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# Beta, Cost of Equity, Style portfolios

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1. The cost of equity for Ryan Corporation is 8.4%. If the expected return on the market is 10% and the risk-free rate is 5%, then the equity beta is ___

2. The beta of a firm is more likely to be high under what two conditions?
high cyclical business activity and low operating leverage
high cyclical business activity and high operating leverage
low cyclical business activity and low financial leverage.
low cyclical business activity and low operating leverage
None of the above.

3. Beta is useful in the calculation of the
company's variance.
company's discount rate.
company's standard deviation.
unsystematic risk.
company's market rate.

4. Style portfolios are characterized by
their stock attributes; P/Es less than the market P/E are value funds.
their systematic factors, higher systematic factors are benchmark portfolios.
their stock attributes; higher stock attribute factors are benchmark portfolios.
their systematic factors, P/Es greater than the market are value portfolios.
There is no difference between systematic factors and stock attributes.

5. Comparing two otherwise equal firms, the beta of the common stock of a levered firm is ____________ than the beta of the common stock of an unlevered firm.
equal to
significantly less
slightly less
greater
None of the above.

#### Solution Preview

1- The cost of equity for Ryan Corporation is 8.4%. If the expected return on the market is 10% and the risk-free rate is 5%, then the equity beta is 0.68_

Required return = risk free rate + beta x (return on market - risk free rate)
Or 8.4 % = 5% + beta x (10% - 5%)
Or beta = (8.4 % - 5%) / (10%-5%) = 0.68

2. The beta of a firm is more likely to be high under what two conditions?

high cyclical business activity and low operating leverage
high cyclical business activity and high operating leverage
low cyclical business activity and low financial leverage.
low cyclical business activity and low operating leverage
None of the above.