FIN 300 W07 EXAM PART 3: RISK,
RETURN, AND COST OF CAPITAL |
QUESTIONS AND ANSWERS |2026/2027
UPDATE | JUST RELEASED
1. Which of the following is the best measure of systematic risk for a well-diversified
portfolio?
A. Standard Deviation
B. Range
C. Variance
D. Beta
Answer: D
Conceptual Explanation: Beta measures the sensitivity of a stock’s returns to the overall
market, which represents systematic risk. Standard deviation measures total risk.
2. According to the Capital Asset Pricing Model (CAPM), what happens to the required return
if the risk-free rate increases while all other factors remain constant?
A. The required return remains the same
B. The required return decreases
C. The required return increases
,D. The market risk premium decreases
Answer: C
Conceptual Explanation: In the CAPM formula (Rf + Beta * (Rm - Rf)), an increase in the
risk-free rate (Rf) results in a higher required return.
3. Which component of the Weighted Average Cost of Capital (WACC) is usually adjusted for
taxes?
A. Cost of Debt
B. Cost of Preferred Stock
C. Cost of Common Equity
D. Retained Earnings
Answer: A
Conceptual Explanation: Interest expense on debt is tax-deductible, so the after-tax cost
of debt is used in WACC calculations.
4. Diversification is most effective at reducing which type of risk?
A. Market risk
B. Unsystematic risk
C. Systematic risk
D. Inflation risk
, Answer: B
Conceptual Explanation: Unsystematic risk (company-specific risk) can be eliminated
through diversification, whereas systematic risk cannot.
5. If a stock has a beta of 1.0, its expected return should be equal to:
A. The risk-free rate
B. Zero
C. The market return
D. The cost of debt
Answer: C
Conceptual Explanation: A beta of 1.0 indicates the stock has the same systematic risk as
the market, thus it should earn the market return.
6. The Security Market Line (SML) depicts the relationship between:
A. Expected return and standard deviation
B. Expected return and beta
C. Risk and time
D. Standard deviation and variance
Answer: B
RETURN, AND COST OF CAPITAL |
QUESTIONS AND ANSWERS |2026/2027
UPDATE | JUST RELEASED
1. Which of the following is the best measure of systematic risk for a well-diversified
portfolio?
A. Standard Deviation
B. Range
C. Variance
D. Beta
Answer: D
Conceptual Explanation: Beta measures the sensitivity of a stock’s returns to the overall
market, which represents systematic risk. Standard deviation measures total risk.
2. According to the Capital Asset Pricing Model (CAPM), what happens to the required return
if the risk-free rate increases while all other factors remain constant?
A. The required return remains the same
B. The required return decreases
C. The required return increases
,D. The market risk premium decreases
Answer: C
Conceptual Explanation: In the CAPM formula (Rf + Beta * (Rm - Rf)), an increase in the
risk-free rate (Rf) results in a higher required return.
3. Which component of the Weighted Average Cost of Capital (WACC) is usually adjusted for
taxes?
A. Cost of Debt
B. Cost of Preferred Stock
C. Cost of Common Equity
D. Retained Earnings
Answer: A
Conceptual Explanation: Interest expense on debt is tax-deductible, so the after-tax cost
of debt is used in WACC calculations.
4. Diversification is most effective at reducing which type of risk?
A. Market risk
B. Unsystematic risk
C. Systematic risk
D. Inflation risk
, Answer: B
Conceptual Explanation: Unsystematic risk (company-specific risk) can be eliminated
through diversification, whereas systematic risk cannot.
5. If a stock has a beta of 1.0, its expected return should be equal to:
A. The risk-free rate
B. Zero
C. The market return
D. The cost of debt
Answer: C
Conceptual Explanation: A beta of 1.0 indicates the stock has the same systematic risk as
the market, thus it should earn the market return.
6. The Security Market Line (SML) depicts the relationship between:
A. Expected return and standard deviation
B. Expected return and beta
C. Risk and time
D. Standard deviation and variance
Answer: B
