Filters
Question type
Study Flashcards

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?


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

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

Correct Answer

verifed

verified

Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has equal amounts invested in each of the three stocks. Each of the stocks has a standard deviation of 25%. The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero) . Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged. Which of the following statements is CORRECT?


A) The required return of all stocks will remain unchanged since there was no change in their betas.
B) The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium.
C) The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will increase while the returns of safer stocks (such as Stock A) will decrease.
D) The required returns on all three stocks will increase by the amount of the increase in the market risk premium.
E) The required return on the average stock will remain unchanged, but the returns on riskier stocks (such as Stock C) will decrease while the returns on safer stocks (such as Stock A) will increase.

F) C) and D)
G) C) and E)

Correct Answer

verifed

verified

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

A) True
B) False

Correct Answer

verifed

verified

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.

A) True
B) False

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) The slope of the security market line is equal to the market risk premium.
B) Lower beta stocks have higher required returns.
C) A stock's beta indicates its diversifiable risk.
D) Diversifiable risk cannot be completely diversified away.
E) Two securities with the same stand-alone risk must have the same betas.

F) A) and E)
G) A) and B)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


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 rebalance 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) B) and C)
G) A) and B)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


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) A) and E)
G) None of the above

Correct Answer

verifed

verified

Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.

A) True
B) False

Correct Answer

verifed

verified

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.)


A) 17.69%
B) 18.62%
C) 19.55%
D) 20.52%
E) 21.55%

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

Correct Answer

verifed

verified

Stock A has a beta of 1.2 and a standard deviation of 20%. Stock B has a beta of 0.8 and a standard deviation of 25%. Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B. Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)


A) Stock A's returns are less highly correlated with the returns on most other stocks than are B's returns.
B) Stock B has a higher required rate of return than Stock A.
C) Portfolio P has a standard deviation of 22.5%.
D) More information is needed to determine the portfolio's beta.
E) Portfolio P has a beta of 1.0.

F) B) and D)
G) A) and C)

Correct Answer

verifed

verified

Assume that to cool off the economy and decrease expectations for inflation, the Federal Reserve tightened the money supply, causing an increase in the risk-free rate, rRF. Investors also became concerned that the Fed's actions would lead to a recession, and that led to an increase in the market risk premium, Under these conditions, with other things held constant, which of the following statements is most correct?


A) The required return on all stocks would increase by the same amount.
B) The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0.
C) Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices.
D) The prices of all stocks would decline, but the decline would be greatest for high-beta stocks.
E) The prices of all stocks would increase, but the increase would be greatest for high-beta stocks.

F) None of the above
G) B) and E)

Correct Answer

verifed

verified

Cooley Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?


A) 11.36%
B) 11.65%
C) 11.95%
D) 12.25%
E) 12.55%

F) A) and B)
G) None of the above

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


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) C) and E)
G) A) and D)

Correct Answer

verifed

verified

The distributions of rates of return for Companies AA and BB are given below: We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.

A) True
B) False

Correct Answer

verifed

verified

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM − rRF, is positive. Which of the following statements is CORRECT?


A) If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.
B) Stock B's required rate of return is twice that of Stock A.
C) If Stock A's required return is 11%, then the market risk premium is 5%.
D) If Stock B's required return is 11%, then the market risk premium is 5%.
E) If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.

F) B) and D)
G) B) and E)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) 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 that one stock.
B) If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless.
C) The required return on a firm's common stock is, in theory, determined solely by its market risk. If the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return.
D) Portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio.
E) A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock.

F) All of the above
G) A) and E)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


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) A) and C)
G) C) and E)

Correct Answer

verifed

verified

Data for Dana Industries is shown below. Now Dana acquires some risky assets that cause its beta to increase by 30%. In addition, expected inflation increases by 2.00%. What is the stock's new required rate of return?


A) 14.00%
B) 14.70%
C) 15.44%
D) 16.21%
E) 17.02%

F) A) and E)
G) B) and D)

Correct Answer

verifed

verified

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?


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.

F) B) and D)
G) A) and D)

Correct Answer

verifed

verified

Assume that you are the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require) on this fund?


A) 10.56%
B) 10.83%
C) 11.11%
D) 11.38%
E) 11.67%

F) A) and B)
G) A) and C)

Correct Answer

verifed

verified

Showing 21 - 40 of 146

Related Exams

Exam 1

Overview

66 Questions

Exam 2

Financial Markets

34 Questions

Exam 3

Financial Statements

130 Questions

Exam 4

Statement Analysis

127 Questions

Exam 5

Time Value of Money

164 Questions

Exam 6

Interest Rates

82 Questions

Exam 7

Bonds

91 Questions

Exam 9

Stocks

83 Questions

Exam 10

Cost of Capital

94 Questions

Exam 11

Capital Budgeting

107 Questions

Exam 12

Cash Flow and Risk

73 Questions

Exam 13

Capital Structure

88 Questions

Exam 14

Dividends

76 Questions

Exam 15

Working Capital

127 Questions

Exam 16

Forecasting

39 Questions

Exam 17

Multinational

50 Questions

Exam 18

Stock Equilibrium and Project Evaluation

8 Questions

Show Answer