Multiple Choice

1. Zelo, Inc. stock has a beta of 1.23. The risk-free rate of return is 4.5% and the market rate of return is 10%. What is the amount of the risk premium on Zelo stock? (Points: 3)
4.47%
5.50%
5.54%
6.77%
12.30%

2. You are comparing stock A to stock B. Given the following information, which one of these two stocks should you prefer and why?

(Points: 3)
Stock A; because it has an expected return of 7% and appears to be more risky.
Stock A; because it has a higher expected return and appears to be less risky than stock B.
Stock A; because it has a slightly lower expected return but appears to be significantly less risky than stock B.
Stock B; because it has a higher expected return and appears to be just slightly more risky than stock A.
Stock B; because it has a higher expected return and appears to be less risky than stock A.

3. The opportunity set of portfolios is: (Points: 3)
all possible return combinations of those securities.
all possible risk combinations of those securities.
all possible risk-return combinations of those securities.
the best or highest risk-return combination.
the lowest risk-return combination.

4. When stocks with the same expected return are combined into a portfolio: (Points: 3)
the expected return of the portfolio is less than the weighted average expected return of the stocks.
the expected return of the portfolio is greater than the weighted average expected return of the stocks.
the expected return of the portfolio is equal to the weighted average expected return of the stocks.
there is no relationship between the expected return of the portfolio and the expected return of the stocks.
None of the above.

5. What is the expected return on a portfolio which is invested 20% in stock A, 50% in stock B, and 30% in stock C?

(Points: 3)
7.40%
8.25%
8.33%
9.45%
9.50%

6. The constant dividend growth model is: (Points: 3)
generally used in practice because most stocks have a constant growth rate.
generally used in practice because the historical growth rate of most stocks is constant.
generally not used in practice because most stocks grow at a non constant rate.
generally not used in practice because the constant growth rate is usually higher than the required rate of return.
based on the assumption Dow 30 represent a good estimate of the market index.

7. Nu-Tek, Inc. is expecting a period of intense growth and has decided to retain more of its earnings to help finance that growth. As a result it is going to reduce its annual dividend by 10% a year for the next three years. After that, it will maintain a constant dividend of $.70 a share. Last month, the company paid $1.80 per share. What is the value of this stock if the required rate of return is 13%? (Points: 3)
$6.79
$7.22
$8.22
$8.87
$9.01

8. Last week, Railway Cabooses paid its annual dividend of $1.20 per share. The company has been reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 14%? (Points: 3)
$4.50
$7.71
$10.80
$15.60
$27.00

9. One basis point is equal to: (Points: 3)
.01%.
.10%.
1.0%.
10%.
100%.

10. Beaksley, Inc. is a very cyclical type of business which is reflected in its dividend policy. The firm pays a $2.00 a share dividend every other year. The last dividend was paid last year. Five years from now, the company is repurchasing all of the outstanding shares at a price of $50 a share. At an 8% rate of return, what is this stock worth today? (Points: 3)
$34.03
$37.21
$43.78
$48.09
$53.18