Question 1

Stock A has a beta of 0.8 and Stock B has a beta of 1.2.50% of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (rM - rRF) were to increase but the risk-free rate (rRF) remained constant,which of the following would occur?

Accepted Answer

A)   The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A.
B)   The required return would decrease by the same amount for both Stock A and Stock B.
C)   The required return would increase for Stock A but decrease for Stock B.
D)   The required return on Portfolio P would remain unchanged.
E)   The required return would increase for Stock B but decrease for Stock A.F) A) and C)
G) A) and E)

Question 2

Assume that you are the portfolio manager of the SF Fund,a $3 million hedge fund that contains the following stocks.The required rate of return on the market is 11.00% and the risk-free rate is 2.00%.What rate of return should investors expect (and require) on this fund? Do not round your intermediate calculations.  ​

Accepted Answer

A)   11.16%
B)   10.82%
C)   9.93%
D)   9.37%
E)   9.71%F) C) and D)
G) D) and E)

Question 3

Company A has a beta of 0.70,while Company B's beta is 1.45.The required return on the stock market is 11.00%,and the risk-free rate is 2.25%.What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium,then find the required returns on the stocks. ) Do not round your intermediate calculations.

Accepted Answer

A)   5.06%
B)   5.01%
C)   4.71%
D)   4.30%
E)   4.25%F) A) and B)
G) A) and E)

Question 4

Dothan Inc.'s stock has a 25% chance of producing a 16% return,a 50% chance of producing a 12% return,and a 25% chance of producing a -18% return.What is the firm's expected rate of return? Do not round your intermediate calculations.

Accepted Answer

A)   4.51%
B)   5.50%
C)   4.68%
D)   4.29%
E)   6.38%F) None of the above
G) A) and C)

Question 5

If investors are risk averse and hold only one stock,we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10.However,if stocks are held in portfolios,it is possible that the required return could be higher on the stock with the lower standard deviation.

Accepted Answer

A) True 
 B)False

Question 6

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 7

When adding a randomly chosen new stock to an existing portfolio,the higher (or more positive)the degree of correlation between the new stock and stocks already in the portfolio,the less the additional stock will reduce the portfolio's risk.

Accepted Answer

A) True 
 B)False

Question 8

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  True

Question 9

Stock A has a beta of 0.8,Stock B has a beta of 1.0,and Stock C has a beta of 1.2.Portfolio P has equal amounts invested in each of the three stocks.Each of the stocks has a standard deviation of 25%.The returns on the three stocks are independent of one another (i.e. ,the correlation coefficients all equal zero) .Assume that there is an increase in the market risk premium,but the risk-free rate remains unchanged.Which of the following statements is CORRECT?

Accepted Answer

A)   The required return of all stocks will remain unchanged since there was no change in their betas.
B)   The required return on Stock A will increase by less than the increase in the market risk premium,while the required return on Stock C will increase by more than the increase in the market risk premium.
C)   The required return on the average stock will remain unchanged,but the returns of riskier stocks (such as Stock 
C)  will increase while the returns of safer stocks (such as Stock 
A)  will decrease.
D)   The required returns on all three stocks will increase by the amount of the increase in the market risk premium.
E)   The required return on the average stock will remain unchanged,but the returns on riskier stocks (such as Stock 
C)  will decrease while the returns on safer stocks (such as Stock 
A)  will increase.F) A) and D)
G) A) and C)

Question 10

A mutual fund manager has a $40 million portfolio with a beta of 1.00.The risk-free rate is 4.25%,and the market risk premium is 6.00%.The manager expects to receive an additional $29.50 million which she plans to invest in additional stocks.After investing the additional funds,she wants the fund's required and expected return to be 13.00%.What must the average beta of the new stocks be to achieve the target required rate of return? Do not round your intermediate calculations.

Accepted Answer

A)   2.08
B)   2.18
C)   2.60
D)   1.66
E)   1.87F) A) and D)
G) B) and D)

Question 11

Because of differences in the expected returns on different investments,the standard deviation is not always an adequate measure of risk.However,the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk.

Accepted Answer

A) True 
 B)False

Question 12

Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.You have a portfolio that consists of 50% A and 50% B.Which of the following statements is CORRECT?

Accepted Answer

A)   The portfolio's beta is less than 1.2.
B)   The portfolio's expected return is 15%.
C)   The portfolio's standard deviation is greater than 20%.
D)   The portfolio's beta is greater than 1.2.
E)   The portfolio's standard deviation is 20%.F) B) and D)
G) A) and B)

Question 13

The risk-free rate is 6%;Stock A has a beta of 1.0;Stock B has a beta of 2.0;and the market risk premium,rM - rRF,is positive.Which of the following statements is CORRECT?

Accepted Answer

A)   If the risk-free rate increases but the market risk premium stays unchanged,Stock B's required return will increase by more than Stock A's.
B)   Stock B's required rate of return is twice that of Stock A.
C)   If Stock A's required return is 11%,then the market risk premium is 5%.
D)   If Stock B's required return is 11%,then the market risk premium is 5%.
E)   If the risk-free rate remains constant but the market risk premium increases,Stock A's required return will increase by more than Stock B's.F) B) and C)
G) None of the above C

Question 14

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?

Accepted Answer

A)   An index fund with beta = 1.0 should have a required return of 11%.
B)   If a stock has a negative beta,its required return must also be negative.
C)   An index fund with beta = 1.0 should have a required return less than 11%.
D)   If a stock's beta doubles,its required return must also double.
E)   An index fund with beta = 1.0 should have a required return greater than 11%.F) B) and E)
G) All of the above

Question 15

Assume that to cool off the economy and decrease expectations for inflation,the Federal Reserve tightened the money supply,causing an increase in the risk-free rate,rRF.Investors also became concerned that the Fed's actions would lead to a recession,and that led to an increase in the market risk premium, (rM - rRF) .Under these conditions,with other things held constant,which of the following statements is most correct?

Accepted Answer

A)   The required return on all stocks would increase by the same amount.
B)   The required return on all stocks would increase,but the increase would be greatest for stocks with betas of less than 1.0.
C)   Stocks' required returns would change,but so would expected returns,and the result would be no change in stocks' prices.
D)   The prices of all stocks would decline,but the decline would be greatest for high-beta stocks.
E)   The prices of all stocks would increase,but the increase would be greatest for high-beta stocks.F) All of the above
G) A) and D) D

Question 16

Consider the following information and then calculate the required rate of return for the Global Investment Fund,which holds 4 stocks.The market's required rate of return is 17.50%,the risk-free rate is 3.00%,and the Fund's assets are as follows (Do not round your intermediate calculations. ) :  ​

Accepted Answer

A)   14.06%
B)   15.46%
C)   14.76%
D)   15.18%
E)   13.35%F) All of the above
G) A) and B)

Question 17

Portfolio A has but one security,while Portfolio B has 100 securities.Because of diversification effects,we would expect Portfolio B to have the lower risk.However,it is possible for Portfolio A to be less risky.

Accepted Answer

A) True 
 B)False

Question 18

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 D)
G) B) and E)

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)   A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock.
B)   If an investor buys enough stocks,he or she can,through diversification,eliminate all of the diversifiable risk inherent in owning stocks.Therefore,if a portfolio contained all publicly traded stocks,it would be essentially riskless.
C)   The required return on a firm's common stock is,in theory,determined solely by its market risk.If the market risk is known,and if that risk is expected to remain constant,then no other information is required to specify the firm's required return.
D)   Portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio.
E)   A security's beta measures its non-diversifiable,or market,risk relative to that of an average stock.F) A) and B)
G) B) and D)

Question 20

Mulherin's stock has a beta of 1.23,its required return is 11.75%,and the risk-free rate is 2.30%.What is the required rate of return on the market? (Hint: First find the market risk premium. ) Do not round your intermediate calculations.

Accepted Answer

A)   7.69%
B)   8.19%
C)   9.98%
D)   12.38%
E)   10.58%F) B) and E)
G) A) and B)

Exam 8: Risk and Rates of Return

Stock A has a beta of 0.8 and Stock B has a beta of 1.2.50% of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (r_M - r_RF) were to increase but the risk-free rate (r_RF) remained constant,which of the following would occur?

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Dothan Inc.'s stock has a 25% chance of producing a 16% return,a 50% chance of producing a 12% return,and a 25% chance of producing a -18% return.What is the firm's expected rate of return? Do not round your intermediate calculations.

Correct Answer
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Correct Answer
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When adding a randomly chosen new stock to an existing portfolio,the higher (or more positive)the degree of correlation between the new stock and stocks already in the portfolio,the less the additional stock will reduce the portfolio's risk.

Correct Answer
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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
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True

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Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.You have a portfolio that consists of 50% A and 50% B.Which of the following statements is CORRECT?

Correct Answer
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The risk-free rate is 6%;Stock A has a beta of 1.0;Stock B has a beta of 2.0;and the market risk premium,r_M - r_RF,is positive.Which of the following statements is CORRECT?

Correct Answer
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C

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?

Correct Answer
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D

Consider the following information and then calculate the required rate of return for the Global Investment Fund,which holds 4 stocks.The market's required rate of return is 17.50%,the risk-free rate is 3.00%,and the Fund's assets are as follows (Do not round your intermediate calculations. ) :

Correct Answer
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Portfolio A has but one security,while Portfolio B has 100 securities.Because of diversification effects,we would expect Portfolio B to have the lower risk.However,it is possible for Portfolio A to be less risky.

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
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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 2.30%.What is the required rate of return on the market? (Hint: First find the market risk premium. ) Do not round your intermediate calculations.

Correct Answer
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Exam 8: Risk and Rates of Return

Stock A has a beta of 0.8 and Stock B has a beta of 1.2.50% of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (rM - rRF) were to increase but the risk-free rate (rRF) remained constant,which of the following would occur?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Dothan Inc.'s stock has a 25% chance of producing a 16% return,a 50% chance of producing a 12% return,and a 25% chance of producing a -18% return.What is the firm's expected rate of return? Do not round your intermediate calculations.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When adding a randomly chosen new stock to an existing portfolio,the higher (or more positive)the degree of correlation between the new stock and stocks already in the portfolio,the less the additional stock will reduce the portfolio's risk.

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 AnswerverifiedTrue

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.You have a portfolio that consists of 50% A and 50% B.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The risk-free rate is 6%;Stock A has a beta of 1.0;Stock B has a beta of 2.0;and the market risk premium,rM - rRF,is positive.Which of the following statements is CORRECT?

Correct AnswerverifiedC

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedD

Consider the following information and then calculate the required rate of return for the Global Investment Fund,which holds 4 stocks.The market's required rate of return is 17.50%,the risk-free rate is 3.00%,and the Fund's assets are as follows (Do not round your intermediate calculations. ) : ​

Correct AnswerverifiedShow Answer

Portfolio A has but one security,while Portfolio B has 100 securities.Because of diversification effects,we would expect Portfolio B to have the lower risk.However,it is possible for Portfolio A to be less risky.

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

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 2.30%.What is the required rate of return on the market? (Hint: First find the market risk premium. ) Do not round your intermediate calculations.

Correct AnswerverifiedShow Answer

Stock A has a beta of 0.8 and Stock B has a beta of 1.2.50% of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (r_M - r_RF) were to increase but the risk-free rate (r_RF) remained constant,which of the following would occur?

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True

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The risk-free rate is 6%;Stock A has a beta of 1.0;Stock B has a beta of 2.0;and the market risk premium,r_M - r_RF,is positive.Which of the following statements is CORRECT?

Correct Answer
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C

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D

Consider the following information and then calculate the required rate of return for the Global Investment Fund,which holds 4 stocks.The market's required rate of return is 17.50%,the risk-free rate is 3.00%,and the Fund's assets are as follows (Do not round your intermediate calculations. ) :

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