Question 1

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

Accepted Answer

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

Question 2

Managers should under no conditions take actions that increase their firm's risk relative to the market,regardless of how much those actions would increase the firm's expected rate of return.

Accepted Answer

A) True 
 B)False

Question 3

For a portfolio of 40 randomly selected stocks,which of the following is most likely to be true?

Accepted Answer

A)   The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.
B)   The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.
C)   The beta of the portfolio is less than the weighted average of the betas of the individual stocks.
D)   The beta of the portfolio is equal to the weighted average of the betas of the individual stocks.
E)   The beta of the portfolio is larger than the weighted average of the betas of the individual stocks.F) B) and E)
G) B) and D)

Question 4

Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%.Stock A has a beta of 0.8 and Stock B has a beta of 1.2.The correlation coefficient,r,between the two stocks is +0.6.Portfolio P has 50% invested in Stock A and 50% invested in B.Which of the following statements is CORRECT?

Accepted Answer

A)   Portfolio P has a standard deviation of 25% and a beta of 1.0.
B)   Based on the information we are given,and assuming those are the views of the marginal investor,it is apparent that the two stocks are in equilibrium.
C)   Portfolio P has more market risk than Stock A but less market risk than B.
D)   Stock A should have a higher expected return than Stock B as viewed by the marginal investor.
E)   Portfolio P has a coefficient of variation equal to 2.5.F) B) and E)
G) B) and C)

Question 5

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 6

Which of the following statements is CORRECT?

Accepted Answer

A)   A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.
B)   A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market,assuming the stocks all have the same standard deviations.
C)   A two-stock portfolio will always have a lower beta than a one-stock portfolio.
D)   If portfolios are formed by randomly selecting stocks,a 10-stock portfolio will always have a lower beta than a one-stock portfolio.
E)   A stock with an above-average standard deviation must also have an above-average beta.F) B) and C)
G) C) and D)

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

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 9

The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

Accepted Answer

A) True 
 B)False

Question 10

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 E)
G) C) and E)

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Linke Motors has a beta of 1.30,the T-bill rate is 3.00%,and the T-bond rate is 6.5%.The annual return on the stock market during the past 3 years was 15.00%,but investors expect the annual future stock market return to be 10.00%.Based on the SML,what is the firm's required return? Do not round your intermediate calculations.

Accepted Answer

A)   11.05%
B)   13.48%
C)   12.71%
D)   10.17%
E)   10.50%F) All of the above
G) C) and D)

Question 13

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5.Which of the following statements must be true,according to the CAPM?

Accepted Answer

A)   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.
B)   Stock Y's realized return during the coming year will be higher than Stock X's return.
C)   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.
D)   Stock Y's return has a higher standard deviation than Stock X.
E)   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.F) B) and E)
G) A) and B)

Question 14

Consider the following information for three stocks,A,B,and C.The stocks' returns are positively but not perfectly positively correlated with one another,i.e. ,the correlations are all between 0 and 1.  Portfolio AB has half of its funds invested in Stock A and half in Stock B.Portfolio ABC has one third of its funds invested in each of the three stocks.The risk-free rate is 5%,and the market is in equilibrium,so required returns equal expected returns.Which of the following statements is CORRECT?

Accepted Answer

A)   Portfolio AB has a standard deviation of 20%.
B)   Portfolio AB's coefficient of variation is greater than 2.0.
C)   Portfolio AB's required return is greater than the required return on Stock A.
D)   Portfolio ABC's expected return is 10.66667%.
E)   Portfolio ABC has a standard deviation of 20%.F) C) and D)
G) B) and C)

Question 15

A firm can change its beta through managerial decisions,including capital budgeting and capital structure decisions.

Accepted Answer

A) True 
 B)False

Question 16

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 greater than the expected return on Stock B.
B)   Portfolio P's expected return is equal to the expected return on Stock A.
C)   Portfolio P's expected return is less than the expected return on Stock B.
D)   Portfolio P's expected return is equal to the expected return on Stock B.
E)   Portfolio P's expected return is greater than the expected return on Stock C.F) A) and E)
G) C) and D)

Question 17

Other things held constant,if the expected inflation rate decreases and investors also become more risk averse,the Security Market Line would be affected as follows:

Accepted Answer

A)   The y-axis intercept would decline,and the slope would increase.
B)   The x-axis intercept would decline,and the slope would increase.
C)   The y-axis intercept would increase,and the slope would decline.
D)   The SML would be affected only if betas changed.
E)   Both the y-axis intercept and the slope would increase,leading to higher required returns.F) B) and C)
G) A) and B)

Question 18

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

Question 19

The tighter the probability distribution of its expected future returns,the greater the risk of a given investment as measured by its standard deviation.

Accepted Answer

A) True 
 B)False

Question 20

Portfolio A has only one stock,while Portfolio B consists of all stocks that trade in the market,each held in proportion to its market value.Because of its diversification,Portfolio B will by definition be riskless.

Accepted Answer

A) True 
 B)False

Exam 8: Risk and Rates of Return

Other things held constant,if the expected inflation rate decreases and investors also become more risk averse,the Security Market Line would be affected as follows:

Correct Answer
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Managers should under no conditions take actions that increase their firm's risk relative to the market,regardless of how much those actions would increase the firm's expected rate of return.

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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The tighter the probability distribution of its expected future returns,the greater the risk of a given investment as measured by its standard deviation.

Correct Answer
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Correct Answer
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Stock X has a beta of 0.5 and Stock Y has a beta of 1.5.Which of the following statements must be true,according to the CAPM?

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 firm can change its beta through managerial decisions,including capital budgeting and capital structure decisions.

Correct Answer
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Portfolio A has only one stock,while Portfolio B consists of all stocks that trade in the market,each held in proportion to its market value.Because of its diversification,Portfolio B will by definition be riskless.

Correct Answer
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During the coming year,the market risk premium (r_M - r_RF) ,is expected to fall,while the risk-free rate,r_RF,is expected to remain the same.Given this forecast,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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The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

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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For a portfolio of 40 randomly selected stocks,which of the following is most likely to be true?

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

Correct Answer
verified

Correct Answer
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Exam 8: Risk and Rates of Return

Other things held constant,if the expected inflation rate decreases and investors also become more risk averse,the Security Market Line would be affected as follows:

Correct AnswerverifiedShow Answer

Managers should under no conditions take actions that increase their firm's risk relative to the market,regardless of how much those actions would increase the firm's expected rate of return.

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

The tighter the probability distribution of its expected future returns,the greater the risk of a given investment as measured by its standard deviation.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5.Which of the following statements must be true,according to the CAPM?

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 firm can change its beta through managerial decisions,including capital budgeting and capital structure decisions.

Correct AnswerverifiedShow Answer

Portfolio A has only one stock,while Portfolio B consists of all stocks that trade in the market,each held in proportion to its market value.Because of its diversification,Portfolio B will by definition be riskless.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

For a portfolio of 40 randomly selected stocks,which of the following is most likely to be true?

Correct AnswerverifiedShow Answer

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

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

Correct AnswerverifiedShow Answer

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

Correct Answer
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