Question 1

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true,assuming the CAPM is correct.

Accepted Answer

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

Question 2

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm is negative.

Accepted Answer

A) True 
 B)False

Question 3

Tom Noel holds the following portfolio:  Tom plans to sell Stock A and replace it with Stock E,which has a beta of 0.80.By how much will the portfolio beta change? Do not round your intermediate calculations.

Accepted Answer

A)   -0.240
B)   -0.194
C)   -0.290
D)   -0.271
E)   -0.230

Question 4

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 very 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.

Question 5

Mike Flannery holds the following portfolio:  What is the portfolio's beta? Do not round your intermediate calculations.

Accepted Answer

A)   1.19
B)   1.36
C)   1.30
D)   1.47
E)   1.45

Question 6

Stock A has an expected return of 12%,a beta of 1.2,and a standard deviation of 20%.Stock B also has a beta of 1.2,but its expected return is 10% and its standard deviation is 15%.Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B.The correlation between the two stocks' returns is zero (that is,rA,B = 0) .Which of the following statements is CORRECT?

Accepted Answer

A)   Portfolio AB's standard deviation is 17.5%.
B)   The stocks are not in equilibrium based on the CAPM;if A is valued correctly,then B is overvalued.
C)   The stocks are not in equilibrium based on the CAPM;if A is valued correctly,then B is undervalued.
D)   Portfolio AB's expected return is 11.0%.
E)   Portfolio AB's beta is less than 1.2.

Question 7

Roenfeld Corp believes the following probability distribution exists for its stock.What is the coefficient of variation on the company's stock? Do not round your intermediate calculations.  ​

Accepted Answer

A)   0.6565
B)   0.6060
C)   0.5050
D)   0.4545
E)   0.4292

Question 8

The CAPM is built on historic conditions,although in most cases we use expected future data in applying it.Because betas used in the CAPM are calculated using expected future data,they are not subject to changes in future volatility.This is one of the strengths of the CAPM.

Accepted Answer

A) True 
 B)False

Question 9

The slope of the SML is determined by the value of beta.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB was created by investing in a combination of Stocks A and B.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?

Accepted Answer

A)   Stock A has more market risk than Portfolio AB.
B)   Stock A has more market risk than Stock B but less stand-alone risk.
C)   Portfolio AB has more money invested in Stock A than in Stock B.
D)   Portfolio AB has the same amount of money invested in each of the two stocks.
E)   Portfolio AB has more money invested in Stock B than in Stock A.

Question 12

In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are really interested in ex ante (future)data.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   If the returns on two stocks are perfectly positively correlated and these stocks have identical standard deviations,an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.
B)   A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5,assuming that the stock's beta was correctly calculated and is stable.
C)   If a stock has a negative beta,its expected return must be negative.
D)   A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5.
E)   According to the CAPM,stocks with higher standard deviations of returns must also have higher expected returns.

Question 14

A stock with a beta equal to -1.0 has zero systematic (or market)risk.

Accepted Answer

A) True 
 B)False

Question 15

The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Accepted Answer

A) True 
 B)False

Question 16

Diversification will normally reduce the riskiness of a portfolio of stocks.

Accepted Answer

A) True 
 B)False

Question 17

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Accepted Answer

A) True 
 B)False

Question 18

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Accepted Answer

A)   If a stock has a negative beta,its required return under the CAPM would be less than 5%.
B)   If a stock's beta doubled,its required return under the CAPM would also double.
C)   If a stock's beta doubled,its required return under the CAPM would more than double.
D)   If a stock's beta were 1.0,its required return under the CAPM would be 5%.
E)   If a stock's beta were less than 1.0,its required return under the CAPM would be less than 5%.

