©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
FIN 470 Final Exam Practice Questions
and Answers
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to
use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 4%, and
the expected market rate of return is 11%. Your company has a beta of 0.75, and the project that you are
evaluating is considered to have risk equal to the average project that the company has accepted in the
past. According to CAPM, the appropriate hurdle rate would be - Ans:✔✔-As per CAPM, expected return
for the company = risk free rate + beta *(market return - risk free rate) = 4% + .75*(11-4) = == 4% +
.75*(7) = 9.25%
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to
use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 3%, and
the expected market rate of return is 11%. Your company has a beta of 1.3, and the project that you are
evaluating is considered to have risk equal to the average project that the company has accepted in the
past. According to CAPM, the appropriate hurdle rate would be - Ans:✔✔-13.4%.
You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3. The beta of the
resulting portfolio is - Ans:✔✔-(200*1.4)+(800*.3)/(200+800) = 0.52
Page 1/17
, ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
Standard deviation and beta both measure risk, but they are different in that beta measures - Ans:✔✔-
only systematic risk, while standard deviation is a measure of total risk.
The capital asset pricing model assumes - Ans:✔✔-all investors are price takers and have the same
holding period.
According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a
function of - Ans:✔✔-beta risk.
According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a
function of - Ans:✔✔-market risk.
In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is - Ans:✔✔-beta.
The risk-free rate and the expected market rate of return are 0.05 and 0.13, respectively. According to
the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.1 is
equal to - Ans:✔✔-13.8%
An overpriced security will plot - Ans:✔✔-below the security market line.
You purchased a share of stock for $25. One year later, you received $1 as a dividend and sold the share
for $29. What was your holding-period return? - Ans:✔✔-(29-25+1)/25 = 20%
Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2018
show that - Ans:✔✔-stocks offered investors greater rates of return than bonds and bills.
Page 2/17
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FIRST PUBLISH OCTOBER 2024
A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 5%. What is
your approximate annual real rate of return if the rate of inflation was 1.5% over the year? - Ans:✔✔-
3.5%
Risk, Return, and Historical Record - Ans:✔✔-Question 4
You purchased a share of stock for $120. One year later, you received $1.82 as a dividend and sold the
share for $136. What was your holding-period return? - Ans:✔✔-None of the options are correct.
Other things equal, an increase in the government budget deficit - Ans:✔✔-drives the interest rate up.
Which of the following measures of risk best highlights the potential loss from extreme negative returns?
- Ans:✔✔-Value at risk (VaR)
Which of the following statement(s) is(are) true?
I) The real rate of interest is determined by the supply and demand for funds.
II) The real rate of interest is determined by the expected rate of inflation.
III) The real rate of interest can be affected by actions of the Fed.
IV) The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation. -
Ans:✔✔-I and III only
Page 3/17
FIRST PUBLISH OCTOBER 2024
FIN 470 Final Exam Practice Questions
and Answers
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to
use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 4%, and
the expected market rate of return is 11%. Your company has a beta of 0.75, and the project that you are
evaluating is considered to have risk equal to the average project that the company has accepted in the
past. According to CAPM, the appropriate hurdle rate would be - Ans:✔✔-As per CAPM, expected return
for the company = risk free rate + beta *(market return - risk free rate) = 4% + .75*(11-4) = == 4% +
.75*(7) = 9.25%
As a financial analyst, you are tasked with evaluating a capital-budgeting project. You were instructed to
use the IRR method, and you need to determine an appropriate hurdle rate. The risk-free rate is 3%, and
the expected market rate of return is 11%. Your company has a beta of 1.3, and the project that you are
evaluating is considered to have risk equal to the average project that the company has accepted in the
past. According to CAPM, the appropriate hurdle rate would be - Ans:✔✔-13.4%.
You invest $200 in security A with a beta of 1.4 and $800 in security B with a beta of 0.3. The beta of the
resulting portfolio is - Ans:✔✔-(200*1.4)+(800*.3)/(200+800) = 0.52
Page 1/17
, ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
Standard deviation and beta both measure risk, but they are different in that beta measures - Ans:✔✔-
only systematic risk, while standard deviation is a measure of total risk.
The capital asset pricing model assumes - Ans:✔✔-all investors are price takers and have the same
holding period.
According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a
function of - Ans:✔✔-beta risk.
According to the Capital Asset Pricing Model (CAPM), a well diversified portfolio's rate of return is a
function of - Ans:✔✔-market risk.
In the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is - Ans:✔✔-beta.
The risk-free rate and the expected market rate of return are 0.05 and 0.13, respectively. According to
the capital asset pricing model (CAPM), the expected rate of return on a security with a beta of 1.1 is
equal to - Ans:✔✔-13.8%
An overpriced security will plot - Ans:✔✔-below the security market line.
You purchased a share of stock for $25. One year later, you received $1 as a dividend and sold the share
for $29. What was your holding-period return? - Ans:✔✔-(29-25+1)/25 = 20%
Historical records regarding return on stocks, Treasury bonds, and Treasury bills between 1926 and 2018
show that - Ans:✔✔-stocks offered investors greater rates of return than bonds and bills.
Page 2/17
, ©GRACEAMELIA 2024/2025 ACADEMIC YEAR. ALL RIGHTS RESERVED
FIRST PUBLISH OCTOBER 2024
A year ago, you invested $10,000 in a savings account that pays an annual interest rate of 5%. What is
your approximate annual real rate of return if the rate of inflation was 1.5% over the year? - Ans:✔✔-
3.5%
Risk, Return, and Historical Record - Ans:✔✔-Question 4
You purchased a share of stock for $120. One year later, you received $1.82 as a dividend and sold the
share for $136. What was your holding-period return? - Ans:✔✔-None of the options are correct.
Other things equal, an increase in the government budget deficit - Ans:✔✔-drives the interest rate up.
Which of the following measures of risk best highlights the potential loss from extreme negative returns?
- Ans:✔✔-Value at risk (VaR)
Which of the following statement(s) is(are) true?
I) The real rate of interest is determined by the supply and demand for funds.
II) The real rate of interest is determined by the expected rate of inflation.
III) The real rate of interest can be affected by actions of the Fed.
IV) The real rate of interest is equal to the nominal interest rate plus the expected rate of inflation. -
Ans:✔✔-I and III only
Page 3/17
