Question 1

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Accepted Answer

A) True 
 B)False

Question 2

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)   Portfolio AB has more money invested in Stock B than in Stock A.F) B) and C)
G) B) and E)

Question 3

Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)

Accepted Answer

A)   2.75%
B)   2.89%
C)   3.05%
D)   3.21%
E)   3.38%F) A) and B)
G) A) and C)

Question 4

Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation.

Accepted Answer

A) True 
 B)False

Question 5

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT?

Accepted Answer

A)   If expected inflation remains constant but the market risk premium (rM − rRF)  declines, the required return of Stock LB will decline but the required return of Stock HB will increase.
B)   If both expected inflation and the market risk premium (rM − rRF)  increase, the required return on Stock HB will increase by more than that on Stock LB.
C)   If both expected inflation and the market risk premium (rM − rRF)  increase, the required returns of both stocks will increase by the same amount.
D)   Since the market is in equilibrium, the required returns of the two stocks should be the same.
E)   If expected inflation remains constant but the market risk premium (rM − rRF)  declines, the required return of Stock HB will decline but the required return of Stock LB will increase.F) B) and C)
G) B) and D)

Question 6

A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.

Accepted Answer

A) True 
 B)False

Exam 8: Risk and Return

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Correct Answer
verified

Correct Answer
verified

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT?

Correct Answer
verified

Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation.

Correct Answer
verified

Correct Answer
verified

A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.

Correct Answer
verified

Exam 8: Risk and Return

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified