QUESTION 14

1. Which of the statement is WRONG?

   	A.	The market portfolio contains all shares of all stocks and securities in the market.
   	B.	Diversification eliminates both idiosyncratic risk and systematic risk.
   	C.	The total risk of a security contains risk which is not rewarded.
   	D.	There is no clear relationship between the volatility and return of individual stocks.

1 points

QUESTION 15

1. At the end of 2019, Treefern Ltd. had BBB-rated, 5-year bonds outstanding with a yield to maturity of 15%. At the time, government bonds with similar maturity had a yield of 2%. Suppose the expected return of the market portfolio is 7% and you believe Treefern Ltd.s bonds have a beta of 0.45. If the expected loss rate of these bonds in the event of default is 55%. What annual probability of default would be consistent with the yield to maturity of Treefern Ltd.s bonds at the end of the year 2019?

   	A.	19.6%
   	B.	20.3%
   	C.	23.4%
   	D.	22.7%

1 points

QUESTION 16

1. Assume that the S&P 500 currently has a dividend yield of 3% and that on average, the dividends of S&P 500 firms have increased by about 5% per year. If the risk-free interest rate is 4%, then your estimate for the future market risk premium is:

   	A.	8%
   	B.	4%
   	C.	6%
   	D.	7%

1 points

QUESTION 17

1. You are considering investing $600,000 in a new automated inventory system that will provide after-tax cost savings of $50,000 next year. These cost savings are expected to grow at the same rate as sales. If sales are expected to grow at 5% per year and your cost of capital is 10%, then what is the NPV of the automated inventory system?

   	A.	$1,000,000
   	B.	-$100,000
   	C.	$500,000
   	D.	$400,000