FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 7: Risk, Return, and the Capital Asset Pricing Model

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 71

Multiple Choice

Review LaterAdd Note

Review Later

Which of the following statements is correct?

A) 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.
B) If a stock has a negative beta, its expected return must be negative.
C) 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.
D) According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns.

E) A) and B)
F) A) and C)

Correct Answer

verified

Show Answer

Question 72

Multiple Choice

Review LaterAdd Note

Review Later

Bertin Bicycles 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 11.50%. Using the SML, what is Bertin's required rate of return?

A) 10.48%
B) 10.75%
C) 11.02%
D) 11.29%

E) B) and C)
F) B) and D)

Correct Answer

verified

Show Answer

Question 73

Multiple Choice

Review LaterAdd Note

Stocks A, B, and C all have an expected return of 10% and a standard deviation of 25%. Stocks A and B have returns that are INDEPENDENT of one another, i.e., their correlation coefficient, r, equals zero. Stocks A and C have returns that are NEGATIVELY CORRELATED with one another, i.e., r is less than 0. Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B. Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C. Which of the following statements is correct?

For diversified investors, the appropriate measure of risk is how the return on an individual stock moves with the returns of other assets in the portfolio.

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

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?

Which of the following statements is correct?

Consider the following information for three stocks, A, B, and C, and portfolios of these stocks. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlation coefficients 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?

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

Any change in 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.

You are given the following returns on the Market and on Stock A. Calculate Stock A's beta coefficient.

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

The larger the number of assets in a portfolio and the longer the time period, what can we say about the portfolio beta?

In the absence of a risk-free rate, what is the minimum variance portfolio?

Diversification can reduce the riskiness of a portfolio of stocks.

Suppose you hold a diversified portfolio consisting of a $10,000 investment in each of 12 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 1.34. What would the portfolio's new beta be?

Campbell's father holds just one stock, East Coast Bank (ECB) , which he thinks is a very low-risk security. Campbell agrees that the stock is relatively safe, but he wants to demonstrate that his father's risk would be even lower if he were more diversified. Campbell obtained the following returns data shown for West Coast Bank (WCB) . Both have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would his father's historical risk have been reduced if he had held a portfolio consisting of 60% ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.)