Finance Exam 2

Beta

-Measured only by systemic Risk - A risk-free asset had B = 0

question 39

0

Math [Ch 12] The following information is for the next three problems. Use a calculator, not Excel, asyou will need to on an exam. Over the last four calendar years, the 1-year holding period totalreturns (i.e., annual returns) for Coca-Cola common stock (ticker symbol KO) were: 2019: 20.61% 2020: 2.48% 2021: 11.37% 2022: 10.61% 17. Calculate the arithmetic average annual return. 18. Calculate the geometric average annual return. 19. Calculate the volatility of the annual returns.

17 - 11.27 18 - 11.08 19 - 7.42

diversifiable risk (unsystematic risk)

A risk that affects only some individuals, businesses, or small groups.

Use the following information for the next two questions.On September 15, 2013, Lowes Companies, Inc. issued $500,000,000 worth of bonds(senior unsecured notes) with $1,000 face value, a coupon rate of 5.000% with semi-annual coupons, and a maturity date of September 15, 2043. These bonds are currently rated Baa1by Moody's and BBB+ by Standard & Poor's. The bonds are callable at par value, and nearly half ($246,928,000) of the original issue has already been repurchased by Lowes. 4. True or False: these bonds are investment-grade bonds. a) True b) False

A true BBB+/- or higher are investment grade

Marginal Tax rate

Amount of tax payable on the next dollar earned.

Free Cash Flow

Another name for cash flow from assets.

2. What is the best estimate of the monthly return that an investor who purchases shares of Tower Semiconductor on March 1, 2022, will earn if she plans on selling the stock on April1, 2022? a. 0.39%b. 0.21%c. 1.18%d. 0.62%e. 0.90%

Arithmetic Average Monthly Return from March 1, 2017, through March 1, 2022 1.18%

investment grade bonds

Bonds rated triple-B or higher; many banks and other institutional investors are permitted by law to hold only investment-grade bonds

Operating Cash Flow

Cash generated from a firm's normal business activities.

Assets Left side of the Balance sheet

Current - Life of less than on year Fixed - Long life, can be tangible(truck or computer) or intangible(trademark or patent) Listed in order of liquidity

6. To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return. a) expected market rate of return ]b) inflation rate c) standard deviation d) risk-free rate e) variance

D. ERP = Re- RFR

cash flow to stockholders

Dividends paid out by a firm less net new equity raised.

3. Which one of the following is the most likely reason why a stock price might not react at all on the day that new information related to the stock's issuer is released? a) Investors do not pay attention to daily news. b) The company's chief executive officer was aware of the information prior to the announcement. c) Investors tend to overreact. d) The news was positive.e) The information was expected.

E is true

21. Of the options listed below, which is the best example of a diversifiable risk? a) Energy costs increase b) Federal income taxes increase c) Interest rates increase d) Core inflation increases e) Local zoning regulations increase

E)Local zoning regulations increase

non cash items

Expenses charged against revenues that do not directly affect cash flow, such as depreciation.

Balance Sheet

Financial statement showing a firm's accounting value on a particular date.

Income Statement

Financial statement summarizing a firm's performance over a period of time. Revenues - Expenses = Income

1. What is the best estimate of the monthly return earned by an investor who purchased 1,000 shares of Tower Semiconductor on March 1, 2017, and sold the shares on March 1, 2022? a. 0.39%b. 0.21%c. 1.18%d. 0.62%e. 0.90%

Geometric Average Monthly Return fromMarch 1, 2017, through March 1, 2022 0.62%

2. Consider three bonds that are identical in every way except in their stipulation of protective covenants; they are issued by the same company, have the same term, have the same coupon rate and frequency of payments, have the same rating, and all other provisions in their indentures are the same. They differ only in that:- Bond P has only Positive protective covenants : meet requirements - Bond Z has Zero (no) protective covenants - Bond N has only Negative protective covenants - must not do certain activities Which of the following statements MUST be true: I. Bond Z's risk premium > Bond N's risk premium II. Bond P's risk premium > Bond N's risk premium III. Bond P's risk premium > Bond Z's risk premium a) Statement I b) Statement II c) Statement III d) Statements I and III e) Statements II and III

I. Bond Z's risk premium > Bond N's risk premium II. Bond P's risk premium > Bond N's risk premium III. Bond P's risk premium > Bond Z's risk premium a) Statement I b) Statement II c) Statement III d) Statements I and III e) Statements II and III

volatility

Indicates how much and how quickly the value of an investment, market, or market sector changes.

