Calculate the expected return on the resulting portfolio

Question

Problem 1: Suppose you borrow at the risk-free rate an amount equal to your initial wealth and invest in a portfolio with an expected return of 20% and a standard deviation of returns of 16%. The risk-free asset has an interest rate of 4%; calculate the expected return on the resulting portfolio ______.

• 20%
• 40%
• 36%
• none of the above

Problem 2: Beta measure indicates ______.

• the ability to diversify risk
• the change in the rate of return on an investment for a given
• change in the market return
• the actual return on an asset
• A and C

Problem 3: If the beta of Microsoft is 1.7, risk-free rate is 3% and the market risk premium is 8%, calculate the expected return for Microsoft.

• 16.6%
• 15.6%
• 13.9%
• 11.3%

Problem 4: The cost of capital for a project depends on ______.

• the company's cost of capital
• the use to which the capital is put, i.e. the project
• the industry cost of capital
• all of the above

Problem 5: Cost of capital is the same as cost of equity for firms ______.

• financed entirely by debt
• financed by both debt and equity
• financed entirely by equity
• none of the above

Problem 6: The market value of XYZ Corporation's common stock is 40 million and the market value of the risk-free debt is 60 million. The beta of the company's common stock is 0.8, and the expected market risk premium is 10%. If the treasury bill rate is 6%, what is the firm's cost of capital? (Assume no taxes.)

• 9.2%
• 14%
• 10%
• none of the above

Problem 7: Cost of equity can be estimated using ______.

• discounted cash flow (DCF) approach
• capital Asset Pricing Model (CAPM)
• arbitrage Pricing theory (APT)
• all of the above

Problem 8: You are given the following data for year-1. Revenue = $43; Total costs = $30; Depreciation = $3; Tax rate = 30%. Calculate the operating cash flow for the project for year-1.

• $7
• $10
• $13
• none of the above

Problem 9: A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3 = 100,000. If the discount rate changes from 12% to 15%, what is the change in the NPV of the project (approximately)?

• 12,750 increase
• 12,750 decrease
• 122,650 increase
• 135,400 decrease

Problem 10: The final decision on a project should be from ______.

• project analysis
• break-even analysis
• NPV analysis
• sensitivity analysis