Question 1

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) C) and E)
G) A) and E)

Question 2

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 low standard deviation.

Accepted Answer

A) True 
 B)False  True

Question 3

In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data.

Accepted Answer

A) True 
 B)False  True

Question 4

Assume that your uncle holds just one stock, East Coast Bank Both banks have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 60% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.)

Accepted Answer

A)   3.29%
B)   3.46%
C)   3.65%
D)   3.84%
E)   4.03%F) None of the above
G) B) and C)

Question 5

The risk-free rate is 6% and the market risk premium is 5%. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is CORRECT?

Accepted Answer

A)   If the stock market is efficient, your portfolio's expected return should equal the expected return on the market, which is 11%.
B)   The required return on the market is 10%.
C)   The portfolio's required return is less than 11%.
D)   If the risk-free rate remains unchanged but the market risk premium increases by 2%, your portfolio's required return will increase by more than 2%.
E)   If the market risk premium remains unchanged but expected inflation increases by 2%, your portfolio's required return will increase by more than 2%.F) C) and D)
G) A) and C)

Question 6

In a portfolio of three randomly selected stocks, which of the following could NOT be true, i.e., which statement always is false?

Accepted Answer

A)   The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.
B)   The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
C)   The beta of the portfolio is lower than the lowest of the three betas.
D)   The beta of the portfolio is lower than the highest of the three betas.
E)   None of the above statements is obviously false, because they all could be true, but not necessarily at the same time.F) B) and D)
G) C) and D)

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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) None of the above
G) A) and E)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.
B)   If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio.
C)   The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future.
D)   The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.
E)   It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free)  rate of return, rRF.F) A) and B)
G) B) and E)

Question 10

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) B) and C)
G) A) and C)

Question 11

Choudhary Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

Accepted Answer

A)   0.2839
B)   0.3069
C)   0.3299
D)   0.3547
E)   0.3813F) C) and E)
G) B) and D)

Question 12

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 re-balance 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) A) and C)
G) None of the above

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   If a stock has a beta of to 1.0, its required rate of return will be unaffected by changes in the market risk premium.
B)   The slope of the Security Market Line is beta.
C)   Any stock with a negative beta must in theory have a negative required rate of return, provided rRF is positive.
D)   If a stock's beta doubles, its required rate of return must also double.
E)   If a stock's returns are negatively correlated with returns on most other stocks, the stock's beta will be negative.F) None of the above
G) C) and D)

Question 14

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) C) and E)
G) A) and B) D

Question 15

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 $60 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?

Accepted Answer

A)   1.68
B)   1.76
C)   1.85
D)   1.94
E)   2.04F) A) and E)
G) B) and D)

Question 16

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 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) C) and D)
G) A) and C)

Question 17

Stock A has an expected return of 10% and a standard deviation of 20%. Stock B has an expected return of 13% and a standard deviation of 30%. The risk-free rate is 5% and the market risk premium, rM − rRF, is 6%. Assume that the market is in equilibrium. Portfolio AB has 50% invested in Stock A and 50% invested in Stock B. The returns of Stock A and Stock B are independent of one another, i.e., the correlation coefficient between them is zero. Which of the following statements is CORRECT?

Accepted Answer

A)   Stock A's beta is 0.8333.
B)   Since the two stocks have zero correlation, Portfolio AB is riskless.
C)   Stock B's beta is 1.0000.
D)   Portfolio AB's required return is 11%.
E)   Portfolio AB's standard deviation is 25%.F) B) and D)
G) All of the above

Question 18

The CAPM is a multi-period model that takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

Accepted Answer

A) True 
 B)False

Question 19

The distributions of rates of return for Companies AA and BB are given below:We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.

Accepted Answer

A) True 
 B)False

Question 20

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 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

Accepted Answer

A)   9.58%
B)   10.09%
C)   10.62%
D)   11.18%
E)   11.77%F) B) and C)
G) B) and E)

Exam 6: Risk, Return, and the Capital Asset Pricing Model

Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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True

In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data.

Correct Answer
verified
True

Correct Answer
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The risk-free rate is 6% and the market risk premium is 5%. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is CORRECT?

Correct Answer
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In a portfolio of three randomly selected stocks, which of the following could NOT be true, i.e., which statement always is false?

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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Which of the following statements is CORRECT?

Correct Answer
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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

Choudhary Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
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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
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D

Correct Answer
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Correct Answer
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Correct Answer
verified

The CAPM is a multi-period model that takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

Correct Answer
verified

The distributions of rates of return for Companies AA and BB are given below:We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.

Correct Answer
verified

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 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

Correct Answer
verified

Exam 6: Risk, Return, and the Capital Asset Pricing Model

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedTrue

In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data.

Correct AnswerverifiedTrue

Correct AnswerverifiedShow Answer

The risk-free rate is 6% and the market risk premium is 5%. Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

In a portfolio of three randomly selected stocks, which of the following could NOT be true, i.e., which statement always is false?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Choudhary Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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 AnswerverifiedD

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The CAPM is a multi-period model that takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

Correct AnswerverifiedShow Answer

The distributions of rates of return for Companies AA and BB are given below:We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.

Correct AnswerverifiedShow Answer

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 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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True

Correct Answer
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True

Correct Answer
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D

Correct Answer
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