Question 1

Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

Accepted Answer

A)   9.58%
B)   10.09%
C)   10.62%
D)   11.18%
E)   11.77%F) C) and D)
G) C) and E)

Question 2

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 = 1.0 will not change.
B)   The required return on a stock with beta > 1.0 will increase.
C)   The return on "the market" will remain constant.
D)   The return on "the market" will increase.
E)   The required return on a stock with beta < 1.0 will decline.F) B) and E)
G) A) and B)

Question 3

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) B) and C)
G) B) and D)

Question 4

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 5

You have the following data on three stocks: If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

Accepted Answer

A)   A; A.
B)   A; B.
C)   B; A.
D)   C; A.
E)   C; B.F) C) and D)
G) B) and E)

Question 6

If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the low standard deviation.

Accepted Answer

A) True 
 B)False

Question 7

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 E)
G) A) and E)

Question 8

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% 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 would increase for both stocks but the increase would be greater for Stock B than for Stock A.
B)   The required return would decrease by the same amount for both Stock A and Stock B.
C)   The required return would increase for Stock A but decrease for Stock B.
D)   The required return on Portfolio P would remain unchanged.
E)   The required return would increase for Stock B but decrease for Stock A.F) A) and E)
G) D) and E)

Question 9

We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

Accepted Answer

A)   If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
B)   The effect of a change in the market risk premium depends on the slope of the yield curve.
C)   If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
D)   If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
E)   The effect of a change in the market risk premium depends on the level of the risk-free rate.F) C) and E)
G) B) and D)

Question 11

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 12

Dothan Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?

Accepted Answer

A)   7.72%
B)   8.12%
C)   8.55%
D)   9.00%
E)   9.50%F) A) and B)
G) A) and C)

Question 13

Bill Dukes has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

Accepted Answer

A)   0.65
B)   0.72
C)   0.80
D)   0.89
E)   0.98F) All of the above
G) A) and B)

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)   A graph of the SML as applied to individual stocks would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
B)   The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt.
C)   If two "normal" or "typical" stocks were combined to form a 2-stock portfolio, the portfolio's expected return would be a weighted average of the stocks' expected returns, but the portfolio's standard deviation would probably be greater than the average of the stocks' standard deviations.
D)   If investors become more risk averse, then (1)  the slope of the SML would increase and (2)  the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.
E)   An increase in expected inflation, combined with a constant real risk-free rate and a constant market risk premium, would lead to identical increases in the required returns on a riskless asset and on an average stock, other things held constant.F) A) and E)
G) B) and C)

Question 15

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 average of the betas of the individual stocks.
D)   The beta of the portfolio is equal to the average of the betas of the individual stocks.
E)   The beta of the portfolio is larger than the average of the betas of the individual stocks.F) A) and D)
G) A) and C)

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A)   Collections Inc. is in the business of collecting past-due accounts for other companies, i.e., it is a collection agency. Collections' revenues, profits, and stock price tend to rise during recessions. This suggests that Collections Inc.'s beta should be quite high, say 2.0, because it does so much better than most other companies when the economy is weak.
B)   Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of -0.6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that 5-year period.
C)   Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be strong in the immediate future. That is, you are convinced that the market is about to rise sharply. You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the expected market move.
D)   You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should re-balance your portfolio to include more high-beta stocks.
E)   If the market risk premium remains constant, but the risk-free rate declines, then the required returns on low-beta stocks will rise while those on high-beta stocks will decline.F) C) and D)
G) B) and D)

Question 17

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 C)
G) A) and B)

Question 18

Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 12.50%. Using the SML, what is the firm's required rate of return?

Accepted Answer

A)   11.34%
B)   11.63%
C)   11.92%
D)   12.22%
E)   12.52%F) A) and B)
G) A) and D)

Question 19

If you plotted the returns of a company against those of the market and found that the slope of your 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 that the observed relationship is expected to continue in the future.

Accepted Answer

A) True 
 B)False

Question 20

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF) , declines with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT?

Accepted Answer

A)   The required return of all stocks will increase by the amount of the increase in the risk-free rate.
B)   The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0.
C)   Since the overall return on the market stays constant, the required return on each individual stock will also remain constant.
D)   The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0.
E)   The required return of all stocks will fall by the amount of the decline in the market risk premium.F) A) and B)
G) D) and E)

Exam 8: Risk and Rates of Return

Correct Answer
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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
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Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

Correct Answer
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We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

Correct Answer
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Correct Answer
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You have the following data on three stocks: If you are a strict risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.

Correct Answer
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Correct Answer
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Bill Dukes has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

Correct Answer
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Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF) , declines with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

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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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 Answer
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Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% 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 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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Dothan Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
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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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Which of the following statements is CORRECT?

Correct Answer
verified

Exam 8: Risk and Rates of Return

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

Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

Correct AnswerverifiedShow Answer

We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You have the following data on three stocks: If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Bill Dukes has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

Correct AnswerverifiedShow Answer

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF) , declines with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

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

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

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% 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

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

Dothan Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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You have the following data on three stocks: If you are a strict risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.

Correct Answer
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