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2. The best fit line of a pairwise plot of the returns of the security against
the market index returns is called the:
A. Security Market Line.
B. Capital Market Line.
C. Beta Line.
D. risk line.
E. None of the above.
3. Using the CAPM to calculate the cost of capital for a risky project
assumes that:
A. using the firm's beta is the same measure of risk as the project.
B. the firm is all-equity financed.
C. the financial risk is equal to business risk.
D. Both A and B.
E. Both A and C.
4. If the risk of an investment project is different than the firm's risk then:
A. you must adjust the discount rate for the project based on the firm's risk.
B. you must adjust the discount rate for the project based on the project
risk.
C. you must exercise risk aversion and use the market rate.
D. an average rate across prior projects is acceptable because estimates
contain errors.
E. one must have the actual data to determine any differences in the
calculations.
10. Betas may vary substantially across an industry. The decision to use
the industry or firm beta to estimate the cost of capital depends on:
A. whether the company is a leader or follower.
B. how similar the firm's operations are to the operations of all other firms
in the industry.
C. how small the estimation errors are of all betas across industries.
D. the size of the company's public float.
E. None of the above.
11. Beta is useful in the calculation of the:
A. company's variance.
B. systematic risk.
C. company's standard deviation.
D. unsystematic risk.
E. company's market rate.
12. The hypothesis that market prices reflect all public available
information is called:
A) Public Form of Efficiency
B) Strong Form Efficiency
C) Semi-Strong Form Efficiency
D) Semi-Weak Form Efficiency
E) Weak Form Efficiency
13. In Arbitrage Pricing Theory, a Factor is a variable that:
A. affects the returns of risky assets in a systematic fashion.
B. affects the returns of risky assets in an unsystematic fashion.
C. correlates with risky asset returns in a unsystematic fashion.
D. does not correlate with the returns of risky assets in a systematic
fashion.
E. None of the above.
14. What would not be true about a GNP beta?
A. If a stock's GDP = 1.5, the stock will experience a 1.5% increase for
every 1% surprise increase in GDP.
B. If a stock's GDP = -1.5, the stock will experience a 1.5% decrease for
every 1% surprise increase in GDP.
C. It is a measure of risk.
D. It measures the impact of systematic risk associated with GDP.
E. None of the above.
15. If the expected rate of inflation was 3% and the actual rate was 6.2%;
the systematic response coefficient from inflation, I, would result in a
change in any security return of ___ I.
A. 9.2
B. 3.2
C. -3.2
D. 3.0
E. 6.2
16. In a portfolio of risky assets, the response to a factor, Fi, can be
determined by:
A. summing the weighted i s and multiplying by the factor Fi.
B. summing the Fi s.
C. adding the average weighted expected returns.
D. summing the weighted random errors.
E. All of the above.
19. The single factor APT model that resembles the market model uses
_________ as the single factor.
A. arbitrage fees
B. GNP
C. the inflation rate
D. the market return
E. the risk-free return
20. For a diversified portfolio including a large number of stocks, the:
A. weighted average expected return goes to zero.
B. weighted average of the betas goes to zero.
C. weighted average of the unsystematic risk goes to zero.
D. return of the portfolio goes to zero.
E. return on the portfolio equals the risk-free rate.
Part 2
Asset
Division
Beta
Oil Exploration 1.4
Oil Refining 1.1
Gas & Convenience
Stores 0.8
Expected
Growth
Rate
4.0%
2.5%
600
3.0%
The risk-free rate of interest is 3% and the market risk premium is 5%.
1. What is the cost of capital for the oil exploration division?
13. What is the cost of capital for the oil refining division?
Expected Return
Oil Exploration
Oil Refining
Riskfree Rate
40.50%
20%
3%
Standard
Deviation
50%
25%
0%
Market
8%
7%
Beta
3.0
1.5
0
Base
Lending 3%
Rate (BLR) of a
Bank
0.1
The returns of Oil Exploration and Oil Refining are perfectly negatively
correlated. The correlation between the projects is -1.
3. If you want a zero risk portfolio, what proportions of Oil Exploration and
Oil Refining should you allocate your capital to?
4. Using Capital Asset Pricing Model, calculate the return of your zero-risk
portfolio?
5) Draw the risk return of Oil Exploration and Oil Refining on a chart.
Below are a simplified balance sheet for Firma A Ltd and the share
information for its FIRMA, at year end 2013.
Petrobus Balance Sheet (as of 31st December 2013, in $ millions)
2014
(in $ million)
ASSETS
Current Assets
2648
Fixed Asset
11.212
Total Assets
13,860
50
Noncurrent Liabilities
Long Term Debt
8,345
Total Liabilities
8,395
Shareholder's Equity
4,814
0
4,814
13,860
263.4
$1.00
Harga saham
Price of the share
$44