Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected.
B)   Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic)  risk.
C)   A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0.
D)   A large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8.
E)   If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.F) A) and B)
G) B) and E)

Question 2

Assume that in recent years both expected inflation and the market risk premium (rM − rRF)  have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?

Accepted Answer

A)   The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas.
B)   The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas.
C)   The average required return on the market, rM , has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0.
D)   Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.
E)   The required returns on all stocks have fallen by the same amount.F) A) and C)
G) B) and E)

Question 3

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Accepted Answer

A) True 
 B)False

Question 4

Inflation, recession, and high interest rates are economic events that are best characterized as being

Accepted Answer

A)   systematic risk factors that can be diversified away.
B)   company-specific risk factors that can be diversified away.
C)   among the factors that are responsible for market risk.
D)   risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.
E)   irrelevant except to governmental authorities like the Federal Reserve.F) B) and D)
G) A) and B)

Question 5

Stocks A and B each have an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of +0.6. Portfolio P has 50% in Stock A and 50% in Stock B. Which of the following statements is CORRECT?

Accepted Answer

A)   Portfolio P has a beta that is greater than 1.2.
B)   Portfolio P has a standard deviation that is greater than 25%.
C)   Portfolio P has an expected return that is less than 12%.
D)   Portfolio P has a standard deviation that is less than 25%.
E)   Portfolio P has a beta that is less than 1.2.F) A) and E)
G) A) and D)

Question 6

Porter Inc's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

Accepted Answer

A)   5.80%
B)   5.95%
C)   6.09%
D)   6.25%
E)   6.40%F) B) and C)
G) A) and C)

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   The slope of the SML is determined by the value of beta.
B)   The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers.
C)   Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression 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 investors expect the observed relationship to continue on into the future.
D)   If investors become less risk averse, the slope of the Security Market Line will increase.
E)   If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock.F) B) and E)
G) None of the above

Question 8

Cheng Inc. is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation?

Accepted Answer

A)   1.20
B)   1.26
C)   1.32
D)   1.39
E)   1.46F) B) and C)
G) C) and D)

Question 9

For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

Accepted Answer

A)   The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.
B)   The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.
C)   The beta of the portfolio is less than the weighted average of the betas of the individual stocks.
D)   The beta of the portfolio is equal to the weighted average of the betas of the individual stocks.
E)   The beta of the portfolio is larger than the weighted average of the betas of the individual stocks.F) B) and E)
G) B) and C)

Question 10

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) C) and D)
G) All of the above

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0. Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds.
B)   If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.
C)   An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk.
D)   There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML.
E)   Assume that the required rate of return on the market, rM , is given and fixed at 10%. If the yield curve were upward sloping, then the Security Market Line (SML)  would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.F) A) and C)
G) B) and E)

Question 12

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

During the coming year, the market risk premium (rM − rRF) , is expected to fall, while the risk-free rate, rRF, is expected to remain the same. Given this forecast, which of the following statements is CORRECT?

Accepted Answer

A)   The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.
B)   The required return on all stocks will remain unchanged.
C)   The required return will fall for all stocks, but it will fall more for stocks with higher betas.
D)   The required return for all stocks will fall by the same amount.
E)   The required return will fall for all stocks, but it will fall less for stocks with higher betas.F) B) and C)
G) B) and D)

Question 15

The CAPM is built on historic conditions, although in most cases we use expected future data in applying it. Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility. This is one of the strengths of the CAPM.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)   If a company with a high beta merges with a low-beta company, the best estimate of the new merged company's beta is 1.0.
B)   Logically, it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks, especially if the projects are closely associated with research and development activities.
C)   The beta of an "average stock," which is also "the market beta," can change over time, sometimes drastically.
D)   If a newly issued stock does not have a past history that can be used for calculating beta, then we should always estimate that its beta will turn out to be 1.0. This is especially true if the company finances with more debt than the average firm.
E)   During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects, the calculated historical beta may be drastically different from the beta that will exist in the future.F) B) and C)
G) B) and D)

Question 17

Other things held constant, if the expected inflation rate decreases and investors also become more risk averse, the Security Market Line would be affected as follows:

Accepted Answer

A)   The y-axis intercept would decline, and the slope would increase.
B)   The x-axis intercept would decline, and the slope would increase.
C)   The y-axis intercept would increase, and the slope would decline.
D)   The SML would be affected only if betas changed.
E)   Both the y-axis intercept and the slope would increase, leading to higher required returns.F) A) and B)
G) D) and E)

Question 18

Jill Angel holds a $200,000 portfolio consisting of the following stocks. The portfolio's beta is 0.875.   Stock ‾ Investment ‾ Beta ‾ A $50,0000.50 B 50,0000.80 C 50,0001.00 D 50,000‾1.20 Total $200,000‾\begin{array} { l r r } \underline { 	ext { Stock }} & \underline { 	ext { Investment } } & \underline { 	ext { Beta } } \	ext { A } & \$ 50,000 & 0.50 \	ext { B } & 50,000 & 0.80 \	ext { C } & 50,000 & 1.00 \	ext { D } & \underline { 50,000 } & 1.20 \	ext { Total } & \underline { \$ 200,000 } &\end{array} Stock ​ A  B  C  D  Total ​ Investment ​$50,00050,00050,00050,000​$200,000​​ Beta ​0.500.801.001.20​  If Jill replaces Stock A with another stock, E, which has a beta of 1.50, what will the portfolio's new beta be?

Accepted Answer

A)   1.07
B)   1.13
C)   1.18
D)   1.24
E)   1.30 F) A) and E)
G) A) and D)

Question 19

Stock A has a beta of 1.2 and a standard deviation of 25%. Stock B has a beta of 1.4 and a standard deviation of 20%. Portfolio AB was created by investing in a combination of Stocks A and B. Portfolio AB has a beta of 1.25 and a standard deviation of 18%. Which of the following statements is CORRECT?

Accepted Answer

A)   Stock A has more market risk than Portfolio AB.
B)   Stock A has more market risk than Stock B but less stand-alone risk.
C)   Portfolio AB has more money invested in Stock A than in Stock B.
D)   Portfolio AB has the same amount of money invested in each of the two stocks.
E)   Portfolio AB has more money invested in Stock B than in Stock A.F) A) and E)
G) C) and E)

Question 20

Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders.

Accepted Answer

A) True 
 B)False

Exam 8: Risk and Rates of Return

During the coming year, the market risk premium (rM − rRF) , is expected to fall, while the risk-free rate, rRF, is expected to remain the same. Given this forecast, which of the following statements is CORRECT?

Correct Answer
verified

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

The CAPM is built on historic conditions, although in most cases we use expected future data in applying it. Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility. This is one of the strengths of the CAPM.

Correct Answer
verified

Stocks A and B each have an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of +0.6. Portfolio P has 50% in Stock A and 50% in Stock B. Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Inflation, recession, and high interest rates are economic events that are best characterized as being

Correct Answer
verified

Other things held constant, if the expected inflation rate decreases and investors also become more risk averse, the Security Market Line would be affected as follows:

Correct Answer
verified

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Cheng Inc. is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation?

Correct Answer
verified

Correct Answer
verified

Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders.

Correct Answer
verified

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Correct Answer
verified

Porter Inc's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

Correct Answer
verified

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

Correct Answer
verified

For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

Correct Answer
verified

Exam 8: Risk and Rates of Return

During the coming year, the market risk premium (rM − rRF) , is expected to fall, while the risk-free rate, rRF, is expected to remain the same. Given this forecast, 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

The CAPM is built on historic conditions, although in most cases we use expected future data in applying it. Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility. This is one of the strengths of the CAPM.

Correct AnswerverifiedShow Answer

Stocks A and B each have an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of +0.6. Portfolio P has 50% in Stock A and 50% in Stock B. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Inflation, recession, and high interest rates are economic events that are best characterized as being

Correct AnswerverifiedShow Answer

Other things held constant, if the expected inflation rate decreases and investors also become more risk averse, the Security Market Line would be affected as follows:

Correct AnswerverifiedShow Answer

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Cheng Inc. is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%. What is the project's coefficient of variation?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders.

Correct AnswerverifiedShow Answer

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Correct AnswerverifiedShow Answer

Porter Inc's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

Correct AnswerverifiedShow Answer

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