Methods of Valuation – Corporate and Management Accounting MCQBy CACSMockTest / November 24, 2022 2 Methods of Valuation – Corporate and Management Accounting MCQ 1 / 38 The expected return of Security A is 22% while that of Security B is 24%. The beta of Security A is 0.86 while that of Security B is 1.24. What is a risk-free rate? (A) 14.74% (B) 17.47% (C) 14.71% (D) 14.00% 2 / 38 Calculate the required return on the security from the following information:Standard deviation 2.5%Market standard deviation 2.0%The risk-free rate of return 13%Expected rate of return on market portfolio 15%The correlation coefficient of the portfolio with the market 0.8 (A) 16% (B) 15% (C) 14% (D) 12% 3 / 38 A financial consultant has gathered the following facts for H Ltd.The systematic risk of the firm is 1.4.182 days Treasury bill yield is 8%The expected yield on the market portfolio is 13%. Calculate expected returns based on the capital asset pricing model (CAPM). (A) 18% (B) 17% (C) 16% (D) 15% 4 / 38 ABC Ltd. beta is 1.45. The rate of market return is 1696. The rate of return on government securities is 8%. What is the expected return as per Capital Asset Pricing Model? If the risk premium on the market goes up by 2.5% points, what would be the revised expected return on this stock? (A) 16.9%;32.32% (B) 18.7%;24.28% (C) 19.6%:23.23% (D) 19.6%; 16.7% 5 / 38 Pavan has invested in four securities. Amount invested and a beta of each security is as follows:Compute portfolio beta. (A) 1.524 (B) 1.874 (C) 0.789 (D) 1.315 6 / 38 You are analyzing the beta for ABC Ltd. and have divided the Company into four broad business groups, with market values and betas for each group.Estimate the beta for ABC Ltd. as a company. (A) 1.275 (B) 1.825 (C) 1.645 (D) 0.895 7 / 38 Return on Lucky Ltd. shares has a standard deviation of 2096, as against the standard deviation of the market at 1596. The correlation coefficient between the market and stock of XM Ltd. is 0.9. Compute the unsystematic risk of Lucky Ltd.’s shares. (A) 5% (B) 2% (C) 18% (D) 20% 8 / 38 Return on XM Ltd. shares has a standard deviation of 23%, as against the standard deviation of the market at 19%. The correlation coefficient between the market and the stock of XM Ltd. is 0.8. Compute the systematic risk of XM Ltd.’s shares. (A) 96.84% (B) 18.4% (C) 25.78% (D) 64.85% 9 / 38 Dividend for the last 4 years of Tara Ltd. was ₹ 7, ₹ 5, 12.8 & ₹ 10, and the market price was ₹ 120, ₹ 80, ₹ 130 & ₹ 150 respectively. What is the average return of the last 3 years considering capital gain and dividend? (A) 19.28% (B) 14.48% (C) 10.84% (D) 16.65% 10 / 38 Return of last 5 years of listed security is 16.2%, 19.8%, 18%, 15% & 21%. Five years ago the price of the security was 120 per share.What is its holding period return? (A) 135.55% (B) 128.58% (C) 145.64% (D) 154.45% 11 / 38 Return of last 5 years of listed security is 16.2%, 19.8%, 18%, 15% & 21%. Five years ago the price of the security was 120 per share. What is its average return? (A) 18% (B) 19% (C) 20% (D) 21% 12 / 38 The actual return of GK Ltd. for the last four years is 20%, 14%, 17%, and 18%. GK Ltd. has a beta of 1.15. Return on the market portfolio is 15%. The risk-free rate of return is 6%. Compute Alpha value and decide whether to hold, buy, or sell the security? (A) Alpha value is +0.8 and hence it is advised to sell the security. (B) Alpha value is -0.9 and hence it is advised to buy the security. (C) Alpha value is -0.8 and hence it is advised to short sell the security (D) Alpha value is +0.9 and hence it is advised to buy the security. 13 / 38 Yogesh invests ₹ 1,25,000 in shares of BABA Ltd., a listed company. At the end of the period investment value is ₹ 1,32,000. He gets a dividend of ₹ 8,000. Return from investment is – (A) 11% (B) 12% (C) 13% (D) 14% 14 / 38 Suppose the risk-free rate is 4% and k is 2.5%. If an investor takes 13% risk, he can expect a return of – (A) 32.5% (B) 52% (C) 10% (D) 36.5% 15 / 38 The APT is an equilibrium model developed by: (A) Stephen Ross and Richard Roll (B) Stephen Ross (C) Richard Roll (D) Harry Markowitz 16 / 38 In contrast to the capital asset pricing model, arbitrage pricing theory: (A) Uses risk premiums based on micro variables. (B) Requires normally distributed security returns. (C) Has fewer restrictive assumptions. (D) Specifies the number and identities of specific factors that determine expected returns. 