Question 1

Campbell's father holds just one stock,East Coast Bank (ECB) ,which he thinks is a very low-risk security.Campbell agrees that the stock is relatively safe,but he wants to demonstrate that his father's risk would be even lower if he were more diversified.Campbell obtained the following returns data shown for West Coast Bank (WCB) .Both have had less variability than most other stocks over the past 5 years.Measured by the standard deviation of returns,by how much would his father's historical risk have been reduced if he had held a portfolio consisting of 60% ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.)    Year  ECB  WCB 200240.00%40.00%2003−10.00%15.00%200435.00%−5.00%2005−5.00%−10.00%200615.00%35.00% Average return =15.00%15.00% Standard deviation =22.64%22.64%\begin{array}{crr}	ext { Year } & 	ext { ECB } &{	ext { WCB }} \\hline 2002 & 40.00 \% & 40.00 \% \2003 & -10.00 \% & 15.00 \% \2004 & 35.00 \% & -5.00 \% \2005 & -5.00 \% & -10.00 \% \2006 & 15.00 \% & 35.00 \% \	ext { Average return }= & 15.00 \% & 15.00 \% \	ext { Standard deviation }= & 22.64 \% & 22.64 \%\end{array} Year 20022003200420052006 Average return = Standard deviation =​ ECB 40.00%−10.00%35.00%−5.00%15.00%15.00%22.64%​ WCB 40.00%15.00%−5.00%−10.00%35.00%15.00%22.64%​​

Accepted Answer

A)  3.56%
B)  3.65%
C)  3.74%
D)  3.84% E) B) and C)
F) A) and D)

Question 2

Standard deviation is a measure of which of the following types of risk?

Accepted Answer

A)  systematic risk
B)  market risk
C)  stand alone
D)  unique riskE) B) and D)
F) None of the above

Question 3

Stock A has a beta = 0.8,while Stock B has a beta = 1.6.Which of the following statements is correct?

Accepted Answer

A)  Stock B's required return is double that of Stock A's.
B)  If the marginal investor becomes more risk averse, the required return on Stock B will increase by more than the required return on Stock A.
C)  An equally weighted portfolio of Stocks A and B will have a beta lower than 1.2.
D)  If the risk-free rate increases but the market risk premium remains constant, the required return on Stock A will increase by more than that on Stock B.E) B) and C)
F) A) and B)

Question 4

Assume that investors have recently become more risk averse,so the market risk premium has increased.Also,assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur?

Accepted Answer

A)  The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.
B)  The required rate of return will decline for stocks whose betas are less than 1.0.
C)  The required rate of return on the market, rM, will not change as a result of these changes.
D)  The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk premium.E) A) and B)
F) None of the above

Question 5

Currently,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)  An index fund with beta = 1.0 should have a required return less than 11%.
C)  If a stock's beta doubles, its required return must also double.
D)  An index fund with beta = 1.0 should have a required return greater than 11%.E) B) and C)
F) None of the above

Question 6

Stock A has an expected return of 12%,a beta of 1.2,and a standard deviation of 20%.Stock B also has a beta of 1.2,an expected return of 10%,and a standard deviation of 15%.Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B.The correlation between the two stocks' returns is zero (that is,rA,B = 0) .Which of the following statements is correct?

Accepted Answer

A)  The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued.
B)  The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued.
C)  Portfolio AB's expected return is 11.0%.
D)  Portfolio AB's beta is less than 1.2.E) A) and C)
F) All of the above

Question 7

An investment has an average return of 8.3%.The standard deviation of returns on this investment is 20.81%.Given this information,what is the range of return 99% of the time?

Accepted Answer

A)  70.73% to -54.13%
B)  70.73% to 8.3%
C)  70.73% to 54.13%
D)  8.3% to 54.13%E) A) and B)
F) C) and D)

Question 8

Diversifiable risk is an important factor in the arbitrage pricing model.

Accepted Answer

A) True 
 B)False

Question 9

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%? (Assume that the risk-free rate remains constant.)

