Question 1

A stock with a beta equal to −1.0 has zero systematic (or market)risk.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  Collections Inc. is in the business of collecting past-due accounts for other companies, i.e., it is a collection agency. Collections' revenues, profits, and stock price tend to rise during recessions. This suggests that Collections Inc.'s beta should be quite high, say 2.0, because it does so much better than most other companies when the economy is weak.
B)  Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of −0.6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that 5-year period.
C)  Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be very strong in the immediate future. That is, you are convinced that the market is about to rise sharply. You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the expected market move.
D)  You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should rebalance your portfolio to include more high-beta stocks.
E)  If the market risk premium remains constant, but the risk-free rate declines, then the required returns on low-beta stocks will rise while those on high-beta stocks will decline.F) B) and C)
G) A) and D)

Question 3

Assume that the risk-free rate,rRF,increases but the market risk premium,(rM − rRF) ,declines with the net effect being that the overall required return on the market,rM,remains constant.Which of the following statements is CORRECT?

Accepted Answer

A)  The required return of all stocks will increase by the amount of the increase in the risk-free rate.
B)  The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0.
C)  Since the overall return on the market stays constant, the required return on each individual stock will also remain constant.
D)  The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0.
E)  The required return of all stocks will fall by the amount of the decline in the market risk premium.F) A) and B)
G) A) and C)

Question 4

A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)  The slope of the security market line is equal to the market risk premium.
B)  Lower beta stocks have higher required returns.
C)  A stock's beta indicates its diversifiable risk.
D)  Diversifiable risk cannot be completely diversified away.
E)  Two securities with the same stand-alone risk must have the same betas.F) B) and E)
G) C) and D)

Question 6

Stocks A,B,and C all have an expected return of 10% and a standard deviation of 25%.Stocks A and B have returns that are independent of one another,i.e.,their correlation coefficient,r,equals zero.Stocks A and C have returns that are negatively correlated with one another,i.e.,r is less than 0.Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B.Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C.Which of the following statements is CORRECT?

Accepted Answer

A)  Portfolio AC has an expected return that is less than 10%.
B)  Portfolio AC has an expected return that is greater than 25%.
C)  Portfolio AB has a standard deviation that is greater than 25%.
D)  Portfolio AB has a standard deviation that is equal to 25%.
E)  Portfolio AC has a standard deviation that is less than 25%.F) A) and B)
G) A) and C)

Question 7

Which of the following is NOT a potential problem when estimating and using betas,i.e.,which statement is FALSE?

Accepted Answer

A)  The fact that a security or project may not have a past history that can be used as the basis for calculating beta.
B)  Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta.
C)  The beta of an "average stock," or "the market," can change over time, sometimes drastically.
D)  Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
E)  The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. This calculated historical beta may differ from the beta that exists in the future.F) C) and D)
G) A) and B)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  Beta is measured by the slope of the security market line.
B)  If the risk-free rate rises, then the market risk premium must also rise.
C)  If a company's beta is halved, then its required return will also be halved.
D)  If a company's beta doubles, then its required return will also double.
E)  The slope of the security market line is equal to the market risk premium, (rM − rRF) .F) A) and B)
G) C) and E)

Question 9

Diversification will normally reduce the riskiness of a portfolio of stocks.

Accepted Answer

A) True 
 B)False

Question 10

If you plotted the returns of a company against those of the market and found that the slope of your line was negative,the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor,assuming that the observed relationship is expected to continue in the future.

Accepted Answer

A) True 
 B)False

Question 11

Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)

Accepted Answer

A)  Stock A's returns are less highly correlated with the returns on most other stocks than are B's returns.
B)  Stock B has a higher required rate of return than Stock A.
C)  Portfolio P has a standard deviation of 22.5%.
D)  More information is needed to determine the portfolio's beta.
E)  Portfolio P has a beta of 1.0.F) A) and B)
G) A) and C)

Question 12

The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Accepted Answer

A) True 
 B)False

Question 13

Bob has a $50,000 stock portfolio with a beta of 1.2,an expected return of 10.8%,and a standard deviation of 25%.Becky also has a $50,000 portfolio,but it has a beta of 0.8,an expected return of 9.2%,and a standard deviation that is also 25%.The correlation coefficient,r,between Bob's and Becky's portfolios is zero.If Bob and Becky marry and combine their portfolios,which of the following best describes their combined $100,000 portfolio?