What is the market risk premium?

The market risk premium (rm-rf) represents the excess returns of investing in stocks over the risk free rate. Practitioners often use the historical excess returns method, and compare historical spreads between S&P 500 returns and the yield on 10 year treasury bonds. it's the slope of the SML

Average Tax Rate (ATR)

Total taxes paid divided by total taxable income. The percentage of income that goes to pay taxes

Z-value calculation

Z = (X( expected) − µX(mean) / σX(SD)

12. Investors demand higher expected rates of return on stocks with greater total risk. a. True b. False

b.) False

27. If the market is efficient and securities are priced fairly, all securities will have the same: a. variance b. standard deviation c. reward-to-risk ratio d. betae. risk premium

c. reward-to-risk ratio

24. The _______________ is a positively sloped linear function that plots securities' expected returns against their betas. a. reward-to-risk matrix b. portfolio weight graph c. normal distribution d. security market line e. market real returns

d. security market line

Which of stock has the greatest risk premium?

largest Beta

Which of stock has the most total risk?

largest SD

Total risk

systematic risk + unsystematic risk standard deviation

Market Value

value of an asset or the value of the firm,when we say the goal of a financial manager is to increase the value of the stock, we mean the market value of the stock. Based on a company's share price Market Value = (current price if sold if liquidated)

Math 14. [Ch 12] Over the last quarter, Verizon Communications, Inc. (ticker symbol VZ) common stock paid the dividends and had (unadjusted) closing prices given below. Assume these dates are spaced exactly one quarter apart - do not convert to days! Date Dividend Price . 1/9/2023 $0.653 $41.37 10/6/2022 $0.653 $37.25 Suppose that on 10/6/2022, after the dividend had been paid to the previous owner, you bought the stock at the closing price that day. You held the stock for one quarter (until1/9/2023), received the dividend, and then sold it at the closing price. Calculate the one-quarter dividend yield, capital gains yield, and total return for the quarter that you held theVerizon stock. Dividend Cap gains Total

1.75% 11.06 % 12.81%

Math 31. [Ch 7] JCNickel Corporation has issued zero-coupon corporate bonds with 7 years to maturity and a face value of $2,000. Investors believe there is a 30% chance that JCNickel will default on these bonds. If JCNickel does default, investors expect to receive only 40% of the promised payoff at maturity. If investors' expected required return is 9.200%, what is the default risk premium on these bonds?

3.14%

Math 22. [Ch 7] Bond J and Bond K are both zero-coupon, $1,000 face value bonds that have thesame YTM. Bond J has a term of 8 years and Bond K has a term of 13 years. If the price ofBond J is $634.56, what is the price of Bond K?

477.55

Math 30. [Ch 7] OMG Inc. has bonds on the market with 22 years to maturity, a YTM of 9.128%, a par value of $1,000, and a current price of $969.00. The bonds make quarterly coupon payments. What must the annual coupon rate be on these bonds?

8.80%

Math 23. [Ch 7] On December 1, 2020, Hilton issued senior unsecured notes (bonds) with $1,000 face value at a coupon rate of 4.000% with semi-annual coupons and a maturity date of May 1,2031. Assume today is December 1, 2022, and the semi-annual coupon was paid out earlier today. If the current yield to maturity is 6.533%, what is the current price of a Hilton bond?

836.77

Math 21. [Ch 13] Adrienne has $1,000.00 to invest in a portfolio. She will build the portfolio from three assets: Stock X with an expected return of 16.0% and a standard deviation of 40% Stock Y with an expected return of 10.0% and a standard deviation of 30% T-Bills with an expected return of 3.00% and a standard deviation of 0%. Assume she can short sell assets (or borrow at the risk-free rate). Assume also that she will invest the same amount in Stock X and Stock Y. How much money will she invest in Stock Xif her goal is to create a portfolio with an expected return of 20.00%.

850

Math Use the following to answer the next two problems.Exactly one year ago, Gina bought a zero-coupon, $1,000 face, US Treasury bond with aterm of 15 years and a market yield to maturity of 4.00%. Today the market YTM is 3.00%and Gina sold her bond. Over the past year, the inflation rate was 5.00% 9. What is Gina's capital gain? a) $100.00 b) $105.85 c) $86.60 d) $22.21 e) None of the above are within$1.00 of the correct answer 10. What is Gina's real return? a) -1.00% b) 13.39% c) 25.02% d) 19.06% e) None of the above are within10 basis points (0.10%) ofthe correct answer

9 b 10 b

18. Which has greater interest rate risk, a 30-year treasury bond or a 30-year BB corporate bond?Assume that each bond has a face value of $1,000 and an annual coupon rate of 5%, paidannually.a. A 30-year treasury bond b. A 30-year BB corporate bond

A 30-year treasury bond

cash flow to creditors

A firm's interest payments to creditors less net new borrowing.

