Question 1

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 diversifiable risk.

Accepted Answer

A) True 
 B)False

Question 2

You hold a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.You plan to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.50.What will the portfolio's new beta be? Do not round your intermediate calculations.

Accepted Answer

A)   1.093
B)   1.185
C)   1.127
D)   1.150
E)   1.242F) A) and E)
G) C) and D)

Question 3

For markets to be in equilibrium,that is,for there to be no strong pressure for prices to depart from their current levels,

Accepted Answer

A)   The expected rate of return must be equal to the required rate of return;that is, = .
B)   The past realized rate of return must be equal to the expected future rate of return;that is, = .
C)   The required rate of return must equal the past realized rate of return;that is, = .
D)   All three of the above statements must hold for equilibrium to exist;that is = = .
E)   None of the above statements is correct.F) A) and E)
G) All of the above

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   If a company's beta doubles,then its required rate of return will also double.
B)   Other things held constant,if investors suddenly become convinced that there will be deflation in the economy,then the required returns on all stocks should increase.
C)   If a company's beta were cut in half,then its required rate of return would also be halved.
D)   If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount,then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase.
E)   If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount,then the required rate of return on an average stock will remain unchanged,but required returns on stocks with betas less than 1.0 will rise.F) D) and E)
G) All of the above

Question 5

Mikkelson Corporation's stock had a required return of 12.50% last year,when the risk-free rate was 3% and the market risk premium was 4.75%.Then an increase in investor risk aversion caused the market risk premium to rise by 2%.The risk-free rate and the firm's beta remain unchanged.What is the company's new required rate of return? (Hint: First calculate the beta,then find the required return. ) Do not round your intermediate calculations.

Accepted Answer

A)   12.87%
B)   16.50%
C)   13.04%
D)   12.71%
E)   14.36%F) A) and E)
G) B) and C)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   Beta is measured by the slope of the security market line.
B)   If the risk-free rate rises,then the market risk premium must also rise.
C)   If a company's beta is halved,then its required return will also be halved.
D)   If a company's beta doubles,then its required return will also double.
E)   The slope of the security market line is equal to the market risk premium, (rM - rRF) .F) B) and C)
G) B) and E)

Question 7

Assume that you manage a $10.00 million mutual fund that has a beta of 1.05 and a 9.50% required return.The risk-free rate is 2.20%.You now receive another $14.50 million,which you invest in stocks with an average beta of 0.65.What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium,then find the new portfolio beta. ) Do not round your intermediate calculations.

Accepted Answer

A)   6.81%
B)   7.82%
C)   6.56%
D)   7.31%
E)   6.31%F) None of the above
G) B) and D)

Question 8

Assume that you hold a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20.You are in the process of buying 1,000 shares of Alpha Corp at $10 a share and adding it to your portfolio.Alpha has an expected return of 21.5% and a beta of 1.70.The total value of your current portfolio is $90,000.What will the expected return and beta on the portfolio be after the purchase of the Alpha stock? Do not round your intermediate calculations.

Accepted Answer

A)   13.98%;1.28
B)   12.29%;1.48
C)   12.41%;1.56
D)   12.05%;1.25
E)   9.40%;1.34F) A) and C)
G) A) and B)

Question 9

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 10

The risk-free rate is 6% and the market risk premium is 5%.Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8.Which of the following statements is CORRECT?

Accepted Answer

A)   If the stock market is efficient,your portfolio's expected return should equal the expected return on the market,which is 11%.
B)   The required return on the market is 10%.
C)   The portfolio's required return is less than 11%.
D)   If the risk-free rate remains unchanged but the market risk premium increases by 2%,your portfolio's required return will increase by more than 2%.
E)   If the market risk premium remains unchanged but expected inflation increases by 2%,your portfolio's required return will increase by more than 2%.F) None of the above
G) A) and E)

Question 11

Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

Accepted Answer

A)   Adding more such stocks will reduce the portfolio's unsystematic,or diversifiable,risk.
B)   Adding more such stocks will increase the portfolio's expected rate of return.
C)   Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.
D)   Adding more such stocks will have no effect on the portfolio's risk.
E)   Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk.F) A) and B)
G) A) and C)

Question 12

Stocks A and B each have an expected return of 12%,a beta of 1.2,and a standard deviation of 25%.The returns on the two stocks have a correlation of +0.6.Portfolio P has 50% in Stock A and 50% in Stock B.Which of the following statements is CORRECT?