Accepted Answer

A)  The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
B)  The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.
C)  The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
D)  The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations, 25%.
E)  The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations, 25%.F) All of the above
G) B) and C)

Question 14

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Accepted Answer

A)  If a stock has a negative beta, its required return under the CAPM would be less than 5%.
B)  If a stock's beta doubled, its required return under the CAPM would also double.
C)  If a stock's beta doubled, its required return under the CAPM would more than double.
D)  If a stock's beta were 1.0, its required return under the CAPM would be 5%.
E)  If a stock's beta were less than 1.0, its required return under the CAPM would be less than 5%.F) A) and E)
G) C) and E)

Question 15

Since the market return represents the expected return on an average stock,the market return reflects a certain amount of risk.As a result,there exists a market risk premium,which is the amount over and above the risk-free rate that is required to compensate stock investors for assuming an average amount of risk.

Accepted Answer

A) True 
 B)False

Question 16

Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year.The T-bill rate is 4.00%,and the T-bond rate is 5.25%.The annual return on the stock market during the past 4 years was 10.25%.Investors expect the average annual future return on the market to be 12.50%.Using the SML,what is the firm's required rate of return?

Accepted Answer

A)  11.34%
B)  11.63%
C)  11.92%
D)  12.22%
E)  12.52%F) A) and B)
G) B) and D)

Question 17

Over the past 88 years,we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns.This observation supports the notion that there is a positive correlation between risk and return.Which of the following answers correctly ranks investments from highest to lowest risk (and return) ,where the security with the highest risk is shown first,the one with the lowest risk last?

Accepted Answer

A)  Small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, U.S. Treasury bills.
B)  Large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds.
C)  Small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills.
D)  U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks.
E)  Large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills.F) B) and E)
G) A) and E)

Question 18

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events,and their effects on investment risk can in theory be diversified away.

Accepted Answer

A) True 
 B)False

Question 19

Mulherin's stock has a beta of 1.23,its required return is 11.75%,and the risk-free rate is 4.30%.What is the required rate of return on the market? (Hint: First find the market risk premium.)

Accepted Answer

A)  10.36%
B)  10.62%
C)  10.88%
D)  11.15%
E)  11.43%F) None of the above
G) A) and B)

Question 20

Consider the following information for three stocks,A,B,and C.The stocks' returns are positively but not perfectly positively correlated with one another,i.e.,the correlations are all between 0 and 1. ​
 Portfolio AB has half of its funds invested in Stock A and half in Stock B.Portfolio ABC has one third of its funds invested in each of the three stocks.The risk-free rate is 5%,and the market is in equilibrium,so required returns equal expected returns.Which of the following statements is CORRECT?

Accepted Answer

A)  Portfolio AB has a standard deviation of 20%.
B)  Portfolio AB's coefficient of variation is greater than 2.0.
C)  Portfolio AB's required return is greater than the required return on Stock A.
D)  Portfolio ABC's expected return is 10.66667%.
E)  Portfolio ABC has a standard deviation of 20%.F) B) and C)
G) A) and E)

Exam 8: Risk and Rates of Return

Correct Answer
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Which of the following is NOT a potential problem when estimating and using betas,i.e.,which statement is FALSE?

Correct Answer
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Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Correct Answer
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Mulherin's stock has a beta of 1.23,its required return is 11.75%,and the risk-free rate is 4.30%.What is the required rate of return on the market? (Hint: First find the market risk premium.)

Correct Answer
verified

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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A stock with a beta equal to −1.0 has zero systematic (or market)risk.

Correct Answer
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Diversification will normally reduce the riskiness of a portfolio of stocks.

Correct Answer
verified

Correct Answer
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Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)

Correct Answer
verified

Correct Answer
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Assume that the risk-free rate,r_RF,increases but the market risk premium,(r_M − r_RF) ,declines with the net effect being that the overall required return on the market,r_M,remains constant.Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Correct Answer
verified

A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Correct Answer
verified

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events,and their effects on investment risk can in theory be diversified away.

Correct Answer
verified

Correct Answer
verified

Exam 8: Risk and Rates of Return

Correct AnswerverifiedShow Answer

Which of the following is NOT a potential problem when estimating and using betas,i.e.,which statement is FALSE?

Correct AnswerverifiedShow Answer

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Mulherin's stock has a beta of 1.23,its required return is 11.75%,and the risk-free rate is 4.30%.What is the required rate of return on the market? (Hint: First find the market risk premium.)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A stock with a beta equal to −1.0 has zero systematic (or market)risk.

Correct AnswerverifiedShow Answer

Diversification will normally reduce the riskiness of a portfolio of stocks.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assume that the risk-free rate,rRF,increases but the market risk premium,(rM − rRF) ,declines with the net effect being that the overall required return on the market,rM,remains constant.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Correct AnswerverifiedShow Answer

A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Correct AnswerverifiedShow Answer

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events,and their effects on investment risk can in theory be diversified away.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Assume that the risk-free rate,r_RF,increases but the market risk premium,(r_M − r_RF) ,declines with the net effect being that the overall required return on the market,r_M,remains constant.Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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