5. True or False. Between 1926 and 2019, the risk premium generated by the portfolio of long-term government bonds was the same as the risk premium generated by the portfolio of long-term corporate bonds. a. True b. False

B

Math AMZ Cinemas, Inc. issued 10-year, zero-coupon, bonds 6 years ago today. Given the bondsB rating, there is some chance of default. Investors believe there is: 80% probability that the bonds will make all of the promised payment 15% probability that the bonds will make only one-half of the promised payment 5% probability that the bonds will make only one-tenth of the promised paymentIf investors' required return is 8.00%, what is the default risk premium on these bonds? a) 2.33% b) 3.51% c) 9.76% d) 3.25% e) None of the above are within10 basis points (0.10%) ofthe correct answer

B 3.51%

Liabilities and Owner's Equity(the right side of the balance sheet)

Liabilities - first thing listed on the right side of a balance sheet, Current(life less than one year, listed before long term liabilities) or Long term(debt not due in the coming year terms bond and bond holders refer to long term debt). EX of current: Accounts payable

26. [2 points] Suppose AlphaAnalytics, Inc. is considering purchasing another firm, BlackBox,Inc. To help them formulate the offer, AlphaAnalytics' financial managers use BlackBox's latest balance sheet. Identify three things they should focus on in their examination of the balance sheet

Liquidity Market VS. Book Values Debt Vs. Equity

Liquity

Liquidity refers to the speed and ease with which an asset can be converted to cash. Liquidity actually has two dimensions: ease of conversion versus loss of value(how much is the product price cut before being sold)

Cash flow from assets

The total of cash flow to creditors and cash flow to stockholders, consisting of the following: operating cash flow, capital spending, change in net working capital.

Book Value

The values shown on the balance sheet of the firm's assets. Based on a company's balance sheet Book Value = (Net Working Capital) + Current Liabilities ) + Net Fixed Assets

Math 14. You would like to combine a risky stock with a beta of 1.60 and U.S. Treasury bills in such away that the risk level of the portfolio will be equivalent to the risk level of the overall market. What percentage of the portfolio should you invest in the risky stock? a) 62.5% b) 16.0% c) 116.0% d) 1.6% e) 60.0%

a) 62.5%

17. Which one of the following categories of securities had the second highest average annual return for the period 1926 through 2019? a) Large company stocks b) Small company stocks c) U.S. Treasury bills d) Long-term corporate bonds e) Long-term government bonds

a) Large company stocks

Math 26. If a stock has a beta of 1.3 and an expected return of 11.5%, ______________, then according to the Capital Asset Pricing Model... a. ...the stock's price should increase. b. ...the stock's price should stay the same. c. ...the stock's price should decrease.

a. ...the stock's price should increase.

Math 19. Suppose a German company issues a bond with a par value of 1000 Euros, 25 years tomaturity, and a coupon rate of 14 percent per year, paid annually. If the yield to maturity forthese bonds is 6 percent per year, what is the current price of the bond in Euros? a. 2,022.37 Euros b. 233.00 Euros c. 1,789.67 Euros d. 450.17 Eurose. None of the above are within 50 Euros of the current price of the bond.

a. 2,022.37 Euros

Math 32. Nazarian's has bonds on the market with 13 years to maturity, a bond yield to maturity of 7.6percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the annual coupon rate of Nazarian's bonds? a. 6.40% b. 3.20% c. 6.60% d. 3.30% e. 4.20%

a. 6.40%

25. According to Burton Malkiel in A Random Walk Down Wall Street (Ch. 7), one form of theEfficient Market Hypothesis (EMH) says that technical analysis—looking for patterns in paststock prices—cannot help investors. Which form of the EMH is this? a. Narrow or weak form b. Semi-strong form c. Strong form d. Sharpe forme. none of the above

a. Narrow or weak form

20. Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bond shave 15 years to maturity, make semiannual coupon payments, and have a yield to maturity of 6 percent per year.True or False. Bond J has more interest rate risk than Bond K. a. True b. False

a. True - lower coupon rate the higher the interest rate

1. Which of the following statements concerning net working capital is/are TRUE? a) Net working capital is the amount of cash a firm currently has available for spending. b) Net working capital may be a negative value. c) Net working capital increases when inventory is purchased with cash. d) Total assets must decrease if net working capital decreases. e) Two of the above are true.

