Question 1

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Accepted Answer

A)   The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.
B)   The beta of the portfolio is less than the average of the betas of the individual stocks.
C)   The beta of the portfolio is equal to the average of the betas of the individual stocks.
D)   The beta of the portfolio is larger than the average of the betas of the individual stocks.
E)   The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.F) B) and D)
G) A) and C)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   The beta of an "average stock," which is also "the market beta," can change over time, sometimes drastically.
C)   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.
D)   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.
E)   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.F) None of the above
G) B) and C)

Question 3

Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks The portfolio's beta is 1.25 Now suppose Stan decided to sell one of his stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35 What would the portfolio's new beta be?

Accepted Answer

A)   1.17
B)   1.23
C)   1.29
D)   1.36
E)   1.43F) B) and E)
G) B) and D)

Question 4

Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2 Portfolio P has 1/3 of its value invested in each stock Each stock has a standard deviation of 25%, and their returns are independent of one another, i.e., the correlation coefficients between each pair of stocks is zero Assuming the market is in equilibrium, which of the following statements is CORRECT?

Accepted Answer

A)   Portfolio P's expected return is equal to the expected return on Stock A.
B)   Portfolio P's expected return is less than the expected return on Stock B.
C)   Portfolio P's expected return is equal to the expected return on Stock B.
D)   Portfolio P's expected return is greater than the expected return on Stock C.
E)   Portfolio P's expected return is greater than the expected return on Stock B.F) None of the above
G) B) and C)

Question 5

have a portfolio P that consists of 50% Stock X and 50% Stock YStock X has a beta of 0.7 and Stock Y has a beta of 1.3 The standard deviation of each stock's returns is 20% The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zeroGiven this information, which of the following statements is CORRECT?

Accepted Answer

A)   The required return on Portfolio P is equal to the market risk premium (rM − rRF) .
B)   Portfolio P has a beta of 0.7.
C)   Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
D)   Portfolio P has the same required return as the market (rM) .
E)   Portfolio P has a standard deviation of 20%.F) A) and C)
G) None of the above

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   If a stock has a negative beta, its expected return must be negative.
C)   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.
D)   According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns.
E)   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.F) All of the above
G) A) and E)

Question 7

a portfolio of three randomly selected stocks, which of the following could NOT be true; i.e., which statement is false?

Accepted Answer

A)   The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
B)   The beta of the portfolio is lower than the lowest of the three betas.
C)   The beta of the portfolio is higher than the highest of the three betas.
D)   None of the above statements is obviously false, because they all could be true, but not necessarily at the same time.
E)   The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.F) None of the above
G) C) and D)

Question 8

if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.

Accepted Answer

A) True 
 B)False

Question 9

Calculate the required rate of return for Everest Expeditions 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) All of the above
G) A) and D)

Question 10

Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRFMeanwhile, investors are afraid of a recession, so the market risk premium, (rM - rRF) , has increased 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, but the increase would be greatest for stocks with betas of less than 1.0.
B)   Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices.
C)   The prices of all stocks would decline, but the decline would be greatest for high-beta stocks.
D)   The prices of all stocks would increase, but the increase would be greatest for high-beta stocks.
E)   The required return on all stocks would increase by the same amount.F) A) and B)
G) D) and E)

Question 11

Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3 Portfolio P has 50% invested in both A and B Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?

Accepted Answer

A)   The required return on both stocks would increase by 1%.
B)   The required return on Portfolio P would remain unchanged.
C)   The required return on Stock A would increase by more than 1%, while the return on Stock B would increase by less than 1%.
D)   The required return for Stock A would fall, but the required return for Stock B would increase.
E)   The required return on Portfolio P would increase by 1%.F) D) and E)
G) C) and D)

Question 12

slope of the SML is determined by investors' aversion to risk The greater the average investor's risk aversion, the steeper the SML.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

McLeod Incis 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 C)
G) C) and E)

Question 15

Hazel Morrison, a mutual fund manager, has a $40 million portfolio with a beta of 1.00 The risk-free rate is 4.25%, and the market risk premium is 6.00% Hazel expects to receive an additional $60 million, which she plans to invest in additional stocks After investing the additional funds, she wants the fund's required and expected return to be 13.00% What must the average beta of the new stocks be to achieve the target required rate of return?

Accepted Answer

A)   1.68
B)   1.76
C)   1.85
D)   1.94
E)   2.04F) A) and C)
G) A) and B)

Question 16

Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Accepted Answer

A) True 
 B)False

Question 17

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 18

two stocks in your portfolio, X and Y, have independent returns, so the correlation between them, rXY is zero Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%Which of the following statements best describes the characteristics of your 2-stock portfolio?

Accepted Answer

A)   Your portfolio has a standard deviation less than 30%, and its beta is greater than 1.6.
B)   Your portfolio has a beta equal to 1.6, and its expected return is 15%.
C)   Your portfolio has a beta greater than 1.6, and its expected return is greater than 15%.
D)   Your portfolio has a standard deviation greater than 30% and a beta equal to 1.6.
E)   Your portfolio has a standard deviation of 30%, and its expected return is 15%.F) B) and C)
G) D) and E)

Question 19

managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 2: Risk and Return: Part I

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

Correct Answer
verified

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

Correct Answer
verified

Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Correct Answer
verified

if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

a portfolio of three randomly selected stocks, which of the following could NOT be true; i.e., which statement is false?

Correct Answer
verified

Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRFMeanwhile, investors are afraid of a recession, so the market risk premium, (rM - rRF) , has increased Under these conditions, with other things held constant, which of the following statements is most correct?

Correct Answer
verified

Correct Answer
verified

managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

Correct Answer
verified

slope of the SML is determined by investors' aversion to risk The greater the average investor's risk aversion, the steeper the SML.

Correct Answer
verified

Correct Answer
verified

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Correct Answer
verified

McLeod Incis 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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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

Which of the following statements is CORRECT?

Correct Answer
verified

Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3 Portfolio P has 50% invested in both A and B Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?

Correct Answer
verified

Exam 2: Risk and Return: Part I

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Correct AnswerverifiedShow Answer

if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

a portfolio of three randomly selected stocks, which of the following could NOT be true; i.e., which statement is false?

Correct AnswerverifiedShow Answer

Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRFMeanwhile, investors are afraid of a recession, so the market risk premium, (rM - rRF) , has increased Under these conditions, with other things held constant, which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

Correct AnswerverifiedShow Answer

slope of the SML is determined by investors' aversion to risk The greater the average investor's risk aversion, the steeper the SML.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Correct AnswerverifiedShow Answer

McLeod Incis 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

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3 Portfolio P has 50% invested in both A and B Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?

Correct AnswerverifiedShow Answer

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