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.
G) C) and D)
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A) 11.49%
B) 13.67%
C) 9.88%
D) 10.68%
E) 9.53%
G) A) and D)
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A) 9.35%
B) 10.50%
C) 10.40%
D) 9.14%
E) 11.76%
G) B) and D)
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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.
G) B) and C)
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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%.
G) C) and D)
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A) If the returns on two stocks are perfectly positively correlated and these stocks have identical standard deviations,an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.
B) A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5,assuming that the stock's beta was correctly calculated and is stable.
C) If a stock has a negative beta,its expected return must be negative.
D) A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5.
E) According to the CAPM,stocks with higher standard deviations of returns must also have higher expected returns.
G) All of the above
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B) False
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A) The slope of the SML is determined by the value of beta.
B) The SML shows the relationship between companies' required returns and their diversifiable risks.The slope and intercept of this line cannot be influenced by a firm's managers,but the position of the company on the line can be influenced by its managers.
C) Suppose you plotted the returns of a given stock against those of the market,and you found that the slope of the regression line was negative.The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well diversified investor,assuming investors expect the observed relationship to continue on into the future.
D) If investors become less risk averse,the slope of the Security Market Line will increase.
E) If a company increases its use of debt,this is likely to cause the slope of its SML to increase,indicating a higher required return on the stock.
G) A) and E)
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B) False
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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%.
G) All of the above
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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.
G) A) and C)
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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.
G) C) and E)
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A) 2.03%
B) 2.13%
C) 1.66%
D) 1.64%
E) 1.52%
G) B) and D)
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A) The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.
B) The required rate of return will decline for stocks whose betas are less than 1.0.
C) The required rate of return on the market,rM,will not change as a result of these changes.
D) The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk premium.
E) The required rate of return on a riskless bond will decline.
G) D) and E)
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A) The expected rate of return must be equal to the required rate of return;that is,= .
B) The past realized rate of return must be equal to the expected future rate of return;that is,= .
C) The required rate of return must equal the past realized rate of return;that is,= .
D) All three of the above statements must hold for equilibrium to exist;that is = = .
E) None of the above statements is correct.
G) A) and D)
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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.
G) All of the above
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A) Portfolio P has a standard deviation of 25% and a beta of 1.0.
B) Based on the information we are given,and assuming those are the views of the marginal investor,it is apparent that the two stocks are in equilibrium.
C) Portfolio P has more market risk than Stock A but less market risk than B.
D) Stock A should have a higher expected return than Stock B as viewed by the marginal investor.
E) Portfolio P has a coefficient of variation equal to 2.5.
G) None of the above
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A) 13.42%
B) 15.79%
C) 18.32%
D) 16.26%
E) 15.63%
G) A) and B)
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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.
G) B) and D)
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A) 1.17
B) 0.91
C) 1.27
D) 1.32
E) 1.09
G) B) and E)
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