Question

1. 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

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

A. True B. False

3. 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

4. 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.

5.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

6. Assuming a stock’s dividend yield is 5% and capital gains yield is 8%, what is the stock’s total return?

A. 3%

B. 5%

C. 8%

D. 13%

7. Which of the following is the criticism of dividend discount model?

A. It does not account for the firm’s dividend

B. It does not account for the firm’s growth

C. It does not account for investor’s required rate of return

D. It does not account the situation that dividend is zero

E. None of the above

8. Under which of the following situations, the constant growth dividend discount model does not apply?

A. When dividend is positive

B. The growth rate (g) is constant

C. When the growth rate (g) is negative

D. When the growth rate (g) > investor required rate of return (rs)

E. None of the above

Answer 1

1-	B	(.5*.8)+(.5*1.4)	1.1
2-	TRUE	it reflects the market risk
3-	D	Using PV function in MS excel =pv(rate,nper,pmt,fv,type)	PV(4.11%,10,37.5,1000)	970.96
4-	A	Systematic risk can be eliminated by proper diversification.
5-	B	stock price =expected dividend/(required return on equity-growth rate)	2/(13%-6%)	28.57
6-	D	5%+8%	13%
7-	E	None of the above
8-	D-	When the growth rate (g) > investor required rate of return (rs)