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.
G) B) and C)
Correct Answer
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Correct Answer
verified
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.
G) All of the above
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Correct Answer
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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.
G) C) and D)
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Correct Answer
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A) 2.75%
B) 2.89%
C) 3.05%
D) 3.21%
E) 3.38%
G) B) and C)
Correct Answer
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Correct Answer
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A) Portfolio AB's coefficient of variation is greater than 2.0.
B) Portfolio AB's required return is greater than the required return on Stock A.
C) Portfolio ABC's expected return is 10.66667%.
D) Portfolio ABC has a standard deviation of 20%.
E) Portfolio AB has a standard deviation of 20%.
G) A) and C)
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Correct Answer
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A) 10.29%
B) 10.83%
C) 11.40%
D) 12.00%
E) 12.60%
G) None of the above
Correct Answer
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Correct Answer
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