Which of the following is not a widely-recognized problem with CAPM? A) The model is complex and poorly understood by many finance professionals. B) The model does not accurately explain stock returns over time. C) Other factors besides market risk may influence security returns. D) Beta values for any stock often change over time. E) […]
How do interest rates affect the optimal order quantity Q*? A) As interest rates increase, Q* increases until it reaches a maximum, after which any further increase in interest causes a decline in Q*. B) As interest rates decrease, Q* decreases. C) As interest rates increase, Q* decreases. D) None of the above […]
Asset y has a beta of 1.2. The risk-free rate of return is 4 percent, while the return on the market portfolio of assets is 10 percent. What is the market risk premium? A) 6% B) 10% C) 11.2% D) 13.2% E) 8% ANSWER A
Both assets A and B plot on the SML. Asset A has an expected return of 15% and a beta of 1.7. Asset B has an expected return of 12% and a beta of 1.1. What is the risk-free rate of return? A) 5.0% B) 6.5% C) 11.5% D) It cannot be determined from this […]
Which of the following is NOT a category of inventory? A) raw materials B) purchases C) finished goods D) work-in-process ANSWER B
Both assets B and C plot on the SML. Asset B has a beta of 1.3 and an expected return of 13.1%. Asset C has a beta of .50 and an expected return of 7.50%. The risk-free rate is 4%. If you wish to hold a portfolio consisting of assets B and C, and have […]
In the EOQ model, carrying costs of inventory include A) the required rate of return on inventory. B) wages for warehouse workers. C) costs associated with inventory shrinkage. D) B and C. E) all of the above. ANSWER D
The security market line A) is negatively sloped. B) shifts in response to changing inflationary expectations. C) does not respond to changes in investors’ willingness to bear risk. D) does not respond to investor expectations about political stability. E) always has a slope of one. ANSWER B
Calculate the required rate of return for Mercury Inc., assuming that the real risk-free rate is equal to 4% and the market risk premium (note that is not the same as the market return) is 6%. Mercury has a beta of 1.5, and its realized rate of return has averaged 15% over the last 5 […]
If Left Bank stock has a beta of 1.25, the return from the market portfolio is 15%, and the Treasury bill return is 5%, what is the required return from the stock? A) 17.5% B) 12.5% C) 16.0% D) 7.5% E) 15.0% ANSWER A