Question 19

Carson Inc.'s manager believes that economic conditions during the next year will be strong,normal,or weak,and she thinks that the firm's returns will have the probability distribution shown below.What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population,not a sample. ) Do not round your intermediate calculations.  ​

Accepted Answer

A)   21.71%
B)   25.18%
C)   22.58%
D)   17.59%
E)   24.75%

Question 20

Taggart Inc.'s stock has a 50% chance of producing a 36% return,a 30% chance of producing a 10% return,and a 20% chance of producing a -28% return.What is the firm's expected rate of return? Do not round your intermediate calculations.

Accepted Answer

A)   15.86%
B)   15.71%
C)   15.40%
D)   12.01%
E)   14.01%

Exam 8: Risk and Rates of Return

Correct Answer
verified

In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are really interested in ex ante (future)data.

Correct Answer
verified

Correct Answer
verified

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Correct Answer
verified

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Correct Answer
verified

The CAPM is built on historic conditions,although in most cases we use expected future data in applying it.Because betas used in the CAPM are calculated using expected future data,they are not subject to changes in future volatility.This is one of the strengths of the CAPM.

Correct Answer
verified

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

Correct Answer
verified

Mike Flannery holds the following portfolio: What is the portfolio's beta? Do not round your intermediate calculations.

Correct Answer
verified

The slope of the SML is determined by the value of beta.

Correct Answer
verified

A stock with a beta equal to -1.0 has zero systematic (or market)risk.

Correct Answer
verified

Tom Noel holds the following portfolio: Tom plans to sell Stock A and replace it with Stock E,which has a beta of 0.80.By how much will the portfolio beta change? Do not round your intermediate calculations.

Correct Answer
verified

Diversification will normally reduce the riskiness of a portfolio of stocks.

Correct Answer
verified

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm is negative.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Roenfeld Corp believes the following probability distribution exists for its stock.What is the coefficient of variation on the company's stock? Do not round your intermediate calculations.

Correct Answer
verified

Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB was created by investing in a combination of Stocks A and B.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Correct Answer
verified

Taggart Inc.'s stock has a 50% chance of producing a 36% return,a 30% chance of producing a 10% return,and a 20% chance of producing a -28% return.What is the firm's expected rate of return? Do not round your intermediate calculations.

Correct Answer
verified

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true,assuming the CAPM is correct.

Correct Answer
verified

Exam 8: Risk and Rates of Return

Correct AnswerverifiedShow Answer

In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are really interested in ex ante (future)data.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Correct AnswerverifiedShow Answer

The CAPM is built on historic conditions,although in most cases we use expected future data in applying it.Because betas used in the CAPM are calculated using expected future data,they are not subject to changes in future volatility.This is one of the strengths of the CAPM.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Mike Flannery holds the following portfolio: What is the portfolio's beta? Do not round your intermediate calculations.

Correct AnswerverifiedShow Answer

The slope of the SML is determined by the value of beta.

Correct AnswerverifiedShow Answer

A stock with a beta equal to -1.0 has zero systematic (or market)risk.

Correct AnswerverifiedShow Answer

Tom Noel holds the following portfolio: Tom plans to sell Stock A and replace it with Stock E,which has a beta of 0.80.By how much will the portfolio beta change? Do not round your intermediate calculations.

Correct AnswerverifiedShow Answer

Diversification will normally reduce the riskiness of a portfolio of stocks.

Correct AnswerverifiedShow Answer

It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm is negative.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Roenfeld Corp believes the following probability distribution exists for its stock.What is the coefficient of variation on the company's stock? Do not round your intermediate calculations. ​

Correct AnswerverifiedShow Answer

Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB was created by investing in a combination of Stocks A and B.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Correct AnswerverifiedShow Answer

Taggart Inc.'s stock has a 50% chance of producing a 36% return,a 30% chance of producing a 10% return,and a 20% chance of producing a -28% return.What is the firm's expected rate of return? Do not round your intermediate calculations.

Correct AnswerverifiedShow Answer

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true,assuming the CAPM is correct.

Correct AnswerverifiedShow Answer

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Roenfeld Corp believes the following probability distribution exists for its stock.What is the coefficient of variation on the company's stock? Do not round your intermediate calculations.

Correct Answer
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