Question 1

Which of the following statements is most correct?

Accepted Answer

A)   The required return on a firm's common stock is determined by the firm's systematic (or market)  risk.If its systematic risk is known, and if it is expected to remain constant, the analyst has sufficient information to specify the firm's required return.
B)   A security's beta measures its nondiversifiable (systematic, or market)  risk relative to that of most other securities.
C)   If the returns of two firms are negatively correlated, one of them must have a negative beta.
D)   A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only one stock.
E)   Statements b and c are both correct.

Question 2

Risk in financial assets only occurs when there is a chance that the actual return is less than expected.It is not considered risk if there is a chance that the actual return is greater than expected.

Accepted Answer

A) True 
 B)False

Question 3

An investor who is risk averse requires lower rates of return for assets of higher risk.

Accepted Answer

A) True 
 B)False

Question 4

If you plotted the returns of 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 less 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 5

Market risk refers to the tendency of a stock to move with the general stock market.A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta which is greater than 1.0.

Accepted Answer

A) True 
 B)False

Question 6

The realized portfolio return is the weighted average of the relative weights of securities in the portfolio multiplied by their respective expected returns.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is most correct?

Accepted Answer

A)   The expected return on a portfolio of financial assets is equal to the summation of the products of the expected returns of the individual assets multiplied by the probability of each return being realized.
B)   When adding new securities to a portfolio, the higher or more positive the degree of correlation between the new securities and those already in the portfolio, the greater the benefits of the additional portfolio diversification.
C)   In portfolio analysis, we rarely use ex post (historical)  returns and standard deviations, because we are interested in ex ante (future)  data.
D)   Portfolio diversification reduces the variability of returns on each security held in the portfolio.
E)   All of the above statements are false.

Question 8

You are holding a stock which has a beta of 2.0 and is currently in equilibrium.The required return on the stock is 15 percent, and the return on an average stock is 10 percent.What would be the percentage change in the return on the stock if the return on an average stock increased by 30 percent while the risk-free rate remained unchanged?

Accepted Answer

A)   +20%
B)   +30%
C)   +40%
D)   +50%
E)   +60%

Question 9

Which type of risk can be eliminated through diversification?

Accepted Answer

A)   total risk
B)   market risk
C)   firm specific risk
D)   none of the above

Question 10

The systematic (market)  risk associated with an individual stock is most closely identified with the

Accepted Answer

A)   Standard deviation of the returns on the stock.
B)   Standard deviation of the returns on the market.
C)   Beta of the stock.
D)   Coefficient of variation of returns on the stock.
E)   Coefficient of variation of returns on the market.

Question 11

Which of the following statements about risk is false?

Accepted Answer

A)   Risk requires the possibility of at least one outcome less favorable than the expected value.
B)   Risk requires the possibility of more than one outcome.
C)   Risk is one of the determinants of the required return.
D)   Risk aversion generally is assumed in finance to be a characteristic of the "marginal investor."
E)   All of the above statements are true.

Question 12

The Y-axis intercept of the SML indicates the return on the individual asset when the realized return on an average stock (beta = 1.0) is zero.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is most correct?

Accepted Answer

A)   According to CAPM theory, the required rate of return on a given stock can be found by use of the SML equation:Ri = rRF + (rM − rRF) βi.Expectations for inflation are not reflected anywhere in this equation, even indirectly, and because of that the text notes that the CAPM may not be strictly correct.
B)   If the required rate of return is given by the SML equation as set forth in Answer a, there is nothing a financial manager can do to change his or her company's cost of capital, because each of the elements in the equation is determined exclusively by the market, not by the type of actions a company's management can take, even in the long run.
C)   Assume that the required rate of return on the market is currently rM = 15%, and that rM remains fixed at that level.If the yield curve has a steep upward slope, the calculated market risk premium would be larger if the 30-day T-bill rate were used as the risk-free rate than if the 30-year T-bond rate were used as rRF.
D)   Statements a and b are both true.
E)   Statements a and c are both true.

Question 14

If investors become more averse to risk, the slope of the Security Market Line (SML) will increase.

Accepted Answer

A) True 
 B)False

Question 15

You hold a diversified portfolio consisting of a $10,000 investment in each of 20 different common stocks .The portfolio beta is equal to 1.2.You have decided to sell one of your stocks which has a beta equal to 0.7 for $10,000.You plan to use the proceeds to purchase another stock which has a beta equal to 1.4.What will be the beta of the new portfolio?

Accepted Answer

A)   1.165
B)   1.235
C)   1.250
D)   1.284
E)   1.333

Question 16

If I know for sure that the market will have a positive return over the next year, to maximize my rate of return, I should increase the beta of my portfolio.

Accepted Answer

A) True 
 B)False

Question 17

The Security Market Line (SML)  relates risk to return, for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase, which of the following changes would be most likely to occur?

Accepted Answer

A)   The market risk premium would increase.
B)   Beta would increase.
C)   The slope of the SML would increase.
D)   The required return on an average stock, rA = rM, would increase.
E)   None of the indicated changes would be likely to occur.

