Question 1

Barker Corp.has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%.What is Barker's required rate of return?

Accepted Answer

A)   9.43%
B)   9.67%
C)   9.92%
D)   10.17%
E)   10.42%F) A) and E)
G) None of the above

Question 2

Someone who is risk averse has a general dislike for risk and a preference for certainty.If risk aversion exists in the market, then investors in general are willing to accept somewhat lower returns on less risky securities.Different investors have different degrees of risk aversion, and the end result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return) than investors who have more tolerance for risk.

Accepted Answer

A) True 
 B)False

Question 3

If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Accepted Answer

A) True 
 B)False

Question 4

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Accepted Answer

A)   the past realized return must be equal to the expected return during the same period.
B)   the required return must equal the realized return in all periods.
C)   the expected return must be equal to both the required future return and the past realized return.
D)   the expected future returns must be equal to the required return.
E)   the expected future return must be less than the most recent past realized return.F) A) and B)
G) None of the above

Question 5

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) C) and E)
G) A) and B) C

Question 6

If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Accepted Answer

A) True 
 B)False

Question 7

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) All of the above
G) C) and E)

Question 8

Zacher Co.'s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%.What is the firm's required rate of return?

Accepted Answer

A)   11.36%
B)   11.65%
C)   11.95%
D)   12.25%
E)   12.55%F) B) and C)
G) B) and D)

Question 9

Stock X has a beta of 0.6, while Stock Y has a beta of 1.4.Which of the following statements is CORRECT?

Accepted Answer

A)   Stock Y must have a higher expected return and a higher standard deviation than Stock X.
B)   If expected inflation increases but the market risk premium is unchanged, then the required return on both stocks will fall by the same amount.
C)   If the market risk premium declines but expected inflation is unchanged, the required return on both stocks will decrease, but the decrease will be greater for Stock Y.
D)   If expected inflation declines but the market risk premium is unchanged, then the required return on both stocks will decrease but the decrease will be greater for Stock Y.
E)   A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a required return that exceeds that of the overall market.F) A) and C)
G) B) and E) C

Question 10

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) C) and D)
G) A) and D)

Question 11

If you plotted the returns on a given stock against those of the market, and if you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the stock should be greater than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue into the future.

Accepted Answer

A) True 
 B)False

Question 12

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 standard deviation of the portfolio is greater than the standard deviation 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 equal to one of the three stock's betas.
D)   The beta of the portfolio is equal to 1.
E)   The standard deviation of the portfolio is less than the standard deviation of each of the stocks if they were held in isolation.F) A) and D)
G) None of the above

Question 13

Data for Atwill Corporation is shown below.Now Atwill acquires some risky assets that cause its beta to increase by 30%.In addition, expected inflation increases by 2.00%.What is the stock's new required rate of return?   Initial beta 1.00 Initial required return (rs) 10.20% Market risk premium, RPM 6.00% Percentage increase in beta 30.00% Increase in inflation premium, IP 2.00%\begin{array}{lr}	ext { Initial beta } & 1.00 \	ext { Initial required return }\left(\mathrm{r}_{\mathrm{s}}ight)  & 10.20 \% \	ext { Market risk premium, RPM } & 6.00 \% \	ext { Percentage increase in beta } & 30.00 \% \	ext { Increase in inflation premium, IP } & 2.00 \%\end{array} Initial beta  Initial required return (rs​)  Market risk premium, RPM  Percentage increase in beta  Increase in inflation premium, IP ​1.0010.20%6.00%30.00%2.00%​

Accepted Answer

A)   14.00%
B)   14.70%
C)   15.44%
D)   16.21%
E)   17.02% F) B) and D)
G) A) and B)

Question 14

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 15

The distributions of rates of return for Companies AA and BB are given below: $\begin{array}{llrr}\text { State of the } & \text { Probability of } \
\text { Economy } & \text { This State Occurring }&AA&BB\
\text { Boom } & 0.2 & 30 \% & -10 \% \
\text { Normal } & 0.6 & 10 \% & 5 \% \
\text { Recession } & 0.2 & -5 \% & 50 \%
\end{array}$ We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.

Accepted Answer

A) True 
 B)False  False

Question 16

Which of the following statements is CORRECT?

Accepted Answer

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

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)   The SML shows the relationship between companies' required returns and their diversifiable risks.The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers.
B)   Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative.The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors expect the observed relationship to continue on into the future.
C)   If investors become less risk averse, the slope of the Security Market Line will increase.
D)   If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock.
E)   The slope of the SML is determined by the value of beta.F) A) and B)
G) B) and D)

Question 18

Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's price, other things held constant.

Accepted Answer

A) True 
 B)False

Question 19

Stock X has a beta of 0.7 and Stock Y has a beta of 1.7.Which of the following statements must be true, according to the CAPM?

Accepted Answer

A)   Stock Y's realized return during the coming year will be higher than Stock X's return.
B)   If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount.
C)   Stock Y's return has a higher standard deviation than Stock X.
D)   If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y.
E)   If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.F) A) and B)
G) C) and E)

Question 20

Stocks A, B, and C are similar in some respects: Each has 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 greater than 25%.
B)   Portfolio AB has a standard deviation that is greater than 25%.
C)   Portfolio AB has a standard deviation that is equal to 25%.
D)   Portfolio AC has a standard deviation that is less than 25%.
E)   Portfolio AC has an expected return that is less than 10%.F) B) and D)
G) A) and C)

Exam 6: Risk and Return

Barker Corp.has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%.What is Barker's required rate of return?

Correct Answer
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If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

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For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Correct Answer
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C

If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

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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?

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Zacher Co.'s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%.What is the firm's required rate of return?

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Stock X has a beta of 0.6, while Stock Y has a beta of 1.4.Which of the following statements is CORRECT?

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C

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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?

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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.

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False

Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's price, other things held constant.

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Stock X has a beta of 0.7 and Stock Y has a beta of 1.7.Which of the following statements must be true, according to the CAPM?

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Exam 6: Risk and Return

Barker Corp.has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%.What is Barker's required rate of return?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Correct AnswerverifiedShow Answer

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Correct AnswerverifiedShow Answer

Correct AnswerverifiedC

If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

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

Zacher Co.'s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%.What is the firm's required rate of return?

Correct AnswerverifiedShow Answer

Stock X has a beta of 0.6, while Stock Y has a beta of 1.4.Which of the following statements is CORRECT?

Correct AnswerverifiedC

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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?

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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 AnswerverifiedShow Answer

Correct AnswerverifiedFalse

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's price, other things held constant.

Correct AnswerverifiedShow Answer

Stock X has a beta of 0.7 and Stock Y has a beta of 1.7.Which of the following statements must be true, according to the CAPM?

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Correct AnswerverifiedShow Answer

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C

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C

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False

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