Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?

Accepted Answer

A)   An index fund with beta = 1.0 should have a required return of 11%.
B)   If a stock has a negative beta,its required return must also be negative.
C)   An index fund with beta = 1.0 should have a required return less than 11%.
D)   If a stock's beta doubles,its required return must also double.
E)   An index fund with beta = 1.0 should have a required return greater than 11%.F) A) and C)
G) All of the above

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   If you add enough randomly selected stocks to a portfolio,you can completely eliminate all of the market risk from the portfolio.
B)   If you were restricted to investing in publicly traded common stocks,yet you wanted to minimize the riskiness of your portfolio as measured by its beta,then according to the CAPM theory you should invest an equal amount of money in each stock in the market.That is,if there were 10,000 traded stocks in the world,the least risky possible portfolio would include some shares of each one.
C)   If you formed a portfolio that consisted of all stocks with betas less than 1.0,which is about half of all stocks,the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio,and that portfolio would have less risk than a portfolio that consisted of all stocks in the market.
D)   Market risk can be eliminated by forming a large portfolio,and if some Treasury bonds are held in the portfolio,the portfolio can be made to be completely riskless.
E)   A portfolio that consists of all stocks in the market would have a required return that is equal to the riskless rate.F) A) and E)
G) B) and C)

Question 4

In 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 less than the riskiness of each of the stocks if they were held in isolation.
B)   The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
C)   The beta of the portfolio is lower than the lowest of the three betas.
D)   The beta of the portfolio is higher than the beta of one or two of the stocks in the portfolio.
E)   The beta of the portfolio is calculated as a weighted average of the individual stocks' betas.F) B) and D)
G) All of the above

Question 5

Diversification will normally reduce the riskiness of a portfolio of stocks.

Accepted Answer

A) True 
 B)False

Question 6

A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Accepted Answer

A) True 
 B)False

Question 7

An individual stock's diversifiable risk,which is measured by its beta,can be lowered by adding more stocks to the portfolio in which the stock is held.

Accepted Answer

A) True 
 B)False

Question 8

You observe the following information regarding Companies X and Y:
​
-Company X has a higher expected return than Company Y.
-Company X has a lower standard deviation of returns than Company Y.
-Company X has a higher beta than Company Y.
​
Given this information,which of the following statements is CORRECT?

Accepted Answer

A)   Company X has more diversifiable risk than Company Y.
B)   Company X has a lower coefficient of variation than Company Y.
C)   Company X has less market risk than Company Y.
D)   Company X's returns will be negative when Y's returns are positive.
E)   Company X's stock is a better buy than Company Y's stock.F) B) and D)
G) B) and C)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   The slope of the security market line is equal to the market risk premium.
B)   Lower beta stocks have higher required returns.
C)   A stock's beta indicates its diversifiable risk.
D)   Diversifiable risk cannot be completely diversified away.
E)   Two securities with the same stand-alone risk must have the same betas.F) C) and E)
G) C) and D)

Question 10

Tom O'Brien has a 2-stock portfolio with a total value of $100,000.$47,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42.What is his portfolio's beta? Do not round your intermediate calculations.Round your final answer to 2 decimal places.

Accepted Answer

A)   1.04
B)   1.10
C)   1.09
D)   1.06
E)   1.05F) A) and D)
G) B) and E)

Question 11

Assume that to cool off the economy and decrease expectations for inflation,the Federal Reserve tightened the money supply,causing an increase in the risk-free rate,rRF.Investors also became concerned that the Fed's actions would lead to a recession,and that led to an increase in the market risk premium, (rM - rRF) .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 by the same amount.
B)   The required return on all stocks would increase,but the increase would be greatest for stocks with betas of less than 1.0.
C)   Stocks' required returns would change,but so would expected returns,and the result would be no change in stocks' prices.
D)   The prices of all stocks would decline,but the decline would be greatest for high-beta stocks.
E)   The prices of all stocks would increase,but the increase would be greatest for high-beta stocks.F) A) and B)
G) A) and C)

Question 12

Stock A has an expected return of 10% and a standard deviation of 20%.Stock B has an expected return of 13% and a standard deviation of 30%.The risk-free rate is 5% and the market risk premium,rM - rRF,is 6%.Assume that the market is in equilibrium.Portfolio AB has 50% invested in Stock A and 50% invested in Stock B.The returns of Stock A and Stock B are independent of one another,i.e. ,the correlation coefficient between them is zero.Which of the following statements is CORRECT?

Accepted Answer

A)   Stock A's beta is 0.8333.
B)   Since the two stocks have zero correlation,Portfolio AB is riskless.
C)   Stock B's beta is 1.0000.
D)   Portfolio AB's required return is 11%.
E)   Portfolio AB's standard deviation is 25%.F) D) and E)
G) None of the above

Question 13

Portfolio A has but one security,while Portfolio B has 100 securities.Because of diversification effects,we would expect Portfolio B to have the lower risk.However,it is possible for Portfolio A to be less risky.