Accepted Answer

A)  The required return on Portfolio P would increase by 1%.
B)  The required return on both stocks would increase by 1%.
C)  The required return on Portfolio P would remain unchanged.
D)  The required return on Stock A would increase by more than 1%, while the return on Stock B would increase by less than 1%.E) A) and C)
F) B) and C)

Question 10

Suppose you hold a diversified portfolio consisting of a $10,000 investment in each of 12 different common stocks.The portfolio's beta is 1.25.Now suppose you decided to sell one of your stocks that has a beta of 1.00 and use the proceeds to buy a replacement stock with a beta of 1.34.What would be the portfolio's new beta?

Accepted Answer

A)  1.15
B)  1.21
C)  1.28
D)  1.34E) A) and C)
F) B) and C)

Question 11

Rodriguez Roofing's stock has a beta of 1.23,its required return is 11.25%,and the risk-free rate is 4.30%.What is the required rate of return on the stock market? (Hint: First find the market risk premium.)

Accepted Answer

A)  9.95%
B)  10.20%
C)  10.45%
D)  10.72%E) A) and B)
F) B) and D)

Question 12

If an investor buys enough stocks,he or she can,through diversification,eliminate all of the market risk inherent in owning stocks,but as a general rule it will not be possible to eliminate all company-specific risk.

Accepted Answer

A) True 
 B)False

Question 13

Which type of correlation will a completely diversified portfolio have with the market portfolio?

Accepted Answer

A)  less than one, because it carries only market risk
B)  less than one, because it carries only diversifiable risk
C)  equal to one, because it carries only diversifiable risk
D)  equal to one, because it carries only market riskE) A) and D)
F) A) and C)

Question 14

Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Which of the following statements is correct? (Assume that stocks are in equilibrium.)

Accepted Answer

A)  Stock A's returns are less highly correlated with the returns on most other stocks than are B's returns.
B)  Stock B has a higher required rate of return than Stock A.
C)  Portfolio P has a standard deviation of 22.5%.
D)  Portfolio P has a beta equal to 1.0.E) All of the above
F) C) and D)

Question 15

Diversification among various types of investments (e.g.,stocks,bonds,money market securities) provides more protection from economic uncertainty than a diversified portfolio based on holdings within only one of these investment groups.

Accepted Answer

A) True 
 B)False

Question 16

The long-run nominal growth rate of the economy is a good measure of which of the following?

Accepted Answer

A)  the inflation rate
B)  the government deficit
C)  the risk-free interest rate
D)  the foreign trade surplusE) B) and C)
F) C) and D)

Question 17

Stock A has a beta of 0.8 and Stock B has a beta of 1.2.Fifty percent of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (rM - rRF)  were to increase but the risk-free rate (rRF)  remained constant,which of the following would occur?

Accepted Answer

A)  The required return will increase for both stocks but the increase will be greater for Stock B than for Stock A.
B)  The required return will decrease by the same amount for both Stock A and Stock B.
C)  The required return will increase for Stock A but will decrease for Stock B.
D)  The required return on Portfolio P will remain unchanged.E) None of the above
F) A) and B)

Question 18

Which of the following best describes behavioural finance?

Accepted Answer

A)  Behavioural finance-mixing finance with psychology-tries to explain the occurrence and persistence of accurate securities pricing.
B)  Behavioural finance-mixing finance with psychology-tries to explain the occurrence and persistence of securities mispricing.
C)  Behavioural finance-mixing finance with sociological economics-tries to explain the occurrence and persistence of accurate debt securities mispricing.
D)  Behavioural finance-mixing finance with psychology-tries to explain the occurrence and persistence of securities legislation.
E)  CHOICE BLANKF) B) and D)
G) A) and B)

Question 19

ABC Co.has a beta of 1.30 and an expected dividend growth rate of 5.00% per year.The T-bill rate is 3.00%,and the T-bond rate is 6.00%.The annual return on the stock market during the past three years was 15.00%.Investors expect the annual future stock market return to be 12.00%.Using the SML,what is ABC's required return?

Accepted Answer

A)  12.8%
B)  13.1%
C)  13.5%
D)  13.8%E) C) and D)
F) B) and C)

Question 20

Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?

Accepted Answer

A)  The required return on a stock with beta greater than 1.0 will increase.
B)  The return on the market will remain constant.
C)  The return on the market will increase.
D)  The required return on a stock with beta less than 1.0 will decline.E) B) and C)
F) A) and C)

Exam 7: Risk, Return, and the Capital Asset Pricing Model

Which of the following best describes behavioural finance?

