Question 1

Food's stock has a beta of 1.4, while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM − rRF) , equals 4%.Which of the following statements is CORRECT?

Accepted Answer

A)  If the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for Nile since it has a higher beta.
B)  If the market risk premium increases but the risk-free rate remains unchanged, Nile's required return will increase because it has a beta greater than 1.0 but Elba's required return will decline because it has a beta less than 1.0.
C)  Since Nile's beta is twice that of Elba's, its required rate of return will also be twice that of Elba's.
D)  If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.
E)  If the market risk premium decreases but the risk-free rate remains unchanged, Nile's required return will decrease because it has a beta greater than 1.0 and Elba's will also decrease, but by more than Nile's because it has a beta less than 1.0.F) B) and D)
G) A) and B)

Question 2

highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio.The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market.Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75.However, Stock A's standard deviation of returns is 12% versus 8% for Stock B.Which stock should this investor add to his or her portfolio, or does the choice not matter?

Accepted Answer

A)  Either A or B, i.e., the investor should be indifferent between the two.
B)  Stock A.
C)  Stock B.
D)  Neither A nor B, as neither has a return sufficient to compensate for risk.
E)  Add A, since its beta must be lower.F) A) and B)
G) B) and C)

Question 3

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

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

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)  All of the statements above are true.F) A) and C)
G) A) and D)

Question 6

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 5.00%.What rate of return should investors expect (and require)  on this fund?

Accepted Answer

A)  10.56%
B)  10.83%
C)  11.11%
D)  11.38%
E)  11.67%F) B) and D)
G) D) and E)

Question 7

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) B) and C)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks.
B)  The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.
C)  It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock.
D)  Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount.
E)  An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well diversified portfolio of stocks.F) A) and B)
G) B) and E)

Question 9

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) A) and B)

Question 10

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, 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) A) and D)
G) B) and E)

Question 11

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true about these securities? (Assume market equilibrium.)

Accepted Answer

A)  When held in isolation, Stock A has more risk than Stock B.
B)  Stock B must be a more desirable addition to a portfolio than A.
C)  Stock A must be a more desirable addition to a portfolio than B.
D)  The expected return on Stock A should be greater than that on B.
E)  The expected return on Stock B should be greater than that on A.F) C) and D)
G) A) and D)

Question 12

Dukes has $100,000 invested in a 2-stock portfolio.$35,000 is invested in Stock X and the remainder is invested in Stock Y.X's beta is 1.50 and Y's beta is 0.70.What is the portfolio's beta?

Accepted Answer

A)  0.65
B)  0.72
C)  0.80
D)  0.89
E)  0.98F) A) and B)
G) B) and C)

Question 13

Calculate the required rate of return for Climax Inc., assuming that (1)  investors expect a 4.0% rate of inflation in the future, (2)  the real risk-free rate is 3.0%, (3)  the market risk premium is 5.0%, (4)  the firm has a beta of 1.00, and (5)  its realized rate of return has averaged 15.0% over the last 5 years.

Accepted Answer

A)  10.29%
B)  10.83%
C)  11.40%
D)  12.00%
E)  12.60%F) B) and E)
G) D) and E)

Question 14

Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

Accepted Answer

A)  Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.
B)  Adding more such stocks will increase the portfolio's expected rate of return.
C)  Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.
D)  Adding more such stocks will have no effect on the portfolio's risk.
E)  Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk.F) B) and E)
G) C) and E)

Question 15

portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Accepted Answer

A) True 
 B)False

Question 16

Scheuer Enterprises has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%.What is Scheuer's required rate of return?

Accepted Answer

A)  9.43%
B)  9.67%
C)  9.92%
D)  10.17%
E)  10.42%F) A) and C)
G) B) and E)

Question 17

would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.

Accepted Answer

A) True 
 B)False

Question 18

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

Question 19

an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 6: Risk and Return

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
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

would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Food's stock has a beta of 1.4, while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM − rRF) , equals 4%.Which of the following statements is CORRECT?

Correct Answer
verified

an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Scheuer Enterprises has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%.What is Scheuer's required rate of return?

Correct Answer
verified

portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Correct Answer
verified

Correct Answer
verified

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 5.00%.What rate of return should investors expect (and require) on this fund?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Dukes has $100,000 invested in a 2-stock portfolio.$35,000 is invested in Stock X and the remainder is invested in Stock Y.X's beta is 1.50 and Y's beta is 0.70.What is the portfolio's beta?

Correct Answer
verified

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 Answer
verified

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true about these securities? (Assume market equilibrium.)

Correct Answer
verified

Correct Answer
verified

Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

Correct Answer
verified

Exam 6: Risk and Return

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

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

would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.

Correct AnswerverifiedShow Answer

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

Food's stock has a beta of 1.4, while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM − rRF) , equals 4%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Scheuer Enterprises has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%.What is Scheuer's required rate of return?

Correct AnswerverifiedShow Answer

portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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 5.00%.What rate of return should investors expect (and require) on this fund?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Dukes has $100,000 invested in a 2-stock portfolio.$35,000 is invested in Stock X and the remainder is invested in Stock Y.X's beta is 1.50 and Y's beta is 0.70.What is the portfolio's beta?

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 (rM − rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

Correct AnswerverifiedShow Answer

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true about these securities? (Assume market equilibrium.)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified