9 .___ __ Combining assets that are not perfectly correlated does affect both the expected return of the portfolio as well as the risk of the portfolio .
10 .__ ___ Bond rating agencies include the analysis of financial ratios in arriving at corporate bond ratings . Multiple choice ( 4 points each )
Multiple Choice 11 . In the context of the Capital Asset Pricing Model ( CAPM ) the relevant measure of risk is
12 . According to the Capital Asset Pricing Model ( CAPM ) a well diversified portfolio ' s rate of return is a function of
13 . The premise of behavioral finance is that 14 . The efficient market hypothesis ____________.
15 . The CAPM is not testable unless 16 . The duration of a bond is a function of the bond ' s A . coupon rate . B . yield to maturity . C . time to maturity . D . All of these are correct . E . None of these is correct .
17 . Treasury STRIPS are
Problems / Essay : Problem 1 ( 15 points ): Be sure to show your work for computations . Use CAPM methodology to compute the following :
Problem 2 ( 15 points ) High Tech Chip Company paid a dividend last year of $ 2.50 . The expected ROE for next year is 12.5 %. An appropriate required return on the stock is 11 %. If the firm has a plowback ratio of 60 %, the dividend in the coming year should be : g = . 125 X . 6 = 7.5 %; $ 2.50 ( 1.075 ) = $ 2.69