Correct Answer
verified

Correct Answer
verified

Assume that investors have recently become more risk averse,so the market risk premium has increased.Also,assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur?

Correct Answer
verified

Correct Answer
verified

Stock A has a beta of 0.8 and Stock B has a beta of 1.2.Fifty percent of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (r_M - r_RF) were to increase but the risk-free rate (r_RF) remained constant,which of the following would occur?

Correct Answer
verified

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%? (Assume that the risk-free rate remains constant.)

Correct Answer
verified

Correct Answer
verified

Which type of correlation will a completely diversified portfolio have with the market portfolio?

Correct Answer
verified

Currently,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

If an investor buys enough stocks,he or she can,through diversification,eliminate all of the market risk inherent in owning stocks,but as a general rule it will not be possible to eliminate all company-specific risk.

Correct Answer
verified

The long-run nominal growth rate of the economy is a good measure of which of the following?

Correct Answer
verified

Rodriguez Roofing's stock has a beta of 1.23,its required return is 11.25%,and the risk-free rate is 4.30%.What is the required rate of return on the stock market? (Hint: First find the market risk premium.)

Correct Answer
verified

Diversification among various types of investments (e.g.,stocks,bonds,money market securities) provides more protection from economic uncertainty than a diversified portfolio based on holdings within only one of these investment groups.

Correct Answer
verified

Stock A has a beta = 0.8,while Stock B has a beta = 1.6.Which of the following statements is correct?

Correct Answer
verified

Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Which of the following statements is correct? (Assume that stocks are in equilibrium.)

Correct Answer
verified

Correct Answer
verified

Diversifiable risk is an important factor in the arbitrage pricing model.

Correct Answer
verified

An investment has an average return of 8.3%.The standard deviation of returns on this investment is 20.81%.Given this information,what is the range of return 99% of the time?

Correct Answer
verified

Standard deviation is a measure of which of the following types of risk?

Correct Answer
verified

Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?

Correct Answer
verified

Exam 7: Risk, Return, and the Capital Asset Pricing Model

Which of the following best describes behavioural finance?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assume that investors have recently become more risk averse,so the market risk premium has increased.Also,assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Stock A has a beta of 0.8 and Stock B has a beta of 1.2.Fifty percent of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (rM - rRF) were to increase but the risk-free rate (rRF) remained constant,which of the following would occur?

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%? (Assume that the risk-free rate remains constant.)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which type of correlation will a completely diversified portfolio have with the market portfolio?

Correct AnswerverifiedShow Answer

Currently,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

If an investor buys enough stocks,he or she can,through diversification,eliminate all of the market risk inherent in owning stocks,but as a general rule it will not be possible to eliminate all company-specific risk.

Correct AnswerverifiedShow Answer

The long-run nominal growth rate of the economy is a good measure of which of the following?

Correct AnswerverifiedShow Answer

Rodriguez Roofing's stock has a beta of 1.23,its required return is 11.25%,and the risk-free rate is 4.30%.What is the required rate of return on the stock market? (Hint: First find the market risk premium.)

Correct AnswerverifiedShow Answer

Diversification among various types of investments (e.g.,stocks,bonds,money market securities) provides more protection from economic uncertainty than a diversified portfolio based on holdings within only one of these investment groups.

Correct AnswerverifiedShow Answer

Stock A has a beta = 0.8,while Stock B has a beta = 1.6.Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Which of the following statements is correct? (Assume that stocks are in equilibrium.)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Diversifiable risk is an important factor in the arbitrage pricing model.

Correct AnswerverifiedShow Answer

An investment has an average return of 8.3%.The standard deviation of returns on this investment is 20.81%.Given this information,what is the range of return 99% of the time?

Correct AnswerverifiedShow Answer

Standard deviation is a measure of which of the following types of risk?

Correct AnswerverifiedShow Answer

Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Stock A has a beta of 0.8 and Stock B has a beta of 1.2.Fifty percent of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (r_M - r_RF) were to increase but the risk-free rate (r_RF) remained constant,which of the following would occur?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified