Question 1

If investors are risk averse and hold only one stock,we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10.However,if stocks are held in portfolios,it is possible that the required return could be higher on the low standard deviation stock.

Accepted Answer

A) True 
 B)False

Question 2

Assume an economy in which there are three securities: Stock A with rA = 10% and σA = 10%;Stock B with rB = 15% and σB = 20%;and a riskless asset with rRF = 7%.Stocks A and B are uncorrelated (rAB = 0) .Which of the following statements is most CORRECT?

Accepted Answer

A)   The expected return on the investor's portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (S
D)  of approximately 10%.
B)   The expected return on the investor's portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (S
D)  that is between 10% and 20%.
C)   The investor's risk/return indifference curve will be tangent to the CML at a point where the expected return is in the range of 7% to 10%.
D)   Since the two stocks have a zero correlation coefficient,the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%.
E)   The expected return on the investor's portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (S
D)  of approximately 20%.F) A) and B)
G) B) and C)

Question 3

If you plotted the returns of Selleck & Company against those of the market and found that the slope of your line was negative,the CAPM would indicate that the required rate of return on Selleck's stock should be less than the risk-free rate for a well-diversified investor,assuming that the observed relationship is expected to continue in the future.

Accepted Answer

A) True 
 B)False  True

Question 4

In a portfolio of three different stocks,which of the following could NOT be true?

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 less than the betas of each of the individual stocks.
C)   The beta of the portfolio is greater than the beta of one or two of the individual stocks' betas.
D)   The beta of the portfolio cannot be equal to 1.
E)   The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.F) A) and E)
G) A) and C)

Question 5

For markets to be in equilibrium (that is,for there to be no strong pressure for prices to depart from their current levels) ,

Accepted Answer

A)   The past realized rate of return must be equal to the expected rate of return;that is, .
B)   The required rate of return must equal the realized rate of return;that is,r = .
C)   All companies must pay dividends.
D)   No companies can be in danger of declaring bankruptcy.
E)   The expected rate of return must be equal to the required rate of return;that is, = r.F) A) and E)
G) B) and D)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry.
B)   The slope of the characteristic line is the stock's standard deviation.
C)   The distance of the plot points from the characteristic line is a measure of the stock's market risk.
D)   The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk.
E)   "Characteristic line" is another name for the Security Market Line.F) B) and C)
G) A) and E)

Question 7

Your mother's well-diversified portfolio has an expected return of 12.0% and a beta of 1.20.She is in the process of buying 100 shares of Safety Corp.at $10 a share and adding it to her portfolio.Safety has an expected return of 15.0% and a beta of 2.00.The total value of your current portfolio is $9,000.What will the expected return and beta on the portfolio be after the purchase of the Safety stock?
Rp bp

Accepted Answer

A)   11.69%;1.22
B)   12.30%;1.28
C)   12.92%;1.34
D)   13.56%;1.41
E)   14.24%;1.48F) A) and D)
G) C) and D)

Question 8

You hold a portfolio consisting of a $5,000 investment in each of 20 different stocks.The portfolio beta is equal to 1.12.You have decided to sell a coal mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a mineral rights company stock (b = 2.00) .What is the new beta of the portfolio?

Accepted Answer

A)   1.1139
B)   1.1700
C)   1.2311
D)   1.2927
E)   1.3573F) C) and D)
G) C) and E)

Question 9

The slope of the SML is determined by the value of beta.

Accepted Answer

A) True 
 B)False

Question 10

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)   Stock B must be a more desirable addition to a portfolio than Stock A.
B)   Stock A must be a more desirable addition to a portfolio than Stock B.
C)   The expected return on Stock A should be greater than that on Stock B.
D)   The expected return on Stock B should be greater than that on Stock A.
E)   When held in isolation,Stock A has greater risk than Stock B.F) None of the above
G) A) and E)

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

Accepted Answer

A) True 
 B)False  False

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   Richard Roll has argued that it is possible to test the CAPM to see if it is correct.
B)   Tests have shown that the risk/return relationship appears to be linear,but the slope of the relationship is greater than that predicted by the CAPM.
C)   Tests have shown that the betas of individual stocks are stable over time,but that the betas of large portfolios are much less stable.
D)   The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller.
E)   Tests have shown that the betas of individual stocks are unstable over time,but that the betas of large portfolios are reasonably stable over time.F) A) and B)
G) A) and C)

Question 14

Suppose 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) Talcott Inc.'s beta is 1.00,and (5) its realized rate of return has averaged 15.0% over the last 5 years.Calculate the required rate of return for Talcot Inc.

