Filters
Question type
Study Flashcards

Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is CORRECT?


A) Jane's portfolio will have less diversifiable risk and also less market risk than Dick's portfolio.
B) The required return on Jane's portfolio will be lower than that on Dick's portfolio because Jane's portfolio will have less total risk.
C) Dick's portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Jane's portfolio, but the required (and expected) returns will be the same on both portfolios.
D) If the two portfolios have the same beta, their required returns will be the same, but Jane's portfolio will have less market risk than Dick's.
E) The expected return on Jane's portfolio must be lower than the expected return on Dick's portfolio because Jane is more diversified.

F) A) and B)
G) A) and E)

Correct Answer

verifed

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?


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 E)
G) A) and B)

Correct Answer

verifed

verified

According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

A) True
B) False

Correct Answer

verifed

verified

Assume that your uncle holds just one stock, East Coast Bank (ECB) , which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for West Coast Bank (WCB) . 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.)


A) 3.29%
B) 3.46%
C) 3.65%
D) 3.84%
E) 4.03%

F) C) and E)
G) D) and E)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


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) A) and E)

Correct Answer

verifed

verified

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

A) True
B) False

Correct Answer

verifed

verified

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.

A) True
B) False

Correct Answer

verifed

verified

Returns for the Dayton Company over the last 3 years are shown below. What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.)


A) 20.08%
B) 20.59%
C) 21.11%
D) 21.64%
E) 22.18%

F) A) and D)
G) A) and B)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.
B) If you were restricted to investing in publicly traded common stocks, yet you wanted to minimize the riskiness of your portfolio as measured by its beta, then according to the CAPM theory you should invest an equal amount of money in each stock in the market. That is, if there were 10,000 traded stocks in the world, the least risky possible portfolio would include some shares of each one.
C) If you formed a portfolio that consisted of all stocks with betas less than 1.0, which is about half of all stocks, the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio, and that portfolio would have less risk than a portfolio that consisted of all stocks in the market.
D) Market risk can be eliminated by forming a large portfolio, and if some Treasury bonds are held in the portfolio, the portfolio can be made to be completely riskless.
E) A portfolio that consists of all stocks in the market would have a required return that is equal to the riskless rate.

F) All of the above
G) A) and D)

Correct Answer

verifed

verified

Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

A) True
B) False

Correct Answer

verifed

verified

"Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

A) True
B) False

Correct Answer

verifed

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?


A) 1.20
B) 1.26
C) 1.32
D) 1.39
E) 1.46

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

Correct Answer

verifed

verified

Linke Motors has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%. Based on the SML, what is the firm's required return?


A) 13.51%
B) 13.86%
C) 14.21%
D) 14.58%
E) 14.95%

F) D) and E)
G) A) and E)

Correct Answer

verifed

verified

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

A) True
B) False

Correct Answer

verifed

verified

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

A) True
B) False

Correct Answer

verifed

verified

Jim Angel holds a $200,000 portfolio consisting of the following stocks: What is the portfolio's beta?


A) 0.938
B) 0.988
C) 1.037
D) 1.089
E) 1.143

F) None of the above
G) A) and B)

Correct Answer

verifed

verified

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM?


A) If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.
B) Stock Y's realized return during the coming year will be higher than Stock X's return.
C) If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount.
D) Stock Y's return has a higher standard deviation than Stock X.
E) If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y.

F) A) and E)
G) A) and B)

Correct Answer

verifed

verified

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?


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

Correct Answer

verifed

verified

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?


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

Correct Answer

verifed

verified

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?


A) The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change.
B) The expected return of your portfolio is likely to decline.
C) The diversifiable risk will remain the same, but the market risk will likely decline.
D) Both the diversifiable risk and the market risk of your portfolio are likely to decline.
E) The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.

F) B) and E)
G) B) and C)

Correct Answer

verifed

verified

Showing 41 - 60 of 147

Related Exams

Exam 1

Overview

65 Questions

Exam 2

Financial Markets

33 Questions

Exam 3

Financial Statements

129 Questions

Exam 4

Statement Analysis

127 Questions

Exam 5

Time Value of Money

164 Questions

Exam 6

Forecasting

39 Questions

Exam 7

Interest Rates

82 Questions

Exam 9

Bonds

92 Questions

Exam 10

Stocks

82 Questions

Exam 11

Cost of Capital

92 Questions

Exam 12

Capital Budgeting Mc Problems

107 Questions

Exam 13

Cash Flow and Risk

78 Questions

Exam 14

Real Options

41 Questions

Exam 15

Capital Structure

88 Questions

Exam 16

Dividends

75 Questions

Exam 17

Working Capital

127 Questions

Exam 18

Derivatives

35 Questions

Exam 19

Multinational

50 Questions

Exam 20

Hybrid Financing

60 Questions

Exam 21

Mergers

39 Questions

Show Answer