Question

1. A good way to reduce macro risk in a stock portfolio is to invest in stocks that:

      a. have only specific risks.                                                                         b. have diversified away the macro risk.

      c. have low exposure to business cycles.                                                 d. pay guaranteed dividends.

2. What is the most likely explanation for a +20.0% return on a stock with a beta of 1.0 in a month when the market

      returned +10.0%?

      a. The stock is aggressive.                                                                        b. The market is undervalued.

      c. Favorable firm-specific news was reported.                                    d. The beta is really less than 1.0.

3. A project requires an investment of $10 million and offers an annual after-tax cash flow of $1,250,000 indefinitely. If the

      firm's WACC is 12.5% and the project is riskier than the firm’s average projects, should it be accepted%?

      a. Yes, since the project's NPV is positive.                                          

      b. Yes, since a zero NPV indicates marginal acceptability.

      c. No, since the project's NPV is zero.

      d. No, since the project's NPV is negative.

Please explain

Answer 1

1.

Have low exposures to business cycles

Macro risk is nothing but beta and beta decreases with decrease in exposure to business cycle

2.

Favorable firm-specific news was reported

A stock with beta of 1 should return the same return as market. Higher return is possible due to idiosyncratic factors such as firm specific positive news

3.

No, since the project's NPV is negative

As the project is riskier than average projects dicount rate should be more than 12.5%

NPV=-10+1.25/r

If r>12.5%, NPV<0