Quiz Space

Corporate Finance · End Term · 13 Apr 2025 · January 2025 term

Question 26: Your opinion is that Akola Inc stock has an expected rat…

Question 26

+4 marksOne or more correct options

Your opinion is that Akola Inc stock has an expected rate of return of 12%. Akola Inc has a beta of 1.6. The risk-free rate of return is 6%, and the expected market rate of return is 10%. According to the capital asset pricing model

Select all that apply.

  1. A

    Akola Inc stock is overpriced.

  2. B

    Akola Inc stock is underpriced.

  3. C

    Akola Inc has an alpha of 0.4%.

  4. D

    Akola Inc has an alpha of -0.4%.

Show answer

Correct answers

  • A

    Akola Inc stock is overpriced.

  • D

    Akola Inc has an alpha of -0.4%.

Video solution

The video solution to this question is being recorded and will play here. Until then, the answer key is above.

See the whole paperTake it as a mock test

Question 26 of 35 in the IIT Madras BS Corporate Finance (Corporate Finance) End Term paper sat on 13 Apr 2025, in the January 2025 term (IIT M IMPROVEMENT AN EXAM QIM3 13 Apr 2025). It carries 4 marks.

More questions from this paper

  1. Q1Diversification works well if two investment opportunities always move in the opposite direction.
  2. Q2If a project has a negative beta with respect to the market, it means that it tends to go up when market goes down.
  3. Q3Holding everything else constant, risk-averse investors would prefer to pay more for the assets that have higher market…
  4. Q4According to capital asset pricing model, risk premia will be proportional to exposure to systematic risk and independe…
  5. Q5Security market line graphs a relationship between the expected rate of return of a project and its beta.
  6. Q6Overpriced stocks would lie below the security market line.
  7. Q7The efficient-market hypothesis says that financial markets are effective in processing and reflecting all available in…
  8. Q8The intrinsic value of at-the-money call options is zero.
  9. Q9The value of put option increases with stock price.
  10. Q10A call option has a negative delta while a put option has a positive delta.
  11. Q11A call option holder is obliged to purchase the asset for a specified price on or before the expiration date.
  12. Q12A European option can be exercised before the expiration date.
  13. Q13Financial trilemma states that an economy cannot achieve financial stability, total national control over financial saf…
  14. Q14An asset is considered safe if it gives the holder different payoffs across a wide variety of possible future scenarios.
  15. Q15Sharpe ratio is defined as the ratio of expected return of the asset to the standard deviation of excess returns.
  16. Q16There is a risky asset that has an expected rate of return of 15% and a standard deviation of 10%. If the risk-free rat…
  17. Q17Sarita is considering investing in an opportunity that promises to pay Rs 5,000 in one year, Rs 10,000 in two years and…
  18. Q18Suppose that the interest rate at a point of time in Thailand is 9%, and the interest rate at that point of time in Chi…
  19. Q19The price of a one-year European call option on a non-dividend-paying stock with a strike price of Rs 120 is Rs 15. The…
  20. Q20Suppose that in the Black-Scholes pricing formula for a put option, we have N(d1)=0.4 and N(d2)=0.7. If the stock price…
  21. Q21A company has two divisions: production division and sales division. The production division has a beta of 1.2 and the …
  22. Q22Suppose the risk-free rate of return is 2% and the expected market return is 10%. If the beta of an asset X is 1.5, the…
  23. Q23A risky asset has an expected rate of return of 12% and standard deviation of the rate of return of 20%. If the Sharpe …
  24. Q24A one-year call option with a strike price of Rs 20 is selling at a call premium of Rs 2. A one-year put option with a …
  25. Q25Suppose you take a long position in the stock and write a call option on the stock. This strategy is referred to as
  26. Q27Cisco Inc. has an expected rate of return of 10% and standard deviation of rate of return of 15%. The expected market r…
  27. Q28A trader buys a put option on a stock with a strike price of Rs 48 when the option price is Rs 5. The trader makes a pr…
  28. Q29The put-call parity states that
  29. Q30Suppose only one variable is change at a time, then the value of a put option increases with
  30. Q31Security A has an expected return of 14% and a standard deviation of 20%. Security B has an expected return of 18% and …
  31. Q32The current price of a non-dividend-paying stock is Rs 60. Over the next three months, it is expected to rise to Rs 70 …
  32. Q33A stock is trading at Rs 100 today. In 6 months, the stock price can either increase to Rs 120 or decrease to Rs 90. Th…
  33. Q34The current share price of HCL is Rs 600. HCL is expected to pay a dividend of Rs 25 per share next year. The appropria…
  34. Q35Consider a put option and a call option with same strike price and time to maturity. Which of the following statements …