Question 1

Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?

Accepted Answer

A)   The fact that a security or project may not have a past history that can be used as the basis for calculating beta.
B)   Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta.
C)   The beta of an "average stock," or "the market," can change over time, sometimes drastically.
D)   Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
E)   All of the statements above are true.F) A) and E)
G) A) and D)

Question 2

Jim Angel holds a $200,000 portfolio consisting of the following stocks:What is the portfolio's beta?

Accepted Answer

A)   0.938
B)   0.988
C)   1.037
D)   1.089
E)   1.143F) A) and B)
G) C) and D)

Question 3

Assume that in recent years both expected inflation and the market risk premium (rM − rRF)  have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?

Accepted Answer

A)   The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas.
B)   The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas.
C)   The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0.
D)   Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.
E)   The required returns on all stocks have fallen by the same amount.F) A) and D)
G) C) and D)

Question 4

Consider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1.Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns. Which of the following statements is CORRECT?

Accepted Answer

A)   Portfolio AB has a standard deviation of 20%.
B)   Portfolio AB's coefficient of variation is greater than 2.0.
C)   Portfolio AB's required return is greater than the required return on Stock A.
D)   Portfolio ABC's expected return is 10.66667%.
E)   Portfolio ABC has a standard deviation of 20%.F) A) and B)
G) None of the above

Question 5

Mike Flannery holds the following portfolio:What is the portfolio's beta?

Accepted Answer

A)   1.06
B)   1.17
C)   1.29
D)   1.42
E)   1.56F) C) and E)
G) A) and B)

Question 6

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?

Accepted Answer

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

Question 7

You have the following data on (1)  the average annual returns of the market for the past 5 years and (2)  similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B?

Accepted Answer

A)   bA > 0; bB = 1.
B)   bA > +1; bB = 0.
C)   bA = 0; bB = -1.
D)   bA 
E)   bA < -1; bB = 1.F) C) and D)
G) A) and B)

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

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

Question 10

You have the following data on three stocks:If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

Accepted Answer

A)   A; A.
B)   A; B.
C)   B; A.
D)   C; A.
E)   C; B.F) B) and E)
G) B) and D)

Question 11

Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

Accepted Answer

A) True 
 B)False

Question 12

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?

Accepted Answer

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) A) and C)

Question 13

CCC Corp has a beta of 1.5 and is currently in equilibrium. The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%. Now the required return on an average stock increases by 30.0% (not percentage points) . Neither betas nor the risk-free rate change. What would CCC's new required return be?

Accepted Answer

A)   14.89%
B)   15.68%
C)   16.50%
D)   17.33%
E)   18.19%F) B) and E)
G) None of the above

Question 14

Suppose you hold a portfolio consisting of a $10,000 investment in each of 8 different common stocks. The portfolio's beta is 1.25. Now suppose you decided to sell one of your stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35. What would the portfolio's new beta be?

Accepted Answer

A)   1.17
B)   1.23
C)   1.29
D)   1.36
E)   1.43F) D) and E)
G) A) and C)

Question 15

Bob has a $50,000 stock portfolio with a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%. Becky also has a $50,000 portfolio, but it has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%. The correlation coefficient, r, between Bob's and Becky's portfolios is zero. If Bob and Becky marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?

Accepted Answer

A)   The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
B)   The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.
C)   The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
D)   The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations, 25%.
E)   The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations, 25%.F) C) and D)
G) B) and C)

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Accepted Answer

A) True 
 B)False

Question 18

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 19

Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%. The returns of the two stocks are independent, so the correlation coefficient between them, rXY, is zero. Which of the following statements best describes the characteristics of your 2-stock portfolio?

Accepted Answer

A)   Your portfolio has a standard deviation of 30%, and its expected return is 15%.
B)   Your portfolio has a standard deviation less than 30%, and its beta is greater than 1.6.
C)   Your portfolio has a beta equal to 1.6, and its expected return is 15%.
D)   Your portfolio has a beta greater than 1.6, and its expected return is greater than 15%.
E)   Your portfolio has a standard deviation greater than 30% and a beta equal to 1.6.F) B) and C)
G) None of the above

Question 20

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

Exam 6: Risk, Return, and the Capital Asset Pricing Model

Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

Correct Answer
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?

Correct Answer
verified

Mike Flannery holds the following portfolio:What is the portfolio's beta?

Correct Answer
verified

You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B?

Correct Answer
verified

Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?

Correct Answer
verified

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

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?

Correct Answer
verified

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Correct Answer
verified

Correct Answer
verified

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
verified

You have the following data on three stocks:If you are a strict risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.

Correct Answer
verified

Jim Angel holds a $200,000 portfolio consisting of the following stocks:What is the portfolio's beta?

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Exam 6: Risk, Return, and the Capital Asset Pricing Model

Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Mike Flannery holds the following portfolio:What is the portfolio's beta?

Correct AnswerverifiedShow Answer

You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B?

Correct AnswerverifiedShow Answer

Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?

Correct AnswerverifiedShow Answer

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

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?

Correct AnswerverifiedShow Answer

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

You have the following data on three stocks:If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

Correct AnswerverifiedShow Answer

Jim Angel holds a $200,000 portfolio consisting of the following stocks:What is the portfolio's beta?

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

You have the following data on three stocks:If you are a strict risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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