Which of the following best describes a pure-play? (Points : 1) a private firm that is held in isolation in a one-company investment portfolioa publicly traded firm that is similar to the company or project being analyzedBoth a and b are correct.Neither a nor b is correct.Question 4. 4. In the Capital Asset Pricing Model, the market risk premium is estimated over a long period of time because: (Points : 1) more data is always better than less.a longer holding period gives a more reliable estimate because it is, in effect, a larger sample size.almost all investors hold stocks for many years, so it matches their investment horizon.historical returns are the best indicators of future returns.Question 5. 5. Beta is estimated as the slope of a regression line fit to pairs of periodic returns, (rx, ry), where: (Points : 1) rx is the return for a market index such as the S&P 500 Index.rx is the return for the stock being analyzed—for example, IBM’s return if we are estimating IBM’s beta.the slope measures the average return for the market portfolio for each percentage change in the value of the security of interest.ry is the return for the market index such as the S&P 500 Index.Question 6. 6. Which of the following statements regarding business risk, financial risk, and investors’ risk, is true? (Points : 1) Business risk is very similar to the risk of bankruptcy and is closely linked to the amount of debt in a firm’s financing mix.Financial risk is associated with the returns earned by equity investors.Business risk is often measured by the variability of earnings before depreciation and taxes and is closely associated with the risk inherent in the goods and services a business is selling.Investment risk is the uncertainty associated with a firm’s investment projects. It can be thought of as the likelihood that the expected IRR or NPV from an investment project will not materialize.Question 7. 7. One reason why we are not concerned with idiosyncratic risk (also called firm-specific risk) is that: (Points : 1) most risk is not firm-specific, so we can ignore it.through hedging and insurance, investors may now invest in stocks with almost no risk exposure of any kind.it is easy and almost costless to diversify one’s portfolio and eliminate idiosyncratic risk.investing in bonds can offset the idiosyncratic risks of shares of stock.Question 8. 8. Weights used in calculating the WACC should: (Points : 1) sum to 1.00.always include Wd.be based on the book value of each source of financing.be calculated according to the price of each security—so if the price of a bond is $1,000, and the price of common stock is $50, then the weight of debt would be .20. Using the Capital Asset Pricing Model, estimate the required rate of return for Caterpillar Incorporated stock if the company’s beta is 1.87 (as of February 1, 2013). Use a risk-free rate of 3% and a market risk premium of 6%. (Points : 1) 8.61%11.22%14.22%16.83%
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