Question 18

The probability distribution for rM for the coming year is as follows: M for the coming year is as follows:   If rRF = 6.05% and Stock X has a beta of 2.0, an expected constant growth rate of 7 percent, and D0 = $2, what market price gives the investor a return consistent with the stock's risk? A)  $25.00 B)  $37.50 C)  $21.72 D)  $42.38 E)  $56.94" class="answers-bank-image d-inline" rel="preload" > If rRF = 6.05% and Stock X has a beta of 2.0, an expected constant growth rate of 7 percent, and D0 = $2, what market price gives the investor a return consistent with the stock's risk?

Accepted Answer

A)   $25.00
B)   $37.50
C)   $21.72
D)   $42.38
E)   $56.94

Question 19

Stock A has a beta of 1.5 and Stock B has a beta of 0.5.Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)

Accepted Answer

A)   When held in isolation, Stock A has greater risk than Stock B.
B)   Stock B would be a more desirable addition to a portfolio than Stock A.
C)   Stock A would be a more desirable addition to a portfolio than Stock B.
D)   The expected return on Stock A will be greater than that on Stock B.
E)   The expected return on Stock B will be greater than that on Stock A.

Question 20

The biggest reduction in risk would be achieved by combining two assets into a portfolio with a correlation coefficient equal to ____.

Accepted Answer

A)   −1.0
B)   −0.5
C)   0
D)   0.5
E)   1.0

Exam 11: Risk and Rates of Return

If investors become more averse to risk, the slope of the Security Market Line (SML) will increase.

Correct Answer
verified

The Security Market Line (SML) relates risk to return, for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase, which of the following changes would be most likely to occur?

Correct Answer
verified

Correct Answer
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Which of the following statements is most correct?

Correct Answer
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The Y-axis intercept of the SML indicates the return on the individual asset when the realized return on an average stock (beta = 1.0) is zero.

Correct Answer
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Stock A has a beta of 1.5 and Stock B has a beta of 0.5.Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)

Correct Answer
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Which of the following statements is most correct?

Correct Answer
verified

If I know for sure that the market will have a positive return over the next year, to maximize my rate of return, I should increase the beta of my portfolio.

Correct Answer
verified

Market risk refers to the tendency of a stock to move with the general stock market.A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta which is greater than 1.0.

Correct Answer
verified

The probability distribution for r_M for the coming year is as follows: If r_RF = 6.05% and Stock X has a beta of 2.0, an expected constant growth rate of 7 percent, and D₀ = $2, what market price gives the investor a return consistent with the stock's risk?

Correct Answer
verified

An investor who is risk averse requires lower rates of return for assets of higher risk.

Correct Answer
verified

Risk in financial assets only occurs when there is a chance that the actual return is less than expected.It is not considered risk if there is a chance that the actual return is greater than expected.

Correct Answer
verified

The realized portfolio return is the weighted average of the relative weights of securities in the portfolio multiplied by their respective expected returns.

Correct Answer
verified

Which type of risk can be eliminated through diversification?

Correct Answer
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Which of the following statements is most correct?

Correct Answer
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The biggest reduction in risk would be achieved by combining two assets into a portfolio with a correlation coefficient equal to ____.

Correct Answer
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Correct Answer
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Which of the following statements about risk is false?

Correct Answer
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The systematic (market) risk associated with an individual stock is most closely identified with the

Correct Answer
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Correct Answer
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Exam 11: Risk and Rates of Return

If investors become more averse to risk, the slope of the Security Market Line (SML) will increase.

Correct AnswerverifiedShow Answer

The Security Market Line (SML) relates risk to return, for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase, which of the following changes would be most likely to occur?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

The Y-axis intercept of the SML indicates the return on the individual asset when the realized return on an average stock (beta = 1.0) is zero.

Correct AnswerverifiedShow Answer

Stock A has a beta of 1.5 and Stock B has a beta of 0.5.Which of the following statements must be true about these securities? (Assume the market is in equilibrium.)

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

If I know for sure that the market will have a positive return over the next year, to maximize my rate of return, I should increase the beta of my portfolio.

Correct AnswerverifiedShow Answer

Market risk refers to the tendency of a stock to move with the general stock market.A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta which is greater than 1.0.

Correct AnswerverifiedShow Answer

The probability distribution for rM for the coming year is as follows: If rRF = 6.05% and Stock X has a beta of 2.0, an expected constant growth rate of 7 percent, and D0 = $2, what market price gives the investor a return consistent with the stock's risk?

Correct AnswerverifiedShow Answer

An investor who is risk averse requires lower rates of return for assets of higher risk.

Correct AnswerverifiedShow Answer

Risk in financial assets only occurs when there is a chance that the actual return is less than expected.It is not considered risk if there is a chance that the actual return is greater than expected.

Correct AnswerverifiedShow Answer

The realized portfolio return is the weighted average of the relative weights of securities in the portfolio multiplied by their respective expected returns.

Correct AnswerverifiedShow Answer

Which type of risk can be eliminated through diversification?

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

The biggest reduction in risk would be achieved by combining two assets into a portfolio with a correlation coefficient equal to ____.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements about risk is false?

Correct AnswerverifiedShow Answer

The systematic (market) risk associated with an individual stock is most closely identified with the

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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The probability distribution for r_M for the coming year is as follows: If r_RF = 6.05% and Stock X has a beta of 2.0, an expected constant growth rate of 7 percent, and D₀ = $2, what market price gives the investor a return consistent with the stock's risk?

Correct Answer
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Correct Answer
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