a.) F b.) T c.) F d.) F e.) F

38. The average market risk premium for stocks in the US over the past 30 years has been 7.5%annually. You find two portfolios, one with an expected return of 14% and another with an expected return of 19%.True or False. This situation contradicts the CAPM. a. True b. False

b - false - depends on the betas

Math 19. Asset K had returns over the last five years of: 15.50%, -6.50%, 18.50%, 4.00%, and -1.50%.What is the volatility on Asset K's returns? a) 10.76% b) 9.62% c) 1.16% d) 0.93% e) None of the above are within10 basis points (0.10%) ofthe correct answer

b) 9.62%

Math 20. Which one of the following stocks is correctly priced according to CAPM if the risk-free rateof return is 3.6 percent and the market risk premium is 7.4 percent? Stock Beta Expected Return A 0.87 9.6% B 1.27 13.0% C 1.62 14.6% D 0.98 10.7% E 1.16 13.9% a) Stock A b) Stock B c) Stock C d) Stock D e) Stock E

b) Stock B

Math [Ch 12] A portfolio of stocks earned a geometric average return of 6.0% and an arithmetic average return of 8.0% over a 10-year period. The market value of the portfolio at the beginning of this period was $10,000. At the end of the 10-year period the portfolio's market value was closest to: a. $16,000.00 b. $17,908.48 c. $18,000.00 d. $19,671.51 e. $19,748.86 f. $21,589.25

b. $17,908.48

26. According to data presented by Burton Malkiel in A Random Walk Down Wall Street (Ch. 7),over a fifteen-year time horizon, approximately what percentage of actively managed large-cap mutual funds are outperformed by an S&P 500 index fund? a. 34% b. 92% c. 64% d. 50% e. 78%

b. 92%

9. Assume that a company announces an unexpectedly large cash dividend to its shareholders.In an efficient market without information leakage, one might expect: a. An abnormal price increase before the announcement. b. An abnormal price change at the announcement (that is, immediately after). c. An abnormal price decrease after the announcement (that is, a day or two after). d. No abnormal price change before or after the announcement.

b. An abnormal price change at the announcement (that is, immediately after).

16. True or False. If a portfolio has a positive investment in every asset, the Beta of the portfolio can be less than the Beta of every asset in the portfolio. a. True b. False

b. False

28. True or False. Take a bond that pays annual coupons. To calculate its yield to maturity, onesets the current market price of the bond equal to sum of the present values of all future expected cash flows the bond will provide, and then solves for the discount rate. a. True b. False

b. False

34. True or False. From an investor's perspective, callable bonds are more valuable than non-callable bonds with the same maturity, credit rating, and coupon rate. a. True b. False

b. False

6. True or False. During recessions, U.S. Treasury bills offer investors a positive risk premium. a. True b. False

b. False

Math 13. An investor who puts $10,000 in Treasury bills and $20,000 in the market portfolio will have a portfolio beta of 2.0. a. True b. False

b. False

37. True or False. An individual who invests $10,000 today in a portfolio of small stocks will have more money five years from today than an individual who invests $10,000 today in a portfolio of long-term corporate bonds. a. True b false

b. False - it should be expected not realized

35. An example of a negative covenant that might be found in a bond indenture is a statement that the company: a. shall maintain a current ratio of 1.1 or higher. b. cannot lease any major assets without bondholder approval. c. must maintain the loan collateral in good working order. d. shall provide audited financial statements in a timely manner. e. shall maintain a cash surplus of $100,000 at all times.

b. cannot lease any major assets without bondholder approval.

Math 8. Assume we are living in a world where the CAPM holds. Matthews Corporation has a betaof 1.2. The annualized market return yesterday was 13%, and the annualized risk-free rate iscurrently 5%. You observe that Matthews had an annualized return yesterday of 17%.Assuming that markets are efficient, this suggests that ________________. a. bad news about Matthews was announced yesterday b. good news about Matthews was announced yesterday c. no news about Matthews was announced yesterday

b. good news about Matthews was announced yesterday

Math 23. Suppose you observe the following situation:Security Beta Expected Return B ,,, Expected Return A 1.16 11.37% B 0.92 9.84% Assume these securities are correctly priced. Based on the CAPM, what is the return on the market? a) 9.99% b) 11.42% c) 10.35% d) 9.78% e) 11.01%

