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Decreases in the risk-free rate will reduce:


A) The market risk premium
B) The stock's risk premium
C) The stock's Beta
D) The stock's expected return

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If last month a stock with Beta of 1.0 lost two percent while the TSX 300 had a one percent gain, then it appears that:


A) Beta has been calculated incorrectly
B) The S&P 500 cannot represent the market
C) Betas are long-term "best fit" averages, not short-term stock measures
D) The market index had a good month

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Beta measures a stock's sensitivity to market risks.

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What should be the Beta of a replacement stock if an investor wishes to achieve a portfolio Beta of 1.0 by replacing Stock C in the following equally weighted portfolio: Stock A = .9 Beta; Stock B = 1.1 Beta; Stock C = 1.35 Beta?


A) 0.93 Beta
B) 1.00 Beta
C) 1.08 Beta
D) 1.15 Beta New Portfolio Beta = (.333 x .9) + (.333 x 1.1) + (.333 x Beta C)
1) 0 = .3 + .366 +.333 x Beta C
-) 334 = .333 x Beta C

Correct Answer

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Treasury bills have a Beta of zero.

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According to the CAPM, a stock's expected return is positively related to its Beta.

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Given recent evidence concerning the CAPM, which of the following portfolios might be expected to plot above the security market line?


A) A portfolio of cyclical stocks
B) A portfolio that includes borrowed funds
C) A portfolio of smaller companies
D) A portfolio split between Treasury bills and the market index

Correct Answer

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The Beta of an investment in Treasury bills is:


A) 0.0
B) 0.5
C) 1.0
D) Meaningless; only common stocks have Betas

Correct Answer

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Determine the expected return of a company's stock given a risk free rate of 7%, an expected market return of 12%, a market risk premium of 5% and a company Beta of 1.5.


A) 115
B) 125
C) 135
D) 145

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A considerable scattering in the plot of points representing the historic returns of a stock versus the returns on the market indicates the:


A) High Beta of the stock
B) Unique risk of the stock
C) Changes in market risk premium over time
D) Current underpricing of the stock

Correct Answer

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Why would a stock market investor not be concerned with unique risks when calculating expected rates of return?


A) There is no method to quantify unique risks.
B) Unique risks are assumed to be diversified away.
C) Unique risks are compensated by the risk-free rate.
D) Beta includes a component to compensate unique risk.

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What will happen to a stock that offers a lower risk premium than predicted by the CAPM?


A) Its Beta will increase
B) Its Beta will decrease
C) Its price will decrease until yield is increased
D) Its price will increase until the yield is reduced

Correct Answer

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What can you assume about an investor whose diversified portfolio of stocks yielded 25% when the market portfolio yielded 15%?


A) Treasury bills are offering a 10% yield
B) The portfolio Beta is greater than 1.0
C) The portfolio Beta equals 1.67
D) The investor's portfolio contains many defensive stocks

Correct Answer

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What is the Beta of a portfolio with an expected return of 12% if Treasury bills yield 6% and the market risk premium is 8%?


A) 0.50
B) 0.75
C) 0.90
D) 1.50

Correct Answer

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The average of Beta values for all individual stocks is:


A) Greater than 1.0; most stocks are aggressive
B) Less than 1.0; most stocks are defensive
C) Unknown; Betas are continually changing
D) Exactly 1.0; these stocks represent the market

Correct Answer

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In theory, the "market portfolio" should contain:


A) The securities of the S&P 500
B) The securities of the Dow
C) The securities of the S&P 500 and Treasury bills
D) All risky assets

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If the plotting of a portfolio's returns against returns on the market index produces a tight pattern, then:


A) The portfolio appears to be well diversified
B) The portfolio has a Beta of 1.0
C) The portfolio has very little systematic risk
D) The portfolio has a very low market risk premium

Correct Answer

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88.Determine the market risk premium if the risk free rate is 2%, the company's Beta is 1.3 and its expected return is 11%.


A) 9.92%
B) 8.92%
C) 7.92%
D) 6.92%

Correct Answer

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An investor was expecting an 18% return on his portfolio with Beta of 1.25 before the market risk premium increased from 8% to 10%.Based on this change, what return will now be expected on the portfolio?


A) 20.0%
B) 20.5%
C) 22.5%
D) 26.0% Old: 18% = rf + 1.25(8%)
= rf + 10.0%
8) 0% = rf
New: Expected return = 8.0% + 1.25(10%)
= 8) 0% + 12.5%

Correct Answer

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The security market line plots the historic relationship between returns on an individual stock and the market portfolio.

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