FIN 470 Final Exam Questions with Verified
Correct Answers
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were
instructed to use the IRR method, and you need to determine an appropriate hurdle rate.
The risk-free rate is 4%, and the expected market rate of return is 11%. Your company has
a beta of 0.75, and the project that you are evaluating is considered to have risk equal to the
average project that the company has accepted in the past. According to CAPM, the
appropriate hurdle rate would be
As per CAPM, expected return for the company = risk free rate + beta (market return - risk
free rate) = 4% + .75(11-4) = == 4% + .75*(7) = 9.25%
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were
instructed to use the IRR method, and you need to determine an appropriate hurdle rate.
The risk-free rate is 3%, and the expected market rate of return is 11%. Your company has
a beta of 1.3, and the project that you are evaluating is considered to have risk equal to the
average project that the company has accepted in the past. According to CAPM, the
appropriate hurdle rate would be
13.4%.
You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3.
The beta of the resulting portfolio is
(2001.4)+(800.3)/(200+800) = 0.52
,Standard deviation and beta both measure risk, but they are different in that beta
measures
only systematic risk, while standard deviation is a measure of total risk.
The capital asset pricing model assumes
all investors are price takers and have the same holding period.
According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of
return is a function of
beta risk.
According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of
return is a function of
market risk.
In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is
beta.
The risk-free rate and the expected market rate of return are 0.05 and 0.13, respectively.
According to the capital asset pricing model (CAPM), the expected rate of return on a
security with a beta of 1.1 is equal to
13.8%
An overpriced security will plot
below the security market line.
, You purchased a share of stock for $25. One year later, you received $1 as a dividend and
sold the share for $29. What was your holding-period return?
(29-25+1)/25 = 20%
Historical records regarding return on stocks, Treasury bonds, and Treasury bills between
1926 and 2018 show that
stocks offered investors greater rates of return than bonds and bills.
A year ago, you invested $10,000 in a savings account that pays an annual interest rate of
5%. What is your approximate annual real rate of return if the rate of inflation was 1.5%
over the year?
3.5%
Risk, Return, and Historical Record
Question 4
You purchased a share of stock for $120. One year later, you received $1.82 as a dividend
and sold the share for $136. What was your holding-period return?
None of the options are correct.
Other things equal, an increase in the government budget deficit
drives the interest rate up.
Which of the following measures of risk best highlights the potential loss from extreme
negative returns?
Value at risk (VaR)
Correct Answers
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were
instructed to use the IRR method, and you need to determine an appropriate hurdle rate.
The risk-free rate is 4%, and the expected market rate of return is 11%. Your company has
a beta of 0.75, and the project that you are evaluating is considered to have risk equal to the
average project that the company has accepted in the past. According to CAPM, the
appropriate hurdle rate would be
As per CAPM, expected return for the company = risk free rate + beta (market return - risk
free rate) = 4% + .75(11-4) = == 4% + .75*(7) = 9.25%
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were
instructed to use the IRR method, and you need to determine an appropriate hurdle rate.
The risk-free rate is 3%, and the expected market rate of return is 11%. Your company has
a beta of 1.3, and the project that you are evaluating is considered to have risk equal to the
average project that the company has accepted in the past. According to CAPM, the
appropriate hurdle rate would be
13.4%.
You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3.
The beta of the resulting portfolio is
(2001.4)+(800.3)/(200+800) = 0.52
,Standard deviation and beta both measure risk, but they are different in that beta
measures
only systematic risk, while standard deviation is a measure of total risk.
The capital asset pricing model assumes
all investors are price takers and have the same holding period.
According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of
return is a function of
beta risk.
According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of
return is a function of
market risk.
In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is
beta.
The risk-free rate and the expected market rate of return are 0.05 and 0.13, respectively.
According to the capital asset pricing model (CAPM), the expected rate of return on a
security with a beta of 1.1 is equal to
13.8%
An overpriced security will plot
below the security market line.
, You purchased a share of stock for $25. One year later, you received $1 as a dividend and
sold the share for $29. What was your holding-period return?
(29-25+1)/25 = 20%
Historical records regarding return on stocks, Treasury bonds, and Treasury bills between
1926 and 2018 show that
stocks offered investors greater rates of return than bonds and bills.
A year ago, you invested $10,000 in a savings account that pays an annual interest rate of
5%. What is your approximate annual real rate of return if the rate of inflation was 1.5%
over the year?
3.5%
Risk, Return, and Historical Record
Question 4
You purchased a share of stock for $120. One year later, you received $1.82 as a dividend
and sold the share for $136. What was your holding-period return?
None of the options are correct.
Other things equal, an increase in the government budget deficit
drives the interest rate up.
Which of the following measures of risk best highlights the potential loss from extreme
negative returns?
Value at risk (VaR)
