FIN3703: Comprehensive Practice Questions &
Answers for 2025/2026 Study
Instructions: Treat these as a practice exam and
study guide. The correct answer for each multiple-
choice question is marked with .
Part 1: Risk and Return
1. Which of the following best describes systematic risk?
A. The risk associated with a specific company's management.
B. The risk that can be eliminated through diversification.
C. The risk inherent to the entire market or market segment.
D. The risk of a company's product failing.
2. The Security Market Line (SML) represents the relationship between:
A. Expected return and standard deviation (total risk).
B. Expected return and beta (systematic risk).
C. Coupon rate and bond maturity.
D. Dividend yield and earnings per share.
3. A stock with a beta of 1.5 is expected to:
A. Be 50% less volatile than the market.
B. Be 50% more volatile than the market.
C. Have a guaranteed return 50% higher than the risk-free rate.
D. Be unaffected by market movements.
4. The Capital Asset Pricing Model (CAPM) states that the expected return on
a security is equal to the risk-free rate plus:
A. The security's variance.
B. A risk premium based on the security's standard deviation.
C. A risk premium based on the market risk premium and the security's beta.
D. The security's dividend yield.
,5. If the risk-free rate is 3%, the market return is 10%, and a stock's beta is
1.2, what is the stock's expected return using CAPM?
A. 10.0%
B. 11.4% (Calculation: 3% + 1.2*(10% - 3%) = 3% + 8.4% = 11.4%)
C. 13.0%
D. 15.0%
6. Unsystematic risk is also known as:
A. Market risk.
B. Diversifiable risk or firm-specific risk.
C. Beta risk.
D. Interest rate risk.
7. The weighted average of the expected returns of the individual securities in
a portfolio is the:
A. Portfolio beta.
B. Portfolio standard deviation.
C. Expected return of the portfolio.
D. Portfolio's correlation coefficient.
8. Diversification is most effective when securities in a portfolio have:
A. High positive correlation.
B. High negative correlation.
C. A correlation of +1.
D. A beta greater than 1.
9. The coefficient of variation is useful for comparing the risk of assets with:
A. Different expected returns.
B. The same beta.
C. Different standard deviations only.
D. The same historical returns.
10. A portfolio that offers the highest expected return for a given level of risk
is known as:
A. A diversified portfolio.
B. An efficient portfolio.
, C. A market portfolio.
D. A minimum-variance portfolio.
Part 2: Cost of Capital
11. A firm's Weighted Average Cost of Capital (WACC) is the:
A. Cost of its cheapest source of funding.
B. Cost of its debt financing.
C. Overall required return on the firm as a whole.
D. Maximum return its projects must earn.
12. Which of the following is a correct component for calculating WACC?
A. After-tax cost of debt.
B. Pre-tax cost of debt.
C. Cost of retained earnings (ignoring flotation costs).
D. Both A and C are correct.
13. Why is the cost of debt adjusted for taxes in the WACC calculation?
A. Because debt is riskier than equity.
B. Because interest payments are tax-deductible, reducing the government's claim
on the firm's earnings.
C. To make it comparable to the cost of equity.
D. Because the coupon rate is fixed.
14. The cost of preferred stock is calculated as:
A. (Preferred Dividend / Net Proceeds from Issue).
B. (Preferred Dividend / Par Value).
C. (Earnings Per Share / Market Price).
D. (Coupon Payment / Face Value).
15. Using the Dividend Growth Model, the cost of retained earnings is
calculated as:
A. (Next Year's Dividend / Current Stock Price) + Dividend Growth Rate.
B. (Last Year's Dividend / Current Stock Price).
Answers for 2025/2026 Study
Instructions: Treat these as a practice exam and
study guide. The correct answer for each multiple-
choice question is marked with .
Part 1: Risk and Return
1. Which of the following best describes systematic risk?
A. The risk associated with a specific company's management.
B. The risk that can be eliminated through diversification.
C. The risk inherent to the entire market or market segment.
D. The risk of a company's product failing.
2. The Security Market Line (SML) represents the relationship between:
A. Expected return and standard deviation (total risk).
B. Expected return and beta (systematic risk).
C. Coupon rate and bond maturity.
D. Dividend yield and earnings per share.
3. A stock with a beta of 1.5 is expected to:
A. Be 50% less volatile than the market.
B. Be 50% more volatile than the market.
C. Have a guaranteed return 50% higher than the risk-free rate.
D. Be unaffected by market movements.
4. The Capital Asset Pricing Model (CAPM) states that the expected return on
a security is equal to the risk-free rate plus:
A. The security's variance.
B. A risk premium based on the security's standard deviation.
C. A risk premium based on the market risk premium and the security's beta.
D. The security's dividend yield.
,5. If the risk-free rate is 3%, the market return is 10%, and a stock's beta is
1.2, what is the stock's expected return using CAPM?
A. 10.0%
B. 11.4% (Calculation: 3% + 1.2*(10% - 3%) = 3% + 8.4% = 11.4%)
C. 13.0%
D. 15.0%
6. Unsystematic risk is also known as:
A. Market risk.
B. Diversifiable risk or firm-specific risk.
C. Beta risk.
D. Interest rate risk.
7. The weighted average of the expected returns of the individual securities in
a portfolio is the:
A. Portfolio beta.
B. Portfolio standard deviation.
C. Expected return of the portfolio.
D. Portfolio's correlation coefficient.
8. Diversification is most effective when securities in a portfolio have:
A. High positive correlation.
B. High negative correlation.
C. A correlation of +1.
D. A beta greater than 1.
9. The coefficient of variation is useful for comparing the risk of assets with:
A. Different expected returns.
B. The same beta.
C. Different standard deviations only.
D. The same historical returns.
10. A portfolio that offers the highest expected return for a given level of risk
is known as:
A. A diversified portfolio.
B. An efficient portfolio.
, C. A market portfolio.
D. A minimum-variance portfolio.
Part 2: Cost of Capital
11. A firm's Weighted Average Cost of Capital (WACC) is the:
A. Cost of its cheapest source of funding.
B. Cost of its debt financing.
C. Overall required return on the firm as a whole.
D. Maximum return its projects must earn.
12. Which of the following is a correct component for calculating WACC?
A. After-tax cost of debt.
B. Pre-tax cost of debt.
C. Cost of retained earnings (ignoring flotation costs).
D. Both A and C are correct.
13. Why is the cost of debt adjusted for taxes in the WACC calculation?
A. Because debt is riskier than equity.
B. Because interest payments are tax-deductible, reducing the government's claim
on the firm's earnings.
C. To make it comparable to the cost of equity.
D. Because the coupon rate is fixed.
14. The cost of preferred stock is calculated as:
A. (Preferred Dividend / Net Proceeds from Issue).
B. (Preferred Dividend / Par Value).
C. (Earnings Per Share / Market Price).
D. (Coupon Payment / Face Value).
15. Using the Dividend Growth Model, the cost of retained earnings is
calculated as:
A. (Next Year's Dividend / Current Stock Price) + Dividend Growth Rate.
B. (Last Year's Dividend / Current Stock Price).
