Question 1

The 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 2

DHF Company has a beta of 1.5 and is currently in equilibrium.The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%.Now the required return on an average stock increases by 30.0% (not percentage points) .Neither betas nor the risk-free rate change.What would DHF's new required return be?

Accepted Answer

A)   14.89%
B)   15.68%
C)   16.50%
D)   17.33%
E)   18.19%F) D) and E)
G) A) and C)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   If the risk-free rate rises,then the market risk premium must also rise.
B)   If a company's beta is halved,then its required return will also be halved.
C)   If a company's beta doubles,then its required return will also double.
D)   The slope of the security market line is equal to the market risk premium, (rM − rRF) .
E)   Beta is measured by the slope of the security market line.F) C) and D)
G) B) and E)

Question 4

Suppose that during the coming year,the risk free rate,rRF,is expected to remain the same,while the market risk premium (rM − rRF) ,is expected to fall.Given this forecast,which of the following statements is CORRECT?

Accepted Answer

A)   The required return on all stocks will remain unchanged.
B)   The required return will fall for all stocks,but it will fall more for stocks with higher betas.
C)   The required return for all stocks will fall by the same amount.
D)   The required return will fall for all stocks,but it will fall less for stocks with higher betas.
E)   The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.F) B) and E)
G) A) and B)

Question 5

Gardner Electric has a beta of 0.88 and an expected dividend growth rate of 4.00% per year.The T-bill rate is 4.00%,and the T-bond rate is 5.25%.The annual return on the stock market during the past 4 years was 10.25%.Investors expect the average annual future return on the market to be 12.50%.Using the SML,what is the firm's required rate of return?

Accepted Answer

A)   11.34%
B)   11.63%
C)   11.92%
D)   12.22%
E)   12.52%F) None of the above
G) B) and E)

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

The 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 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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

Question 10

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?

Accepted Answer

A)   The required returns on all stocks have fallen,but the fall has been greater for stocks with higher betas.
B)   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.
C)   Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.
D)   The required returns on all stocks have fallen by the same amount.
E)   The required returns on all stocks have fallen,but the decline has been greater for stocks with lower betas.F) A) and D)
G) A) and C)

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Charlie and Lucinda each have $50,000 invested in stock portfolios.Charlie's has a beta of 1.2,an expected return of 10.8%,and a standard deviation of 25%.Lucinda's has a beta of 0.8,an expected return of 9.2%,and a standard deviation that is also 25%.The correlation coefficient,r,between Charlie's and Lucinda's portfolios is zero.If Charlie and Lucinda marry and combine their portfolios,which of the following best describes their combined $100,000 portfolio?

Accepted Answer

A)   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%.
B)   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%.
C)   The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations,25%.
D)   The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations,25%.
E)   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%.F) None of the above
G) B) and D)

Question 13

Your friend is considering adding one additional stock to a 3-stock portfolio,to form a 4-stock portfolio.She is highly risk averse and has asked for your advice.The three stocks currently held all have b = 1.0,and they are perfectly positively correlated with the market.Potential new Stocks A and B both have expected returns of 15%,are in equilibrium,and are equally correlated with the market,with r = 0.75.However,Stock A's standard deviation of returns is 12% versus 8% for Stock B.Which stock should this investor add to his or her portfolio,or does the choice not matter?

Accepted Answer

A)   Stock A.
B)   Stock B.
C)   Neither A nor B,as neither has a return sufficient to compensate for risk.
D)   Add A,since its beta must be lower.
E)   Either A or B,i.e. ,the investor should be indifferent between the two.F) A) and B)
G) A) and C)

Question 14

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero,which is the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 15

Freedman Flowers' stock has a 50% chance of producing a 25% return,a 30% chance of producing a 10% return,and a 20% chance of producing a −28% return.What is the firm's expected rate of return?

Accepted Answer

A)   9.41%
B)   9.65%
C)   9.90%
D)   10.15%
E)   10.40%F) B) and E)
G) A) and B)

Question 16

Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80.What will the portfolio's new beta be?

Accepted Answer

A)   1.286
B)   1.255
C)   1.224
D)   1.194
E)   1.165F) A) and D)
G) A) and C)

Question 17

Portfolio AB was created by investing in a combination of Stocks A and B.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 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 Stock B but less stand-alone risk.
B)   Portfolio AB has more money invested in Stock A than in Stock B.
C)   Portfolio AB has the same amount of money invested in each of the two stocks.
D)   Portfolio AB has more money invested in Stock B than in Stock A.
E)   Stock A has more market risk than Portfolio AB.F) A) and D)
G) C) and D)

Question 18

If you randomly select stocks and add them to your portfolio,which of the following statements best describes what you should expect?

Accepted Answer

A)   Adding more such stocks will increase the portfolio's expected rate of return.
B)   Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.
C)   Adding more such stocks will have no effect on the portfolio's risk.
D)   Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk.
E)   Adding more such stocks will reduce the portfolio's unsystematic,or diversifiable,risk.F) C) and D)
G) A) and C)

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)   Portfolio diversification reduces the variability of returns on an individual stock.
B)   Risk refers to the chance that some unfavorable event will occur,and a probability distribution is completely described by a listing of the likelihood of unfavorable events.
C)   The SML relates a stock's required return to its market risk.The slope and intercept of this line cannot be controlled by the firms' managers,but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs.
D)   A stock with a beta of −1.0 has zero market risk if held in a 1-stock portfolio.
E)   When diversifiable risk has been diversified away,the inherent risk that remains is market risk,which is constant for all stocks in the market.F) A) and C)
G) B) and D)

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 6: Risk and Return

The 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

Portfolio AB was created by investing in a combination of Stocks A and B.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 has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?

Correct Answer
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Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80.What will the portfolio's new beta be?

Correct Answer
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Assume that in recent years both expected inflation and the market risk premium (r_M − r_RF) 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?

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

Correct Answer
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Correct Answer
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Correct Answer
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If you randomly select stocks and add them to your portfolio,which of the following statements best describes what you should expect?

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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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.

Correct Answer
verified

Suppose that during the coming year,the risk free rate,r_RF,is expected to remain the same,while the market risk premium (r_M − r_RF) ,is expected to fall.Given this forecast,which of the following statements is CORRECT?

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
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The 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
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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

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero,which is the risk-free rate.

Correct Answer
verified

Freedman Flowers' stock has a 50% chance of producing a 25% return,a 30% chance of producing a 10% return,and a 20% chance of producing a −28% return.What is the firm's expected rate of return?

Correct Answer
verified

Exam 6: Risk and Return

The 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

Portfolio AB was created by investing in a combination of Stocks A and B.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 has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80.What will the portfolio's new beta be?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If you randomly select stocks and add them to your portfolio,which of the following statements best describes what you should expect?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Suppose that during the coming year,the risk free rate,rRF,is expected to remain the same,while the market risk premium (rM − rRF) ,is expected to fall.Given this forecast,which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The 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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero,which is the risk-free rate.

Correct AnswerverifiedShow Answer

Freedman Flowers' stock has a 50% chance of producing a 25% return,a 30% chance of producing a 10% return,and a 20% chance of producing a −28% return.What is the firm's expected rate of return?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Assume that in recent years both expected inflation and the market risk premium (r_M − r_RF) 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?

Correct Answer
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Suppose that during the coming year,the risk free rate,r_RF,is expected to remain the same,while the market risk premium (r_M − r_RF) ,is expected to fall.Given this forecast,which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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