Accepted Answer

A)   Portfolio P has a beta that is greater than 1.2.
B)   Portfolio P has a standard deviation that is greater than 25%.
C)   Portfolio P has an expected return that is less than 12%.
D)   Portfolio P has a standard deviation that is less than 25%.
E)   Portfolio P has a beta that is less than 1.2.F) A) and D)
G) A) and C)

Question 13

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Accepted Answer

A) True 
 B)False

Question 14

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)   The required rate of return on a riskless bond will decline.F) C) and D)
G) C) and E)

Question 15

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 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)   The required return for Stock A would fall,but the required return for Stock B would increase.F) B) and C)
G) None of the above

Question 16

Porter Inc's stock has an expected return of 12.50%,a beta of 1.25,and is in equilibrium.If the risk-free rate is 2.00%,what is the market risk premium? Do not round your intermediate calculations.

Accepted Answer

A)   10.50%
B)   8.48%
C)   7.98%
D)   8.40%
E)   6.80%F) A) and E)
G) B) and D)

Question 17

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Accepted Answer

A) True 
 B)False

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 14.75%.Using the SML,what is the firm's required rate of return? Do not round your intermediate calculations.

Accepted Answer

A)   13.61%
B)   11.57%
C)   12.25%
D)   14.70%
E)   12.11%F) B) and D)
G) B) and C)

Question 19

The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by a manager's actions.

Accepted Answer

A) True 
 B)False

Question 20

Cooley Company's stock has a beta of 1.28,the risk-free rate is 2.25%,and the market risk premium is 5.50%.What is the firm's required rate of return? Do not round your intermediate calculations.

Accepted Answer

A)   9.29%
B)   9.94%
C)   10.96%
D)   8.55%
E)   11.52%F) B) and E)
G) B) and D)

Exam 8: Risk and Rates of Return

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
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Which of the following statements best describes what you should expect if you randomly select stocks and add them to your 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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Cooley Company's stock has a beta of 1.28,the risk-free rate is 2.25%,and the market risk premium is 5.50%.What is the firm's required rate of return? Do not round your intermediate calculations.

Correct Answer
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Porter Inc's stock has an expected return of 12.50%,a beta of 1.25,and is in equilibrium.If the risk-free rate is 2.00%,what is the market risk premium? Do not round your intermediate calculations.

Correct Answer
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For markets to be in equilibrium,that is,for there to be no strong pressure for prices to depart from their current levels,

Correct Answer
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Stocks A and B each have an expected return of 12%,a beta of 1.2,and a standard deviation of 25%.The returns on the two stocks have a correlation of +0.6.Portfolio P has 50% in Stock A and 50% in Stock B.Which of the following statements is CORRECT?

Correct Answer
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The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by a manager's actions.

Correct Answer
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A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Correct Answer
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Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Correct Answer
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You hold a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.You plan to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.50.What will the portfolio's new beta be? Do not round your intermediate calculations.

Correct Answer
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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?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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The risk-free rate is 6% and the market risk premium is 5%.Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8.Which of the following statements is CORRECT?

Correct Answer
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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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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 diversifiable risk.

Correct Answer
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Exam 8: Risk and Rates of Return

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

Correct AnswerverifiedShow Answer

Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Cooley Company's stock has a beta of 1.28,the risk-free rate is 2.25%,and the market risk premium is 5.50%.What is the firm's required rate of return? Do not round your intermediate calculations.

Correct AnswerverifiedShow Answer

Porter Inc's stock has an expected return of 12.50%,a beta of 1.25,and is in equilibrium.If the risk-free rate is 2.00%,what is the market risk premium? Do not round your intermediate calculations.

Correct AnswerverifiedShow Answer

For markets to be in equilibrium,that is,for there to be no strong pressure for prices to depart from their current levels,

Correct AnswerverifiedShow Answer

Stocks A and B each have an expected return of 12%,a beta of 1.2,and a standard deviation of 25%.The returns on the two stocks have a correlation of +0.6.Portfolio P has 50% in Stock A and 50% in Stock B.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by a manager's actions.

Correct AnswerverifiedShow Answer

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Correct AnswerverifiedShow Answer

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Correct AnswerverifiedShow Answer

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

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The risk-free rate is 6% and the market risk premium is 5%.Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

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 diversifiable risk.

Correct AnswerverifiedShow Answer

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