公司理财课后习题和答案

...wd......wd......wd...CorporateFinance,3e(Berk/DeMarzo)Chapter12EstimatingtheCostofCapital12.1TheEquityCostofCapitalUsethefollowinginformationtoanswerthequestion(s)below.BetaVolatility"Eenie"0.4520%"Meenie"0.7518%"Miney"1.0535%"Moe"1.2025%Assumethattherisk-freerateofinterestis3%andyouestimatethemarket'sexpectedreturntobe9%.1)Whichfirmhasthemosttotalrisk?A)EenieB)MeenieC)MineyD)MoeAnswer:CExplanation:C)TotalriskismeasuredusingvolatilityandMineyhasthehighestvolatility,hencethemosttotalrisk.Diff:1Section:12.1TheEquityCostofCapitalSkill:Analytical2)Whichfirmhastheleastmarketrisk?A)EenieB)MeenieC)MineyD)MoeAnswer:AExplanation:A)MarketriskismeasuredusingbetaandEeniehasthelowestbeta,hencethelowestmarketrisk.Diff:1Section:12.1TheEquityCostofCapitalSkill:Analytical3)Whichfirmhasthehighestcostofequitycapital?A)EenieB)MeenieC)MineyD)MoeAnswer:DExplanation:D)CostofcapitalismeasuredusingtheCAPMandisalinearfunctionofbeta.Thereforethefirmwiththehighestbeta(Moe)hasthehighestcostofequitycapital.Diff:1Section:12.1TheEquityCostofCapitalSkill:Analytical4)Theequitycostofcapitalfor"Miney"isclosestto:A)6.30%B)7.50%C)9.30%D)9.75%Answer:CExplanation:C)rMiney=3%+1.05(9%-3%)=9.3%Diff:1Section:12.1TheEquityCostofCapitalSkill:Analytical5)Theequitycostofcapitalfor"Meenie"isclosestto:A)4.50%B)7.50%C)9.30%D)9.75%Answer:BExplanation:B)rMeenie=3%+0.75(9%-3%)=7.5%Diff:1Section:12.1TheEquityCostofCapitalSkill:Analytical6)Theriskpremiumfor"Meenie"isclosestto:A)4.50%B)7.50%C)9.30%D)9.75%Answer:AExplanation:A)riskpremiumMeenie=0.75(9%-3%)=4.5%Diff:2Section:12.1TheEquityCostofCapitalSkill:Analytical12.2TheMarketPortfolioUsethefollowinginformationtoanswerthequestion(s)below.Supposeallpossibleinvestmentopportunitiesintheworldarelimitedtothefourstockslistinthetablebelow:StockPriceperShareNumberofSharesOutstanding(Millions)TaggartTranscontinental$15.6025ReardenMetal$13.0045WyattOil$29.2510NielsonMotors$26.25261)TheweightonTaggartTranscontinentalstockinthemarketportfolioisclosestto:A)15%B)20%C)25%D)30%Answer:BExplanation:B)CalculationsB×CD/1950StockPriceperShareNumberofSharesOutstanding(Millions)MarketCapWeightTaggartTranscontinental$15.6025$390.000.2ReardenMetal$13.0045$585.000.3WyattOil$29.2510$292.500.15NielsonMotors$26.2526$682.500.35Total$1950.00Diff:1Section:12.2TheMarketPortfolioSkill:Analytical2)TheweightonWyattOilstockinthemarketportfolioisclosestto:A)15%B)20%C)25%D)30%Answer:AExplanation:A)CalculationsB×CD/1950StockPriceperShareNumberofSharesOutstanding(Millions)MarketCapWeightTaggartTranscontinental$15.6025$390.000.2ReardenMetal$13.0045$585.000.3WyattOil$29.2510$292.500.15NielsonMotors$26.2526$682.500.35Total$1950.00Diff:1Section:12.2TheMarketPortfolioSkill:Analytical3)Supposethatyouareholdingamarketportfolioandyouhaveinvested$9,000inReardenMetal.TheamountthatyouhaveinvestedinNielsonMotorsisclosestto:A)$6,000B)$7,715C)$9,000D)$10,500Answer:DExplanation:D)CalculationsB×CD/1950StockPriceperShareNumberofSharesOutstanding(Millions)MarketCapWeightTaggartTranscontinental$15.6025$390.000.2ReardenMetal$13.0045$585.000.3WyattOil$29.2510$292.500.15NielsonMotors$26.2526$682.500.35Total$1950.00AmountNielson=×AmountRearden=×$9,000=$10,500Diff:2Section:12.2TheMarketPortfolioSkill:Analytical4)Supposethatyouareholdingamarketportfolioandyouhaveinvested$9,000inReardenMetal.TheamountthatyouhaveinvestedinTaggartTranscontinentalisclosestto:A)$4,500B)$6,000C)$7,715D)$9,000Answer:BExplanation:B)CalculationsB×CD/1950StockPriceperShareNumberofSharesOutstanding(Millions)MarketCapWeightTaggartTranscontinental$15.6025$390.000.2ReardenMetal$13.0045$585.000.3WyattOil$29.2510$292.500.15NielsonMotors$26.2526$682.500.35Total$1950.00AmountNielson=×AmountRearden=×$9,000=$6,000Diff:2Section:12.2TheMarketPortfolioSkill:Analytical5)Supposethatyouhaveinvested$30,000investedinthemarketportfolio.ThentheamountthatyouhaveinvestedinWyattOilisclosestto:A)$4,500B)$6,000C)$7,715D)$9,000Answer:AExplanation:A)CalculationsB×CD/1950StockPriceperShareNumberofSharesOutstanding(Millions)MarketCapWeightTaggartTranscontinental$15.6025$390.000.2ReardenMetal$13.0045$585.000.3WyattOil$29.2510$292.500.15NielsonMotors$26.2526$682.500.35Total$1950.00AmountWO=WeightWO×AmountMarket=.15×$30,000=$4,500Diff:2Section:12.2TheMarketPortfolioSkill:Analytical6)Supposethatyouhaveinvested$30,000inthemarketportfolio.ThenthenumberofsharesofReardenMetalthatyouholdisclosestto:A)450sharesB)700sharesC)1,400sharesD)2,300sharesAnswer:BExplanation:B)CalculationsB×CD/1950StockPriceperShareNumberofSharesOutstanding(Millions)MarketCapWeightTaggartTranscontinental$15.6025$390.000.2ReardenMetal$13.0045$585.000.3WyattOil$29.2510$292.500.15NielsonMotors$26.2526$682.500.35Total$1950.00SharesRM===692.31sharesDiff:2Section:12.2TheMarketPortfolioSkill:Analytical7)Supposethatyouhaveinvested$30,000inthemarketportfolio.ThenthenumberofsharesofWyattOilthatyouholdisclosestto:A)150sharesB)300sharesC)350sharesD)450sharesAnswer:AExplanation:A)CalculationsB×CD/1950StockPriceperShareNumberofSharesOutstanding(Millions)MarketCapWeightTaggartTranscontinental$15.6025$390.000.2ReardenMetal$13.0045$585.000.3WyattOil$29.2510$292.500.15NielsonMotors$26.2526$682.500.35Total$1950.00SharesWO===153.85sharesDiff:2Section:12.2TheMarketPortfolioSkill:Analytical8)Supposethatyouareholdingamarketportfolioandyouhaveinvested$18,000inTaggartTranscontinental.ThenumberofsharesofWyattOilthatyouholdisclosestto:A)90sharesB)460sharesC)615sharesD)770sharesAnswer:BExplanation:B)CalculationsB×CD/1950StockPriceperShareNumberofSharesOutstanding(Millions)MarketCapWeightTaggartTranscontinental$15.6025$390.000.2ReardenMetal$13.0045$585.000.3WyattOil$29.2510$292.500.15NielsonMotors$26.2526$682.500.35Total$1950.00==461.54sharesDiff:2Section:12.2TheMarketPortfolioSkill:Analytical9)Supposethatyouareholdingamarketportfolioandyouhaveinvested$18,000inTaggartTranscontinental.ThenumberofsharesofReardenMetalthatyouholdisclosestto:A)780sharesB)925sharesC)1,730sharesD)2,075sharesAnswer:BExplanation:B)CalculationsB×CD/1950StockPriceperShareNumberofSharesOutstanding(Millions)MarketCapWeightTaggartTranscontinental$15.6025$390.000.2ReardenMetal$13.0045$585.000.3WyattOil$29.2510$292.500.15NielsonMotors$26.2526$682.500.35Total$1950.00==2,076.92sharesDiff:2Section:12.2TheMarketPortfolioSkill:Analytical10)Supposethatyouhaveinvested$100,000investedinthemarketportfolioandthatthestockpriceofTaggartTranscontinentalsuddenlydropsto$7.80pershare.Whichofthefollowingtradeswouldyouneedtomakeinordertomaintainyourinvestmentinthemarketportfolio:1. Buyapproximately1,140sharesofTaggartTranscontinental2. Sellapproximately256sharesofReardenMetal3. Sellapproximately57sharesofWyattOil4. Sellapproximately148sharesofNielsonMotorsA)1onlyB)2onlyC)2,3,and4onlyD)1,2,3,and4E)NoneoftheaboveAnswer:EExplanation:E)Thereisnoneedtorebalanceyourportfolio.Asaninvestor,youstillholdthemarketportfolioandthereforetherearenotradesneeded.Diff:3Section:12.2TheMarketPortfolioSkill:AnalyticalUsethefollowinginformationtoanswerthequestion(s)below.SupposethatMerck(MRK)stockistradingfor$36.70persharewith2.11billionsharesoutstandingwhileBoeing(BA)has697.5millionsharesoutstandingandamarketcapitalizationof$38.223billion.Assumethatyouholdthemarketportfolio.11)Boeing'sstockpriceisclosestto:A)$18.25B)$36.70C)$54.80D)$63.40Answer:CExplanation:C)PriceBA===$54.80Diff:1Section:12.2TheMarketPortfolioSkill:Analytical12)Merck'smarketcapitalizationisclosestto:A)$38.2billionB)$77.4billionC)$89.4billionD)$115.6billionAnswer:BExplanation:B)MarketCap=Price×sharesoutstanding=$36.70×2,110=$77,437millionDiff:1Section:12.2TheMarketPortfolioSkill:Analytical13)Ifyouhold1,000sharesofMerck,thenthenumberofsharesofBoeingthatyouholdisclosestto:A)240sharesB)330sharesC)510sharesD)780sharesAnswer:BExplanation:B)SharesBA = ==330.57sharesDiff:3Section:12.2TheMarketPortfolioSkill:Analytical14)WhichofthefollowingstatementsisFALSE?A)Allinvestorsshoulddemandthesameefficientportfolioofsecuritiesinthesameproportions.B)TheCapitalAssetPricingModel(CAPM)allowscorporateexecutivestoidentifytheefficientportfolio(ofriskyassets)byusingknowledgeoftheexpectedreturnofeachsecurity.C)Ifinvestorsholdtheefficientportfolio,thenthecostofcapitalforanyinvestmentprojectisequaltoitsrequiredreturncalculatedusingitsbetawiththeefficientportfolio.D)TheCAPMidentifiesthemarketportfolioastheefficientportfolio.Answer:BDiff:1Section:12.2TheMarketPortfolioSkill:Conceptual15)WhichofthefollowingstatementsisFALSE?A)Ifinvestorshavehomogeneousexpectations,theneachinvestorwillidentifythesameportfolioashavingthehighestSharperatiointheeconomy.B)Homogeneousexpectationsarewhenallinvestorshavethesameestimatesconcerningfutureinvestmentsandreturns.C)Therearemanyinvestorsintheworld,andeachmusthaveidenticalestimatesofthevolatilities,correlations,andexpectedreturnsoftheavailablesecurities.D)Thecombinedportfolioofriskysecuritiesofallinvestorsmustequaltheefficientportfolio.Answer:CDiff:1Section:12.2TheMarketPortfolioSkill:Conceptual16)WhichofthefollowingstatementsisFALSE?A)Ifsomesecuritywerenotpartoftheefficientportfolio,theneveryinvestorwouldwanttoownit,anddemandforthissecuritywouldincreasecausingitsexpectedreturntofalluntilitisnolongeranattractiveinvestment.B)Theefficientportfolio,theportfoliothatallinvestorsshouldhold,mustbethesameportfolioasthemarketportfolioofallriskysecurities.C)Becauseeverysecurityisownedbysomeone,thesumofallinvestors'portfoliosmustequaltheportfolioofallriskysecuritiesavailableinthemarket.D)Ifallinvestorsdemandtheefficientportfolio,andsincethesupplyofsecuritiesisthemarketportfolio,thentwoportfoliosmustcoincide.Answer:ADiff:2Section:12.2TheMarketPortfolioSkill:Conceptual17)WhichofthefollowingstatementsisFALSE?A)Themarketportfoliocontainsmoreofthesmalleststocksandlessofthelargerstocks.B)Forthemarketportfolio,theinvestmentineachsecurityisproportionaltoitsmarketcapitalization.C)Becausethemarketportfolioisdefinedasthetotalsupplyofsecurities,theproportionsshouldcorrespondexactlytotheproportionofthetotalmarketthateachsecurityrepresents.D)Marketcapitalizationisthetotalmarketvalueoftheoutstandingsharesofafirm.Answer:ADiff:1Section:12.2TheMarketPortfolioSkill:Conceptual18)WhichofthefollowingstatementsisFALSE?A)Avalue-weightedportfolioisanequal-ownershipportfolio:Weholdanequalfractionofthetotalnumberofsharesoutstandingofeachsecurityintheportfolio.B)Whenbuyingavalue-weightedportfolio,weenduppurchasingthesamepercentageofsharesofeachfirm.C)Tomaintainavalue-weightedportfolio,wedonotneedtotradesecuritiesandrebalancetheportfoliounlessthenumberofsharesoutstandingofsomesecuritychanges.D)Inavalueweightedportfoliothefractionofmoneyinvestedinanysecuritycorrespondstoitsshareofthetotalnumberofsharesoutstandingofallsecuritiesintheportfolio.Answer:DDiff:1Section:12.2TheMarketPortfolioSkill:Conceptual19)WhichofthefollowingstatementsisFALSE?A)ThemostfamiliarstockindexintheUnitedStatesistheDowJonesIndustrialAverage(DJIA).B)Aportfolioinwhicheachsecurityisheldinproportiontoitsmarketcapitalizationiscalledaprice-weightedportfolio.C)TheDowJonesIndustrialAverage(DJIA)consistsofaportfolioof30largeindustrialstocks.D)TheDowJonesIndustrialAverage(DJIA)isaprice-weightedportfolio.Answer:BExplanation:B)Aportfolioinwhicheachsecurityisheldinproportiontoitsmarketcapitalizationiscalledavalue-weightedportfolio.Diff:2Section:12.2TheMarketPortfolioSkill:Conceptual20)WhichofthefollowingstatementsisFALSE?A)Becauseverylittletradingisrequiredtomaintainit,anequal-weightedportfolioiscalledapassiveportfolio.B)Ifthenumberofsharesinavalueweightedportfoliodoesnotchange,butonlythepriceschange,theportfoliowillremainvalueweighted.C)TheCAPMsaysthatindividualinvestorsshouldholdthemarketportfolio,avalue-weightedportfolioofallriskysecuritiesinthemarket.D)Apriceweightedportfolioholdsanequalnumberofsharesofeachstock,independentoftheirsize.Answer:AExplanation:A)Becauseverylittletradingisrequiredtomaintainit,avalue-weightedportfolioiscalledapassiveportfolio.Diff:3Section:12.2TheMarketPortfolioSkill:Conceptual21)WhichofthefollowingstatementsisFALSE?A)Amarketindexreportsthevalueofaparticularportfolioofsecurities.B)TheS&P500isthestandardportfoliousedtorepresent"themarket"whenusingtheCAPMinpractice.C)EventhoughtheS&P500includesonly500ofthemorethan7,000individualU.S.Stocksinexistence,itrepresentsmorethan70%oftheU.S.stockmarketintermsofmarketcapitalization.D)TheS&P500isanequal-weightedportfolioof500ofthelargestU.S.stocks.Answer:DExplanation:D)TheS&P500isavalue-weightedportfolioof500ofthelargestU.S.stocks.Diff:2Section:12.2TheMarketPortfolioSkill:Conceptual22)WhichofthefollowingstatementsisFALSE?A)TheS&P500andtheWilshire5000indexesarebothwell-diversifiedindexesthatroughlycorrespondtothemarketofU.S.stocks.B)PractitionerscommonlyusetheS&P500asthemarketportfoliointheCAPMwiththebeliefthatthisindexisthemarketportfolio.C)Standard&Poor'sDepositoryReceipts(SPDR,nicknamed"spider")tradeontheAmericanStockExchangeandrepresentownershipintheS&P500.D)TheS&P500wasthefirstwidelypublicizedvalueweightedindexandithasbecomeabenchmarkforprofessionalinvestors.Answer:BDiff:2Section:12.2TheMarketPortfolioSkill:Conceptual23)InpracticewhichmarketindexismostwidelyusedasaproxyforthemarketportfoliointheCAPM?A)DowJonesIndustrialAverageB)Wilshire5000C)S&P500D)U.S.TreasuryBillAnswer:CDiff:1Section:12.2TheMarketPortfolioSkill:Conceptual24)InpracticewhichmarketindexwouldbestbeusedasaproxyforthemarketportfoliointheCAPM?A)S&P500B)DowJonesIndustrialAverageC)U.S.TreasuryBillD)Wilshire5000Answer:DDiff:1Section:12.2TheMarketPortfolioSkill:ConceptualUsethetableforthequestion(s)below.Considerthefollowingstockpriceandsharesoutstandingdata:StockNamePriceperShareSharesOutstanding(Billions)Lowes$28.801.53Wal-Mart$47.904.17Intel$19.605.77Boeing$75.000.7925)ThemarketcapitalizationforWal-Martisclosestto:A)$415BillionB)$276BillionC)$479BillionD)$200BillionAnswer:DExplanation:D)StockNamePriceperShareSharesOutstanding(Billions)MarketCapitalization(Billions)Lowes$28.801.53$44.06Wal-Mart$47.904.17$199.74Intel$19.605.77$113.09Boeing$75.000.79$59.25Total$416.15Diff:1Section:12.2TheMarketPortfolioSkill:Analytical26)Thetotalmarketcapitalizationforallfourstocksisclosestto:A)$479BillionB)$415BillionC)$2,100BillionD)$200BillionAnswer:BExplanation:B)StockNamePriceperShareSharesOutstanding(Billions)MarketCapitalization(Billions)Lowes$28.801.53$44.06Wal-Mart$47.904.17$199.74Intel$19.605.77$113.09Boeing$75.000.79$59.25Total$416.15Diff:1Section:12.2TheMarketPortfolioSkill:Analytical27)Ifyouareinterestedincreatingavalue-weightedportfolioofthesefourstocks,thenthepercentageamountthatyouwouldinvestinLowesisclosestto:A)25%B)11%C)20.0%D)12%Answer:BExplanation:B)StockNamePriceperShareSharesOutstanding(Billions)MarketCapitalization(Billions)PercentofTotalLowes$28.801.53$44.0610.6%Wal-Mart$47.904.17$199.7448.0%Intel$19.605.77$113.0927.2%Boeing$75.000.79$59.2514.2%Total$416.15Diff:2Section:12.2TheMarketPortfolioSkill:Analytical28)Assumethatyouhave$100,000toinvestandyouareinterestedincreatingavalue-weightedportfolioofthesefourstocks.ThenumberofsharesofWal-Martthatyouwouldholdinyourportfolioisclosestto:A)710B)1390C)1000D)870Answer:CExplanation:C)StockNamePriceperShareSharesOutstanding(Billions)MarketCapitalization(Billions)PercentofTotalNumberofSharesLowes$28.801.53$44.0610.6%368Wal-Mart$47.904.17$199.7448.0%1,002Intel$19.605.77$113.0927.2%1,387Boeing$75.000.79$59.2514.2%190Total$416.15Numberofshares=Diff:2Section:12.2TheMarketPortfolioSkill:Analytical29)Assumethatyouhave$100,000toinvestandyouareinterestedincreatingavalue-weightedportfolioofthesefourstocks.ThepercentageofthesharesoutstandingofBoeingthatyouwouldholdinyourportfolioisclosestto:A).000018%B).000020%C).000024%D).000031%Answer:CExplanation:C)StockNamePriceperShareSharesOutstanding(Billions)MarketCapitalization(Billions)PercentofTotalNumberofSharesLowes$28.801.53$44.0610.6%368Wal-Mart$47.904.17$199.7448.0%1,002Intel$19.605.77$113.0927.2%1,387Boeing$75.000.79$59.2514.2%190Total$416.15Numberofshares=percentagesharesoutstanding=190/790000000=.000024%Diff:2Section:12.2TheMarketPortfolioSkill:Analytical30)Assumethatyouhave$250,000toinvestandyouareinterestedincreatingavalue-weightedportfolioofthesefourstocks.Howmanysharesofeachofthefourstockswillyouhold?Whatpercentageofthesharesoutstandingofeachstockwillyouhold?Answer:StockNamePriceperShareSharesOutstanding(Billions)MarketCapitalization(Billions)PercentofTotalNumberofSharesLowes$28.801.53$44.0610.6%368Wal-Mart$47.904.17$199.7448.0%1,002Intel$19.605.77$113.0927.2%1,387Boeing$75.000.79$59.2514.2%190Total$416.15%ofShares0.000060%Numberofshares=Inavalueweightedportfolio,thepercentageofsharesofeverystockwillbethesame.Diff:3Section:12.2TheMarketPortfolioSkill:Analytical12.3BetaEstimationUsethefollowinginformationtoanswerthequestion(s)below.YearRisk-freeReturnMarketReturnWyattOilReturnMarketExcessReturnWyattOilExcessReturnBeta20073.0%6.0%5.5%3.0%2.5%0.83320081.5%-38.5%-32.6%.40%-34.1%0.85320091.0%22.5%19.6%21.5%18.6%0.8651)WyattOil'saveragehistoricalreturnisclosestto:A)-2.50%B)-3.33%C)-4.33%D)-5.17%Answer:AExplanation:A)raverage=YearRisk-freeReturnMarketReturnWyattOilReturnMarketExcessReturnWyattOilExcessReturn20073.0%6.0%5.5%3.0%2.5%20081.5%-38.5%-32.6%-40.0%-34.1%20091.0%22.5%19.6%21.5%18.6%Average1.83%-3.33%-2.50%-5.17%-4.33%Diff:1Section:12.3BetaEstimationSkill:Analytical2)TheMarket'saveragehistoricalreturnisclosestto:A)-2.50%B)-3.33%C)-4.33%D)-5.17%Answer:BExplanation:B)raverage=YearRisk-freeReturnMarketReturnWyattOilReturnMarketExcessReturnWyattOilExcessReturn20073.0%6.0%5.5%3.0%2.5%20081.5%-38.5%-32.6%-40.0%-34.1%20091.0%22.5%19.6%21.5%18.6%Average1.83%-3.33%-2.50%-5.17%-4.33%Diff:1Section:12.3BetaEstimationSkill:Analytical3)WyattOil'saveragehistoricalexcessreturnisclosestto:A)-2.50%B)-3.33%C)-4.33%D)-5.17%Answer:CExplanation:C)excessreturnaverage=YearRisk-freeReturnMarketReturnWyattOilReturnMarketExcessReturnWyattOilExcessReturn20073.0%6.0%5.5%3.0%2.5%20081.5%-38.5%-32.6%-40.0%-34.1%20091.0%22.5%19.6%21.5%18.6%Average1.83%-3.33%-2.50%-5.17%-4.33%Diff:2Section:12.3BetaEstimationSkill:Analytical4)TheMarket'saveragehistoricalexcessreturnisclosestto:A)-2.50%B)-3.33%C)-4.33%D)-5.17%Answer:DExplanation:D)excessreturnaverage=YearRisk-freeReturnMarketReturnWyattOilReturnMarketExcessReturnWyattOilExcessReturn20073.0%6.0%5.5%3.0%2.5%20081.5%-38.5%-32.6%-40.0%-34.1%20091.0%22.5%19.6%21.5%18.6%Average1.83%-3.33%-2.50%-5.17%-4.33%Diff:2Section:12.3BetaEstimationSkill:Analytical5)WyattOil'sexcessreturnfor2009isclosestto:A)18.6%B)19.6%C)20.0%D)21.5%Answer:AExplanation:A)excessreturne=(rWO-rrf)2009YearRisk-freeReturnMarketReturnWyattOilReturnMarketExcessReturnWyattOilExcessReturn20073.0%6.0%5.5%3.0%2.5%20081.5%-38.5%-32.6%-40.0%-34.1%20091.0%22.5%19.6%21.5%18.6%Average1.83%-3.33%-2.50%-5.17%-4.33%Diff:1Section:12.3BetaEstimationSkill:Analytical6)TheMarket'sexcessreturnfor2008isclosestto:A)-40.0%B)-38.5%C)-37.0%D)-34.1%Answer:AExplanation:A)excessreturne=(rWO-rrf)2009YearRisk-freeReturnMarketReturnWyattOilReturnMarketExcessReturnWyattOilExcessReturn20073.0%6.0%5.5%3.0%2.5%20081.5%-38.5%-32.6%-40.0%-34.1%20091.0%22.5%19.6%21.5%18.6%Average1.83%-3.33%-2.50%-5.17%-4.33%Diff:1Section:12.3BetaEstimationSkill:Analytical7)UsingtheaveragehistoricalexcessreturnsforbothWyattOilandtheMarketportfolio,yourestimateofWyattOil'sBetaisclosestto:A)0.75B)0.84C)1.00D)1.19Answer:BExplanation:B)excessreturnaverage=excessreturnaverage=YearRisk-freeReturnMarketReturnWyattOilReturnMarketExcessReturnWyattOilExcessReturn20073.0%6.0%5.5%3.0%2.5%20081.5%-38.5%-32.6%-40.0%-34.1%20091.0%22.5%19.6%21.5%18.6%Average1.83%-3.33%-2.50%-5.17%-4.33%βWO===.8375Diff:3Section:12.3BetaEstimationSkill:Analytical8)UsingtheaveragehistoricalexcessreturnsforbothWyattOilandtheMarketportfolioestimateofWyattOil'sBeta.Whenusingthisbeta,thealphaforWyattoilin2007isclosestto:A)-0.5000%B)-0.0250%C)-0.0125%D)+0.0250%Answer:CExplanation:C)excessreturnaverage=excessreturnaverage=YearRisk-freeReturnMarketReturnWyattOilReturnMarketExcessReturnWyattOilExcessReturn20073.0%6.0%5.5%3.0%2.5%20081.5%-38.5%-32.6%-40.0%-34.1%20091.0%22.5%19.6%21.5%18.6%Average1.83%-3.33%-2.50%-5.17%-4.33%βWO===.8375α =actualreturn-expectedreturnforCAPM =5.5%-[3%+.8375(6%-3%)]=-.0125%Diff:3Section:12.3BetaEstimationSkill:Analytical9)Usingjustthereturndatafor2009,yourestimateofWyattOil'sBetaisclosestto:A)0.84B)0.87C)1.00D)1.16Answer:BExplanation:B)YearRisk-freeReturnMarketReturnWyattOilReturnMarketExcessReturnWyattOilExcessReturn20073.0%6.0%5.5%3.0%2.5%20081.5%-38.5%-32.6%-40.0%-34.1%20091.0%22.5%19.6%21.5%18.6%Average1.83%-3.33%-2.50%-5.17%-4.33%βWO===.8651Diff:2Section:12.3BetaEstimationSkill:Analytical10)Usingjustthereturndatafor2008,yourestimateofWyattOil'sBetaisclosestto:A)0.85B)0.87C)1.00D)1.17Answer:AExplanation:A)YearRisk-freeReturnMarketReturnWyattOilReturnMarketExcessReturnWyattOilExcessReturn20073.0%6.0%5.5%3.0%2.5%20081.5%-38.5%-32.6%-40.0%-34.1%20091.0%22.5%19.6%21.5%18.6%Average1.83%-3.33%-2.50%-5.17%-4.33%βWO=-=.8525Diff:2Section:12.3BetaEstimationSkill:Analytical11)WhichofthefollowingstatementsisFALSE?A)Betaistheexpectedpercentchangeintheexcessreturnofthesecurityfora1%changeintheexcessreturnofthemarketportfolio.B)Betarepresentstheamountbywhichrisksthataffecttheoverallmarketareamplifiedforagivenstockorinvestment.C)Itiscommonpracticetoestimatebetabasedonthehistoricalcorrelationandvolatilities.D)Betameasuresthediversifiableriskofasecurity,asopposedtoitsmarketrisk,andistheappropriatemeasureoftheriskofasecurityforaninvestorholdingthemarketportfolio.Answer:DExplanation:D)Betameasuresthenondiversifiableriskofasecurity.Diff:1Section:12.3BetaEstimationSkill:Conceptual12)WhichofthefollowingstatementsisFALSE?A)Onedifficultywhentryingtoestimatebetaforasecurityisthatbetadependsonthecorrelationandvolatilitiesofthesecurity'sandmarket'sreturnsinthefuture.B)Itiscommonpracticetoestimatebetabasedontheexpectationsoffuturecorrelationsandvolatilities.C)Onedifficultywhentryingtoestimatebetaforasecurityisthatbetadependsoninvestorsexpectationsofthecorrelationandvolatilitiesofthesecurity'sandmarket'sreturns.D)Securitiesthattendtomovelessthanthemarkethavebetasbelow1.Answer:BExplanation:B)Betaismeasuredusingpastinformation.Diff:1Section:12.3BetaEstimationSkill:Conceptual13)WhichofthefollowingstatementsisFALSE?A)Securitiesthattendtomovemorethanthemarkethavebetashigherthan0.B)Securitieswhosereturnstendtomoveintandemwiththemarketonaveragehaveabetaof1.C)Betacorrespondstotheslopeofthebestfittinglineintheplotofthesecuritiesexcessreturnsversusthemarketexcessreturn.D)Thestatisticaltechniquethatidentifiesthebets-fittinglinethroughasetofpointsiscalledlinearregression.Answer:ADiff:2Section:12.3BetaEstimationSkill:ConceptualUsetheequationforthequestion(s)below.Considerthefollowinglinearregressionmodel:(Ri-rf)=ai+bi(RMkt-rf)+ei14)ThebiintheregressionA)measuresthesensitivityofthesecuritytomarketrisk.B)measuresthehistoricalperformanceofthesecurityrelativetotheexpectedreturnpredictedbytheSML.C)measuresthedeviationfromthebestfittinglineandiszeroonaverage.D)measuresthediversifiableriskinreturns.Answer:ADiff:2Section:12.3BetaEstimationSkill:Conceptual15)TheaiintheregressionA)measuresthesensitivityofthesecuritytomarketrisk.B)measuresthedeviationfromthebestfittinglineandiszeroonaverage.C)measuresthediversifiableriskinreturns.D)measuresthehistoricalperformanceofthesecurityrelativetotheexpectedreturnpredictedbytheSML.Answer:DDiff:2Section:12.3BetaEstimationSkill:Conceptual16)TheeiintheregressionA)measuresthemarketriskinreturns