c) 10.35%

15. Which one of the following statements is FALSE: I. If all portfolio weights are positive, then the portfolio's expected return cannot be greater than the maximum expected return of the assets in the portfolio II. If all portfolio weights are positive, then the portfolio's beta cannot be less than the minimum beta of the assets in the portfolio III. If all portfolio weights are positive, then the portfolio's volatility cannot be less than the minimum volatility of the assets in the portfolio IV. If some portfolio weights are negative, then the portfolio's expected return can be greater than the maximum expected return of the assets in the portfolio a) Statement I b) Statement II c) Statement III d) Statement IV e) None of the statements are false

c) Statement III

22. If a portfolio becomes less diversified, we would expect the portfolio's: a) beta to increase. b) beta to decrease. c) standard deviation to increase. d) a and c e) b and c

c) standard deviation to increase.

Math 36. JCPenney just issued zero-coupon corporate bonds with a face value of $1,000 and ten years to maturity. Investors believe there is a 70% chance that the JCPenney will default on these bonds. If JCPenney does default, investors expect to receive nothing.If investors require an expected return of 8% per year on these bonds, what is the default risk premium on these bonds? a. 70.00% b. 8.00% c. 21.82% d. 13.82% e. None of the above are within 0.30% (i.e., 30 basis points) of the default risk premium onthese bonds.

c. 21.82%

11. Select the most accurate statement below. a. The most important characteristic in determining the risk of a well-diversified portfolio is the variance of the individual assets in the portfolio. b. If a portfolio has a positive investment in every asset, it is possible for the expected return on the portfolio to be greater than that on every asset in the portfolio. c. A risky asset can have a beta of zero. d. Two of the above statements are correct.e. None of the above statements is correct.

c. A risky asset can have a beta of zero.

4. Which one of the following categories of securities had the highest average annual return for the period 1926 through 2019?a. U.S. Treasury bills b. Large-company stocks c. Small-company stocks d. Long-term corporate bonds e. Long-term government bonds

c. Small-company stocks

29. Suppose that you estimate that Stock A has a volatility of 32% and Stock B has a volatility of68%. Which stock should have the highest required rate of return? a. Stock A b. Stock B c. There is not enough information provided to determine which stock should have the highest rate of return

c. There is not enough information provided to determine which stock should have the highest rate of return need bata

Math 18. Juno owns a portfolio that has $1,640 invested in Stock X and $3,360 invested in Stock Y.The expected returns on these stocks are 13.95 percent and 10.20 percent, respectively. What is the expected return on the portfolio? a) 12.72% b) 11.79% c) 12.08% d) 11.43% e) None of the above are within10 basis points (0.10%) ofthe correct answer

d) 11.43%

13. Consider these two bonds when the market yield is 10.0%:- Bond X: 20-year term, 10.0% coupon rate, annual coupons, duration of 9.36 years- Bond Y: 13-year term, 2.0% coupon rate, semiannual coupons, duration of 10.43 yearsSelect the most accurate statement below. a) Bond X has more overall interest rate risk; this is due to its longer term. b) Bond Y has less overall interest rate risk; this is due to its lower coupon rate. c) Bond Y has more overall interest rate risk; this is due to more frequent coupons. d) Bond X has less overall interest rate risk; this is due to its shorter duration. e) Since the information above conflicts, we cannot determine which bond has more overall interest rate risk.

d) Bond X has less overall interest rate risk; this is due to its shorter duration.

16. For which two-stock portfolio would you expect to see the greatest drop in total risk as measured by the portfolio volatility relative to the weighted average of two stocks' volatilities? a) Verizon Communications Inc. and AT&T Inc. b) Ford Motor Company and General Motors Company (GM) c) Target Corporation and Walmart Inc. d) Pfizer Inc. and The Walt Disney Company e) Levi Strauss & Co. and Columbia Sportweat Company

d) Pfizer Inc. and The Walt Disney Company

24. Which of the following statements are correct if the assumptions of the Capital Asset PricingModel hold? a) If two stocks have the same beta, they must also have the same volatility of returns. b) If two stocks have the same beta, they must also have the same expected return. c) If two stocks have the same beta, they must also have the same risk premium d) Two of the above statements are correct e) All three of the above statements (a, b, c) are correct.

