that they offer small investors diversification at low costs

Back 30

mutual funds

Front 31

Difference between the return on the market and the return on risk free T-Bills is termed the ___ ___ ___

Back 31

MRP

Front 32

Beta for t-bills is ____

Back 32

zero

Front 33

the ____ ___ ____ shows the relationship between expected return and beta

Back 33

security market line

Front 34

CAPM can be used to estimate the ____ ____ for capital budgeting projects

Back 34

discount rate

Front 35

The discount rate that is the minimum acceptable expected return on a project given its risk is known as the project ____ ___ ____

Back 35

cost of capital

Front 36

Projects that have high fixed costs will tend to have ___ betas

Back 36

high

Front 37

Projects involving revenues that are strongly dependent ont he state of the economy tend to have ____ beats and high cost of capital

Back 37

hgih

Front 38

_____ is a model that helps explain the trade off between risk and return for a security

Back 38

CAPM

Front 39

T/F
investors demand higher expected rates of return on stocks w/ more variable rates of return

Back 39

falses

Front 40

capital asset pricing model predicts that a security with a beta of zero will provide an expected return of 0

Back 40

false

Front 41

T/F
investor who puts 10,000 in T-bills and 20,000 in the market portfolio will have a portfolio beta of 2

Back 41

false

Front 42

T/F
investors demand higher expected rates of return from stocks w/ returns that are highly exposed to macroeconomic changes

Back 42

true

Front 43

investors demand higher expected rates of return from stocks w/ returns that are very sensitive to fluctuations in the stock market

Back 43

true

Front 44

Proposed assets can be evaluated using the company cost of capital providing that the:

Back 44

new assets have same risk as existing assets

Front 45

_____ _____ of securities should be used as weights when calculating the weighted average cost of capital.

Back 45

market value

Front 46

Capital structure shows blend of __ and ____

Back 46

debt and equity

Front 47

The _____ is the rate of return that the business must expect to earn on its average risk investments in order to provide the opportunity rate of return to all its investors, debt and equity

Back 47

WACC

Front 48

T/F
Funding hte project with increased proporitons of debt will lower the WACC

Back 48

FALSE

Front 49

T/F
As debt ratio increases, the incremental cost of debt, both explicit interest rates and implicity through increase in the cost of equity capital, raises the WACC

Back 49

true

Front 50

T/F
If there are NO corporate taxes, a change in the capital structure doesn't affect the WACC

Back 50

true

Front 51

The ____ is the return the company needs to earn after tax in order to satisfy all its security holders

Back 51

WACC

Front 52

T/F
If firm increases its debt ratio, BOTH the debt and equity will become more risky

Back 52

true

Front 53

t/f
Cost of equity is affected by the existence of income taxes

Back 53

FALSE - unaffected

Front 54

According to CAPM, when the market risk premium decreases, the cost of equtiy capital for all firms will _______

Back 54

decrease

Front 55

T/F
income tax rates were increased, cost of debt would increase as well

Back 55

false - decrease as well

Front 56

______ cost of debt is the rate of interest that bondholders demand

Back 56

explicit

Front 57

_____ cost of debt - borrowing increases the required return to equtiy

Back 57

implicit

Front 58

_____ is the right discount rate for average risk capital investments

Back 58

WACC

Front 59

The _____ is the return the company needs to earn after tax in order to satisfy all its security holders

Back 59

WACC

Front 60

If firm _____ its debt ratio, both the debt and equity will become more risky. q

Back 60

increase

Front 61

riskiest stock to a diversified investor is a stock with a ___ beta

Back 61

hgih

Front 62

riskiest stock to a undiversified investor is a stock with a ___ beta

Back 62

low