17 / 38 ____is also called specific risk. (A) Systematic risk (B) Unsystematic risk (C) Covariance (D) Coefficient 18 / 38 Systematic risk =? (A) Beta × SD of market (B) Total risk – SD of market (C) Total risk – Beta (D) Beta ÷ SD of market 19 / 38 The positive alpha value indicates that – (A) Expected return is less than required return as per CAPM and hence security is overvalued. Such security should be sold. (B) Expected return is more than required return as per CAPM and hence security is undervalued. Such security should be bought. (C) Expected return is equal to required return as per CAPM and hence security is correctly valued. Such security should behold. (D) Expected return is more than required return as per CAPM and hence security is overvalued. Such security should be sold. 20 / 38 Systematic Risk is – (A) Uncontrollable (B) Controllable (C) Avoidable (D) Voidable 21 / 38 The negative alpha value indicates that – (A) Expected return is less than required return as per CAPM and hence security is overvalued. Such security should be sold. (B) Expected return is less than required return as per CAPM and hence security is undervalued. Such security should be bought. (C) Expected return is more than required return as per CAPM and hence security is undervalued. Such security should be bought. (D) Expected return is equal to required return as per CAPM and hence security is correctly valued. Such security should behold. 22 / 38 Alpha is denoted by the symbol – (A) A (B) ¥ (C) α (D) Δ 23 / 38 Alpha is an indicator of the extent to which the – (A) Actual return of security deviates from those predicated by market experts. (B) Actual return of security deviates from those predicated by derivative market (C) Actual return of security deviates from those predicated by its beta value. (D) Actual return of security deviates from those predicated by its probable distribution value. 24 / 38 Capital asset pricing theory asserts that portfolio returns are best explained by: (A) Economic factors (B) Systematic risk (C) Specific risk (D) Diversification 25 / 38 The beta of the risk-free asset is: (A) 0 (B) 0.5 (C) 2.0 (D) 1.0 26 / 38 According to the CAPM, overpriced securities have: (A) Negative alphas (B) Positive alphas (C) Zero betas (D) Zero alphas 27 / 38 If the required return as per CAPM is more than the expected return, then – (A) Security is undervalued and can be sold (B) Security is correctly priced and hence should behold (C) Security is overvalued and hence can be bought (D) Security is undervalued and hence can be bought 28 / 38 Which of the following investment advice will you provide to your client investor if CAPM Return = Expected return? (A) Sell (B) Buy (C) Hold (D) Put 29 / 38 Market risk is also called: (A) Systematic risk and unique risk. (B) Unique risk & non-diversifiable risk. (C) Systematic risk & diversifiable risk. (D) Non-diversihable risk & systematic risk. 30 / 38 The Security Market Line (SML) is a line drawn on a chart that serves as a graphical representation of the Capital Asset Pricing Model, which shows different levels of ____ of various marketable securities plotted against the expected return. (A) Systematic risk (B) Unsystematic risk (C) Total risk (D) Free risk 31 / 38 If the expected return is more than the required return as per CAPM, then – (A) Security is overvalued and hence can be bought (B) Security is correctly priced and hence should behold (C) Security is undervalued and hence can be sold (D) Security is undervalued and hence can be bought 32 / 38 Which of the following investment advice will you provide to your client investor if CAPM Return > Expected return? (A) Sell (B) Buy (C) Hold (D) None of the above 33 / 38 Which of the following investment advice will you provide to your client investor if CAPM Return < Expected return? (A) Sell (B) Hold (C) Buy (D) Short 34 / 38 Capital Asset Pricing Model (CAPM) provides the link between – (A) Return and total risk (B) Risk and covariance (C) Return and non-diversifiable risk (D) Return and diversifiable risk 35 / 38 A beta of 0.8 for security would indicate that – (A) Security is 20% riskier than index/ market. (B) Security is 80% less risky than index/market. (C) Security is 20% less risky than index/market. (D) Securityis80%riskierthanindex/ market 36 / 38 A beta of 1.15 for security would indicate that – (A) Security is trading 15% higher than a market index (B) Security is 15% riskier than index/ market. (C) Security is 15% less risky than index/market. (D) Security and market have a covariance of 0.15. 37 / 38 Investors should be agreeing to invest in riskier investments merely – (A) If a return is short (B) If there are no safe alternatives except for holding cash (C) If the expected return is adequate for risk level (D) If there are true speculators 38 / 38 Beta is a measure of __ (A) Non-diversifiable risk (B) Diversifiable risk (C) Total risk (D) Covariance Your score is LinkedIn Facebook Twitter VKontakte