Corporate Finance Quiz 2: 12 April 2026 (January 2026 term)

If the slope of the Capital Allocation Line (CAL) is 0.5 and the risk-free rate is 4%, what is the expected return of a portfolio on the CAL with a standard deviation of 12%?

A risk-neutral investor is offered a bet: 20% chance to win 500, 30% chance to win 200, and 50% chance to lose 100. What is the fair price of this bet?

A risk-neutral lender requires an expected return of 10%. A borrower has a 20% probability of total default (0 recovery). What is the promised interest rate that the lender should charge?

What is the Sharpe Ratio for a portfolio with an expected return of 15%, a risk-free rate of 3%, and a standard deviation of 20%?

You short-sell 80 shares of a stock at Rs 60 per share. One year later, you buy them back at Rs 55 per share. Ignoring interest and transaction costs, what is your total profit?

A portfolio has a beta of 1.5. The risk-free rate is 5% and the market risk premium is 8%. According to CAPM, what is the expected return?

A project pays 200 units with probability 0.25, 400 units with probability 0.40 and 600 units with probability 0.35, in the next year. If the expected annual discount rate is 10%, what is the project's present value? (Rounded off to nearest integer)

An asset has a return of 20% in a "Boom" condition (probability 0.3), 8% in a “Normal” condition (probability 0.4) and 2% in a "Bust" condition (probability 0.3). What is the standard deviation of the asset return?

MNO Bank has total assets of Rs 500 billion and a leverage ratio of 5. What is the value of the total liabilities of MNO Bank?

A pharmaceutical company start a new project to discover a drug. The project costs 500 thousand units, which is financed with a 400 thousand-unit loan and the remaining amount in equity. There is a 70% chance of a successful discovery, and in this case, the project generates a payoff of 900 thousand units in the next year. In the event of failure (30% chance), only 100 thousand units are recovered. The appropriate cost of capital is 10% per year.
Based on the above data, answer the given subquestions.

What would be the appropriate promised rate of return that the creditor of the loan would demand?

A pharmaceutical company start a new project to discover a drug. The project costs 500 thousand units, which is financed with a 400 thousand-unit loan and the remaining amount in equity. There is a 70% chance of a successful discovery, and in this case, the project generates a payoff of 900 thousand units in the next year. In the event of failure (30% chance), only 100 thousand units are recovered. The appropriate cost of capital is 10% per year.
Based on the above data, answer the given subquestions.

What is the expected payoff for the equity owner in the next year?

What would be the standard deviation of the rate of return of the equally weighted portfolio?

Suppose you would like to construct a portfolio with an expected rate of return of 19%. What weights would you put on Asset 1 and Asset 2, respectively?

What are the weights of Asset 1 and Asset 2 in the minimum variance portfolio?