1. The intercept of the security market line is equal to:
A) one.
B) the market risk premium.
C) the risk-free rate.
D) the market rate of return.
2. A stock has an expected return of 12.3 percent and a beta of 1.3. The risk-free rate is 2.2 percent. What is the slope of the security market line?
A) 8.15 percent
B) 9.97 percent
C) 7.77 percent
D) 6.82 percent
3. If a security plots above the security market line, then the security:
A) is under-priced.
B) is overpriced.
C) is correctly priced.
D) has a beta greater than 1.0.
4. Montana Co. is considering a project with an initial cost of $4 million. The project will produce cash inflows of $1.2 million a year for five years. The firm has a weighted average cost of capital of 9%. Assume that the project has an average risk level as the whole firm. What is the net present value of the project?
A) $0.67 million
B) $1.92 million
C) $1.22 million
D) $2.41 million
5. You own a portfolio of two stocks, A and B. Stock A is valued at $2,000 and has an expected return of 10.5 percent. Stock B has an expected return of 14.7 percent. What is the expected return on the portfolio if the portfolio value is $5,000?
A) 12.03 percent
B) 11.73 percent
C) 10.92 percent
D) 13.02 percent