Accepted Answer

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

Question 15

The CAPM is a multi-period model which takes account of differences in securities' maturities,and it can be used to determine the required rate of return for any given level of systematic risk.

Accepted Answer

A) True 
 B)False

Question 16

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm are negative.

Accepted Answer

A) True 
 B)False

Question 17

Which is the best measure of risk for an asset held in isolation,and which is the best measure for an asset held in a diversified portfolio?

Accepted Answer

A)   Standard deviation;correlation coefficient.
B)   Beta;variance.
C)   Coefficient of variation;beta.
D)   Beta;beta.
E)   Variance;correlation coefficient.F) All of the above
G) D) and E) C

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are interested in ex ante (future)data.

Accepted Answer

A) True 
 B)False

Question 20

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns,and the factors are specified to be (1)market returns, (2)dividend yields,and (3)changes in inflation.

Accepted Answer

A) True 
 B)False

Exam 25: Portfolio Theory and Asset Pricing Models

Correct Answer
verified

Assume an economy in which there are three securities: Stock A with r_A = 10% and σ_A = 10%;Stock B with r_B = 15% and σ_B = 20%;and a riskless asset with r_RF = 7%.Stocks A and B are uncorrelated (r_AB = 0) .Which of the following statements is most CORRECT?

Correct Answer
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Correct Answer
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True

In a portfolio of three different stocks,which of the following could NOT be true?

Correct Answer
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For markets to be in equilibrium (that is,for there to be no strong pressure for prices to depart from their current levels) ,

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Correct Answer
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The slope of the SML is determined by the value of beta.

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

Correct Answer
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We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

Correct Answer
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False

Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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The CAPM is a multi-period model which takes account of differences in securities' maturities,and it can be used to determine the required rate of return for any given level of systematic risk.

Correct Answer
verified

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm are negative.

Correct Answer
verified

Which is the best measure of risk for an asset held in isolation,and which is the best measure for an asset held in a diversified portfolio?

Correct Answer
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C

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

Correct Answer
verified

In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are interested in ex ante (future)data.

Correct Answer
verified

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns,and the factors are specified to be (1)market returns, (2)dividend yields,and (3)changes in inflation.

Correct Answer
verified

Exam 25: Portfolio Theory and Asset Pricing Models

Correct AnswerverifiedShow Answer

Assume an economy in which there are three securities: Stock A with rA = 10% and σA = 10%;Stock B with rB = 15% and σB = 20%;and a riskless asset with rRF = 7%.Stocks A and B are uncorrelated (rAB = 0) .Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedTrue

In a portfolio of three different stocks,which of the following could NOT be true?

Correct AnswerverifiedShow Answer

For markets to be in equilibrium (that is,for there to be no strong pressure for prices to depart from their current levels) ,

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The slope of the SML is determined by the value of beta.

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

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

Correct AnswerverifiedShow Answer

We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

Correct AnswerverifiedFalse

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The CAPM is a multi-period model which takes account of differences in securities' maturities,and it can be used to determine the required rate of return for any given level of systematic risk.

Correct AnswerverifiedShow Answer

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm are negative.

Correct AnswerverifiedShow Answer

Which is the best measure of risk for an asset held in isolation,and which is the best measure for an asset held in a diversified portfolio?

Correct AnswerverifiedC

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

Correct AnswerverifiedShow Answer

In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are interested in ex ante (future)data.

Correct AnswerverifiedShow Answer

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns,and the factors are specified to be (1)market returns, (2)dividend yields,and (3)changes in inflation.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Assume an economy in which there are three securities: Stock A with r_A = 10% and σ_A = 10%;Stock B with r_B = 15% and σ_B = 20%;and a riskless asset with r_RF = 7%.Stocks A and B are uncorrelated (r_AB = 0) .Which of the following statements is most CORRECT?

Correct Answer
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True

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False

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C

Correct Answer
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