A) 1.286
B) 1.255
C) 1.224
D) 1.194
E) 1.165
G) A) and D)
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A) 1.07
B) 1.13
C) 1.18
D) 1.24
E) 1.30
G) None of the above
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A) Jane's portfolio will have less diversifiable risk and also less market risk than Dick's portfolio.
B) The required return on Jane's portfolio will be lower than that on Dick's portfolio because Jane's portfolio will have less total risk.
C) Dick's portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Jane's portfolio, but the required (and expected) returns will be the same on both portfolios.
D) If the two portfolios have the same beta, their required returns will be the same, but Jane's portfolio will have less market risk than Dick's.
E) The expected return on Jane's portfolio must be lower than the expected return on Dick's portfolio because Jane is more diversified.
G) D) and E)
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A) The slope of the SML is determined by the value of beta.
B) The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers.
C) Suppose you plotted the returns of a given stock against those of the market, and 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 investors expect the observed relationship to continue on into the future.
D) If investors become less risk averse, the slope of the Security Market Line will increase.
E) If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock.
G) B) and E)
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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.
G) A) and C)
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A) 1.06
B) 1.17
C) 1.29
D) 1.42
E) 1.56
G) B) and C)
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A) If the stock market is efficient, your portfolio's expected return should equal the expected return on the market, which is 11%.
B) The required return on the market is 10%.
C) The portfolio's required return is less than 11%.
D) If the risk-free rate remains unchanged but the market risk premium increases by 2%, your portfolio's required return will increase by more than 2%.
E) If the market risk premium remains unchanged but expected inflation increases by 2%, your portfolio's required return will increase by more than 2%.
G) B) and C)
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B) False
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A) Portfolio P has a standard deviation of 25% and a beta of 1.0.
B) Based on the information we are given, and assuming those are the views of the marginal investor, it is apparent that the two stocks are in equilibrium.
C) Portfolio P has more market risk than Stock A but less market risk than B.
D) Stock A should have a higher expected return than Stock B as viewed by the marginal investor.
E) Portfolio P has a coefficient of variation equal to 2.5.
G) A) and C)
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B) False
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B) False
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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.
G) B) and E)
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A) Portfolio P has a beta that is greater than 1.2.
B) Portfolio P has a standard deviation that is greater than 25%.
C) Portfolio P has an expected return that is less than 12%.
D) Portfolio P has a standard deviation that is less than 25%.
E) Portfolio P has a beta that is less than 1.2.
G) A) and C)
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B) False
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True
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A) Variance; correlation coefficient.
B) Standard deviation; correlation coefficient.
C) Beta; variance.
D) Coefficient of variation; beta.
E) Beta; beta.
G) A) and E)
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B) False
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B) False
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True
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A) If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.
B) Stock Y's realized return during the coming year will be higher than Stock X's return.
C) If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount.
D) Stock Y's return has a higher standard deviation than Stock X.
E) If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y.
G) D) and E)
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A) The portfolio's beta is less than 1.2.
B) The portfolio's expected return is 15%.
C) The portfolio's standard deviation is greater than 20%.
D) The portfolio's beta is greater than 1.2.
E) The portfolio's standard deviation is 20%.
G) A) and B)
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B
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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.
G) A) and C)
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