d) Two of the above statements are correct

15. Suppose your portfolio has an average return of 12.0% with a volatility of 20.0%. Assuming your returns are normally distributed, what is the approximate chance that your portfolio's return next year will be less than -8.0%? a. 5.0 percent d. 68 percent c. 2.5 percent d. 68 percent e. 32 percent

d. 68 percent

22. An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of____________________ risk. a. portfolio b. nondiversifiable c. market d. unsystematic or firm specific risk e. expected

d. unsystematic or firm specific risk

27. [3 points] According to data presented by Burton Malkiel in A Random Walk Down WallStreet (Ch. 7), over a fifteen-year time horizon, an S&P 500 index fund outperformed about what percentage of actively managed large-cap mutual funds? a) 12%b) 32%c) 52%d) 72%e) 92% Identify the other important advantage of investing in an index fund compared to an actively managed fund. (One sentence could be sufficient.)

e) 92% Index funds seek market-average returns, while active mutual funds try to outperform the market. Active mutual funds typically have higher fees than index funds. Index fund performance is relatively predictable; active mutual fund performance tends to be less so.

25. Which one of the following statements is most accurate? a) An investor should expect to be rewarded for assuming unsystematic risk. b) Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. c) Beta measures the level of unsystematic risk inherent in an individual security. d) Standard deviation is a measure of unsystematic risk only. e) Eliminating unsystematic risk is the responsibility of the individual investor.

e) Eliminating unsystematic risk is the responsibility of the individual investor.

11. Select the most accurate statement below about the period 1926-2019. a) The portfolio of large company stocks had greater risk than the portfolio of smallcompany stocks. b) The portfolio of long-term corporate bonds had greater risk than the portfolio of smallcompany stocks. c) The portfolio of U.S. Treasury bills had the same risk as the portfolio of long-termgovernment bonds. d) Two of the above statements are correct. e) None of the above statements are correct.

e) None of the above statements are correct.

Math 33. The outstanding bonds of Pingale, Incorporated, provide a real rate of return of 3.6 percent. If the current rate of inflation is 2.68 percent, what is the actual nominal rate of return on these bonds? a. 7.58% b. 6.28% c. 7.71% d. 6.76% e. 6.38%

e. 6.38%

30. Based on the capital asset pricing model (CAPM), which of the following should earn thehighest risk premium? a. A diversified portfolio with returns similar to the overall market b. A stock with a beta of 1.24 c. A stock with a beta of 0.63 d. A U.S. Treasury bill. e. A portfolio with a beta of 1.36

e. A portfolio with a beta of 1.36

21. You have been presented with three gambles: Gamble A: There is a 50% chance that you get -$10,000 and there is a 50% chance that you get $0.00. Gamble B: There is a 50% chance that you get -$5,000 and there is a 50% chance that you get $5,000. Gamble C: There is a 50% chance that you get $0.00 and there is a 50% chance that you get $10,000. Select the most accurate statement below. a. Gamble A has more risk than Gamble B. b. Gamble A has more risk than Gamble C. c. Gamble C has more risk than Gamble B. d. Two of the above statements are correct. e. None of the above statements are correct.

e. None of the above statements are correct.

7. Select the most accurate statement below. a. Between 1926 and 2019, the portfolio of large stocks had greater risk than the portfolio ofsmall stocks. b. Between 1926 and 2019, the portfolio of long-term corporate bonds had greater risk thanthe portfolio of small stocks. c. Between 1926 and 2019, the portfolio of U.S. Treasury bills had the same risk as the portfolio of long-term government bonds. d. Two of the above statements are correct. e. None of the above statements are correct.

e. None of the above statements are correct.

Math 31. The common stock of Alpha Manufacturers has a beta of 1.24 and is currently trading at a price that gives investors an expected return of 13.25 percent. The risk-free rate of return is3.7 percent, and the market rate of return is 11.78 percent. Which one of the following statements is true given this information? a. An investor who purchases shares of Alpha today will earn an expected stock return that plots above the security market line. b. Shares of Alpha Manufacturers are currently underpriced. c. To be correctly priced according to the CAPM, the stock should have an expected return of 13.56%. d. The stock has less systematic risk than the overall market. e. Shares of Alpha Manufacturers are currently overpriced.

e. Shares of Alpha Manufacturers are currently overpriced.

Net Working Capital

the difference between Current assets and current liabilities.

default risk premium

the portion of a nominal interest rate or bond yield that represents compensation for the possibility of default

financial leverage

the use of debt in a firm's capital structure. The more debt a firm has the greater the degree of financial leverage.

Leverage ratio

total assets/ equity

What is the risk-free rate of return?

vertical intercept of the SML