FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 6: Risk and Return

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 21

Multiple Choice

Review LaterAdd Note

Review Later

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

A) The effect of a change in the market risk premium depends on the slope of the yield curve.
B) If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
C) If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
D) The effect of a change in the market risk premium depends on the level of the risk-free rate.
E) If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.

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

Correct Answer

verified

Show Answer

Question 22

Multiple Choice

Review LaterAdd Note

Review Later

Which of the following statements is CORRECT?

A) If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio.
B) The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns.One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta.However, this historical beta may differ from the beta that exists in the future.
C) The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.
D) It is theoretically possible for a stock to have a beta of 1.0.If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, r_RF.
E) The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.

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

Correct Answer

verified

Show Answer

Question 23

Multiple Choice

Review LaterAdd Note

Stock A's stock has a beta of 1.30, and its required return is 12.00%.Stock B's beta is 0.80.If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)

Ivan Knobel holds a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20.He is in the process of buying 1,000 shares of Syngine Corp at $10 a share and adding it to his portfolio.Syngine has an expected return of 13.0% and a beta of 1.50.The total value of Ivan's current portfolio is $90,000.What will the expected return and beta on the portfolio be after the purchase of the Syngine stock?

Megan Ross holds the following portfolio: $\begin{array} { c r r } \text { Stock } & \text { Investment } & \text { Beta } \\\text { A } & \$ 150,000 & 1.40 \\\text { B } & 50,000 & 0.80 \\\text { C } & 100,000 & 1.00 \\\text { D } & 75,000 & 1.20 \\\text { Total } & \$ 375,000 &\end{array}$ What is the portfolio's beta?

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.

Donald Gilmore has $100,000 invested in a 2-stock portfolio.$35,000 is invested in Stock X and the remainder is invested in Stock Y.X's beta is 1.50 and Y's beta is 0.70.What is the portfolio's beta?

The two stocks in your portfolio, X and Y, have independent returns, so the correlation between them, r_XY is zero.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%.Which of the following statements best describes the characteristics of your 2-stock portfolio?

Sherrie Hymes holds a $200,000 portfolio consisting of the following stocks.The portfolio's beta is 0.875. $\begin{array}{crr}\text { Stock }&\text { Investment }&\text { Beta }\\\text { A } & \$ 50,000 & 0.50 \\\text { B } & 50,000 & 0.80 \\\text { C } & 50,000 & 1.00 \\\text { D } & 50,000 & 1.20 \\\text { Total } & \$ 200,000 &\end{array}$ If Sherrie replaces Stock A with another stock, E, which has a beta of 1.50, what will the portfolio's new beta be?

The CAPM is a multi-period model that takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

If you plotted the returns of a company against those of the market and found that the slope of your 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 that the observed relationship is expected to continue in the future.

Joel Foster is 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? $\begin{array} { c r r } \text { Stock } & \text { Amount } & \text { Beta } \\\text { A } & \$ 1,075,000 & 1.20 \\\text { B } & 675,000 & 0.50 \\\text { C } & 750,000 & 1.40 \\\text { D } & 500,000 & 0.75 \\& \$ 3,000,000 &\end{array}$

For markets to be in equilibrium, that is, for there to be no strong pressure for prices to depart from their current levels,

Hazel Morrison, a mutual fund manager, has a $40 million portfolio with a beta of 1.00.The risk-free rate is 4.25%, and the market risk premium is 6.00%.Hazel expects to receive an additional $60 million, which she plans to invest in additional stocks.After investing the additional funds, she wants the fund's required and expected return to be 13.00%.What must the average beta of the new stocks be to achieve the target required rate of return?

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

Bloome Co.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a −18% return.What is the firm's expected rate of return?

Dixon Food's stock has a beta of 1.4, while Clark Café's stock has a beta of 0.7.Assume that the risk-free rate, r_RF, is 5.5% and the market risk premium, (r_M − r_RF) , equals 4%.Which of the following statements is CORRECT?

Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%.Stock A has a beta of 0.8 and Stock B has a beta of 1.2.The correlation coefficient, r, between the two stocks is 0.6.Portfolio P has 50% invested in Stock A and 50% invested in B.Which of the following statements is CORRECT?

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

Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.