Question 1

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 2

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 E)
G) A) and C)

Question 3

Assume that you hold a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20. You are in the process of buying 1,000 shares of Omega Corp at $10 a share and adding it to your portfolio. Omega has an expected return of 13.0% and a beta of 1.50. The total value of your current portfolio is $90,000. What will the expected return and beta on the portfolio be after the purchase of the Omega stock?

Accepted Answer

A)   10.64%; 1.17
B)   11.20%; 1.23
C)   11.76%; 1.29
D)   12.35%; 1.36
E)   12.97%; 1.42F) A) and B)
G) A) and C)

Question 4

Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.

Accepted Answer

A) True 
 B)False

Question 5

Stock A's stock has a beta of 1.30, and its required return is 12.00%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)

Accepted Answer

A)   8.76%
B)   8.98%
C)   9.21%
D)   9.44%
E)   9.68%F) A) and E)
G) A) and B)

Question 6

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 C)
G) B) and D)

Question 7

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

Question 8

Assume that you manage a $10.00 million mutual fund that has a beta of
1) 05 and a 9.50% required return. The risk-free rate is 4.20%. You now receive another $5.00 million, which you invest in stocks with an average beta of 0.65. What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium, then find the new portfolio beta.)

Accepted Answer

A)   8.83%
B)   9.05%
C)   9.27%
D)   9.51%
E)   9.74%F) None of the above
G) B) and E)

Question 9

The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

Accepted Answer

A) True 
 B)False

Question 10

Levine Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investment's coefficient of variation?

Accepted Answer

A)   0.67
B)   0.73
C)   0.81
D)   0.89
E)   0.98F) A) and B)
G) A) and C)

Question 11

Mike Flannery holds the following portfolio: 
 What is the portfolio's beta?

Accepted Answer

A)   1.06
B)   1.17
C)   1.29
D)   1.42
E)   1.56F) B) and D)
G) All of the above

Question 12

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) A) and B)
F) B) and C)

Exam 6: Risks and Rates of Return

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
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Levine Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investment's coefficient of variation?

Correct Answer
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Stock A's stock has a beta of 1.30, and its required return is 12.00%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)

Correct Answer
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Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.

Correct Answer
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Correct Answer
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Mike Flannery holds the following portfolio: What is the portfolio's beta?

Correct Answer
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The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

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

Correct Answer
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Exam 6: Risks and Rates of Return

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Levine Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investment's coefficient of variation?

Correct AnswerverifiedShow Answer

Stock A's stock has a beta of 1.30, and its required return is 12.00%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)

Correct AnswerverifiedShow Answer

Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Mike Flannery holds the following portfolio: What is the portfolio's beta?

Correct AnswerverifiedShow Answer

The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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