# ECO3010 Corporate Finance Assignment-City, University of London

Instructions to students: All questions are compulsory

Materials:

Dictionaries are not permitted

## TASK: ECO3010 Corporate Finance Assignment

Question 1.

The future value of \$120, 000 expected five years from today at an interest rate (discount rate) of 10% per year is:

1. \$74,510.558.
2. \$193,261.2.
3. \$110,000.
4. \$108,900.

Question 2.

As the number of stocks in a portfolio is increased:

1. unique risk decreases and approaches zero
2. market risk decreases
3. unique risk decreases and becomes equal to market risk
4. total risk approaches zero

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Question 3.

Remember the hyperbolic relationship between the number of securities in a portfolio and the risk of the portfolio (standard deviation/variance). A well-defined only by market risk, hence unique risk (the risk brought about by each security) tends towards zero as NàThe expected return — beta relationship of the CAPM is graphically represented by

1. the security market line.
2. the capital market line.
3. the efficient frontier with a risk-free asset.
4. the efficient frontier without a risk-free asset.

### Question 4: ECO3010 Corporate Finance-City, University of London

The SML is, essentially, CAPM! (see slides)

An “aggressive” common stock would have a “beta”

1. equal to zero.
2. greater than one.
3. equal to one.
4. less than one.

Question 5.

An aggressive stock is more volatile than the market portfolio.

Your opinion is that security A has an expected rate of return of 0.145. It has a beta of 1.5. The risk-free rate is 0.04 and the market expected rate of return is 0.11. According to the Capital Asset Pricing Model, this security is

1. underpriced
2. overpriced
3. fairly priced.
4. cannot be determined from data provided.

Question 6.

All correctly priced stocks lie on the SML. Hence, if beta(calculated)=beta(given) the stock is correctly priced; if beta(calculated)>beta(given), the stock is underpriced (since for a given amount of risk, it yields a higher return); if beta(calculated)<beta(given), the stock is overpriced.

For each additional 2% change in market return, the return on a stock having a beta of 1 changes, on average, by

1. 00%
2. 50%
3. 00%
4. None of the above

Question 7.

A stock with a beta of 1 exactly follows movements in the market portfolio.

Beta of Treasury bills is:

1. +1.0
2. +0.5
3. -1.0
4. 0