Corporate Finance 2_Quiz 2

The unexpected return on a security is made up of:

• market risk and systematic risk.

• systematic risk and unsystematic risk.

• idiosyncratic risk and unsystematic risk.

• expected return and idiosyncratic risk.

As used in the market model, the symbol "ε" represents:

• systematic risk.

• the expected change in GNP.

• unsystematic risk.

• a stock's response to systematic risk.

If a security has a GNP beta of 1.5, then the security's total rate of return will:

• change by an amount equal to 1.5 times the percentage amount of any

  unexpected change in GNP.

• increase by 1.5 percent for every 1 percent decrease in GNP.

• increase by 1.5 percent whenever the GNP increases by 1.5 percent.

• increase by 1.5 percent every time the GNP increases by 1.5 percent.

A beta coefficient reflects the response of a security's return to:

• the risk-free rate.

• idiosyncratic risk.

• a systematic risk.

• an unsystematic risk.

If you were to consider the CAPM as a one-factor model, then the factor would be the:

• market risk premium.

• GNP.

• rate of inflation.

• individual beta of each security or portfolio.

Which one of the following statements is true?

• CAPM assigns a beta of 1 to the market while APT assigns the market a beta of

  zero.

• APT and CAPM are the only quantitative approaches to measure expected

  returns in risky assets.

• The factors to be used in the APT are easier to identify than the factor used in the

  CAPM.

• Both APT and CAPM argue that expected excess return must be proportional to

  the beta(s).

Alpha stock has an expected return of 8.2 percent and betas of: β_GNP = 1.23; β_I = .97; and β_Ex = 1.08. This expectation is based on a three-factor model with expected values of: GNP growth of −1 percent; inflation of 2.4 percent; and export growth of 3.5 percent. However, actual growth in these factors turns out to be .55 percent, 1.8

percent, and 2.6 percent, respectively. Assuming there was no unexpected news related specifically to the stock, what was the stock's total rate of return?

• 7.85 percent

• 8.04 percent

• 8.47 percent

• 8.55 percent

Outdoor Products stock has an expected return of 12.6 percent and betas of: β_GNP = 8) 1.52; β_I = 1.06; and β_Ex = 1.28. This expectation is based on a three-factor model with expected values of: GNP growth of 3.2 percent; inflation of 2.9 percent; and export growth of 2.2 percent. However, actual growth in these factors turns out to be 3.6

percent, 3.2 percent, and 2.5 percent, respectively. Calculate the stock's total return if the company unexpectedly announces they had an industrial accident and the operating facilities will close down temporarily which will reduce the return by 7 percent (from 10 percent down to 3 percent).

• −1.85 percent

• −4.05 percent

• 3.57 percent

• 6.91 percent

Estimating the rate of return for any portfolio lying on the security market line requires which of the following?

• Portfolio beta, the risk-free rate, and the market risk premium

• Market rate of return and the portfolio beta

• Market rate of return, market beta, and the risk-free rate

• Factor beta and the market risk premium

A factor, as used in APT, is a variable that:

• correlates the returns of a risky asset with those of a risk-free asset.

• measures the response of a specific asset to a systematic risk.

• represents a firm-specific risk.

• represents a nondiversifiable risk.