Mid-Term Exam Sample Paper
NOTE: This sample test should only be used as a guide to the styles of questions. The topics covered here are not exhaustive. Your revision should not be based on these set of questions only. The level of difficulty of this sample test is also NOT indicative of the level of difficulty of the actual test. The answers are provided at the end of the document.
1. A reasonable estimate of the annual standard deviation of return of the stock market would be? a. Less than 5 percent. b. Between 5 and 10 percent. c. Between 15 and 25 percent d. More than 30 percent e. Impossible to estimate 2. A project has an expected cash flow of $200, in year 1. The risk-free rate is 6%, the market rate of return is 16%, and the project's beta is 1.5. Calculate the certainty equivalent cash flow for year 1. a. $175.21 b. $164.29 c. $228.30 d. $212.56 e. None of the above 3. Share X has a standard deviation of return of 10%, share Y has a standard deviation of return of 20%. The correlation coefficient between the shares is 0.5. If you invest 60% of your funds in share X and 40% in share Y, what is the standard deviation of the portfolio? a. 10% b. 20% c. 12.2% d. 14.0% e. None of the above 4. Richard Rolls critique of tests of the capital asset pricing model is that: a. Given an efficient market portfolio the CAPM is tautology b. The market portfolio is not efficient c. You need to test the model using the market portfolio for all capital assets d. a and c e. a and b 5. The Template Corporation has an equity beta of 1.2 and a debt beta of .8. The firm's market value debt to equity ratio is .6. If it undertakes a new project with the same risk profile, what is the project beta (assuming zero tax rate)? a. 0.70 b. 0.72 c. 0.96 d. 1.04
e.
1.05
6. Consider following data on three shares: Share Standard Deviation A 0.16 B 0.30 C 0.20 Beta 1.00 0.80 1.29
Assuming that you wished to minimise risk, you would select share if the share was held in on its own, and you would select
1. A reasonable estimate of the annual standard deviation of return of the stock market would be? a. Less than 5 percent. b. Between 5 and 10 percent. c. Between 15 and 25 percent d. More than 30 percent e. Impossible to estimate 2. A project has an expected cash flow of $200, in year 1. The risk-free rate is 6%, the market rate of return is 16%, and the project's beta is 1.5. Calculate the certainty equivalent cash flow for year 1. a. $175.21 b. $164.29 c. $228.30 d. $212.56 e. None of the above 3. Share X has a standard deviation of return of 10%, share Y has a standard deviation of return of 20%. The correlation coefficient between the shares is 0.5. If you invest 60% of your funds in share X and 40% in share Y, what is the standard deviation of the portfolio? a. 10% b. 20% c. 12.2% d. 14.0% e. None of the above 4. Richard Rolls critique of tests of the capital asset pricing model is that: a. Given an efficient market portfolio the CAPM is tautology b. The market portfolio is not efficient c. You need to test the model using the market portfolio for all capital assets d. a and c e. a and b 5. The Template Corporation has an equity beta of 1.2 and a debt beta of .8. The firm's market value debt to equity ratio is .6. If it undertakes a new project with the same risk profile, what is the project beta (assuming zero tax rate)? a. 0.70 b. 0.72 c. 0.96 d. 1.04
e.
1.05
6. Consider following data on three shares: Share Standard Deviation A 0.16 B 0.30 C 0.20 Beta 1.00 0.80 1.29
Assuming that you wished to minimise risk, you would select share if the share was held in on its own, and you would select