Accepted Answer

A) True 
 B)False

Question 14

Mike Flannery holds the following portfolio:   Stock  Investment  Beta A$150,0001.40 B$10,0000.80C$140,0001.00D$75,0001.20 Total $375,000\begin{array}{lrr}	ext { Stock }&	ext { Investment }&	ext { Beta }\A & \$ 150,000 & 1.40 \\mathrm{~B} & \$ 10,000 & 0.80 \\mathrm{C} & \$ 140,000 & 1.00 \\mathrm{D} & \$ 75,000 & 1.20\	ext { Total }&\$375,000\end{array} Stock A BCD Total ​ Investment $150,000$10,000$140,000$75,000$375,000​ Beta 1.400.801.001.20​ 
What is the portfolio's beta? Do not round your intermediate calculations.

Accepted Answer

A)   1.19
B)   1.36
C)   1.30
D)   1.47
E)   1.45 F) B) and E)
G) A) and C)

Question 15

Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.You have a portfolio that consists of 50% A and 50% B.Which of the following statements is CORRECT?

Accepted Answer

A)   The portfolio's beta is less than 1.2.
B)   The portfolio's expected return is 15%.
C)   The portfolio's standard deviation is greater than 20%.
D)   The portfolio's beta is greater than 1.2.
E)   The portfolio's standard deviation is 20%.F) C) and E)
G) D) and E)

Question 16

Assume that two investors each hold a portfolio,and that portfolio is their only asset.Investor A's portfolio has a beta of minus 2.0,while Investor B's portfolio has a beta of plus 2.0.Assuming that the unsystematic risks of the stocks in the two portfolios are the same,then the two investors face the same amount of risk.However,the holders of either portfolio could lower their risks,and by exactly the same amount,by adding some "normal" stocks with beta = 1.0.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is CORRECT?

Accepted Answer

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

Question 18

Taggart Inc.'s stock has a 50% chance of producing a 36% 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? Do not round your intermediate calculations.

Accepted Answer

A)   15.86%
B)   15.71%
C)   15.40%
D)   12.01%
E)   14.01%F) B) and E)
G) A) and D)

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Stocks A,B,and C all have an expected return of 10% and a standard deviation of 25%.Stocks A and B have returns that are independent of one another,i.e. ,their correlation coefficient,r,equals zero.Stocks A and C have returns that are negatively correlated with one another,i.e. ,r is less than 0.Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B.Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C.Which of the following statements is CORRECT?

Accepted Answer

A)   Portfolio AC has an expected return that is less than 10%.
B)   Portfolio AC has an expected return that is greater than 25%.
C)   Portfolio AB has a standard deviation that is greater than 25%.
D)   Portfolio AB has a standard deviation that is equal to 25%.
E)   Portfolio AC has a standard deviation that is less than 25%.F) None of the above
G) A) and B)

Exam 8: Risk and Rates of Return

A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Taggart Inc.'s stock has a 50% chance of producing a 36% 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? Do not round your intermediate calculations.

Correct Answer
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Tom O'Brien has a 2-stock portfolio with a total value of $100,000.$47,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42.What is his portfolio's beta? Do not round your intermediate calculations.Round your final answer to 2 decimal places.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Diversification will normally reduce the riskiness of a portfolio of stocks.

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

Correct Answer
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Correct Answer
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Correct Answer
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Portfolio A has but one security,while Portfolio B has 100 securities.Because of diversification effects,we would expect Portfolio B to have the lower risk.However,it is possible for Portfolio A to be less risky.

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

Correct Answer
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An individual stock's diversifiable risk,which is measured by its beta,can be lowered by adding more stocks to the portfolio in which the stock is held.

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

Correct Answer
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Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.You have a portfolio that consists of 50% A and 50% B.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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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?

Correct Answer
verified

Exam 8: Risk and Rates of Return

A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Taggart Inc.'s stock has a 50% chance of producing a 36% 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? Do not round your intermediate calculations.

Correct AnswerverifiedShow Answer

Tom O'Brien has a 2-stock portfolio with a total value of $100,000.$47,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42.What is his portfolio's beta? Do not round your intermediate calculations.Round your final answer to 2 decimal places.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Diversification will normally reduce the riskiness of a portfolio of stocks.

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

Portfolio A has but one security,while Portfolio B has 100 securities.Because of diversification effects,we would expect Portfolio B to have the lower risk.However,it is possible for Portfolio A to be less risky.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

An individual stock's diversifiable risk,which is measured by its beta,can be lowered by adding more stocks to the portfolio in which the stock is held.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.You have a portfolio that consists of 50% A and 50% B.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct Answer
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