Question 1

The slope of the SML is determined by investors' aversion to risk. The greater the marginal investor's risk aversion, the steeper the SML.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Which type of correlation will a completely diversified portfolio have with the market portfolio?

Accepted Answer

A)   less than one, because it carries only market risk
B)   less than one, because it carries only diversifiable risk
C)   equal to one, because it carries only diversifiable risk
D)   equal to one, because it carries only market riskE) B) and D)
F) A) and C)

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

A payoff matrix shows the set of possible rates of return on an investment, along with their probabilities of occurrence, and the investment's expected rate of return is found by multiplying each outcome or "state" by its probability.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is correct?

Accepted Answer

A)   If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.
B)   An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky.
C)   The slope of the yield curve has no effect on the slope of the SML.
D)   Assume that the required rate of return on the market, rM, is given and fixed at 10%. If the yield curve were upward sloping, then the Security Market Line (SML)  would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.E) A) and D)
F) C) and D)

Question 7

Efficient portfolio has the best risk and expected return combination for any given level of risk or return.

Accepted Answer

A) True 
 B)False

Question 8

Assume that the risk-free rate is 5%. Which statement about a stock's beta is correct?

Accepted Answer

A)   If a stock has a negative beta, its required return under the CAPM would be less than 5%.
B)   If a stock's beta doubled, its required return under the CAPM would also double.
C)   If a stock's beta were less than 1.0, its required return under the CAPM would less than 5%.
D)   If a stock's beta were 1.0, its required return under the CAPM would be 5%.E) B) and C)
F) C) and D)

Question 9

Assume that two investors each hold a portfolio, and that portfolio is their only asset. Investor A's portfolio has a beta of minus 2.0, while Investor B's portfolio has a beta of plus 2.0. Assuming that the unsystematic risks of the stocks in the two portfolios are the same, then the two investors face the same amount of risk. However, the holders of either portfolio could lower their risks, and by exactly the same amount, by adding some "normal" stocks with beta = 1.0.

Accepted Answer

A) True 
 B)False

Question 10

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM?

Accepted Answer

A)   Stock Y's return during the coming year will be higher than Stock X's return.
B)   If expected inflation increases but the market risk premium is unchanged, the required returns on the two stocks will increase by the same amount.
C)   Stock Y's return has a higher standard deviation than Stock X.
D)   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.E) All of the above
F) B) and C)

Question 11

The real risk-free rate is 2%, the expected inflation rate is 3.00%, the market risk premium is 4.70%, and Kohers Enterprises has a beta of 1.10. What is the required rate of return on Kohers' stock?

Accepted Answer

A)   9.43%
B)   9.67%
C)   9.92%
D)   10.17%E) B) and D)
F) All of the above

Question 12

Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is correct?

Accepted Answer

A)   Stock B's required return is double that of Stock A's.
B)   If the marginal investor becomes more risk averse, the required return on Stock B will increase by more than the required return on Stock A.
C)   An equally weighted portfolio of Stocks A and B will have a beta lower than 1.2.
D)   If the risk-free rate increases but the market risk premium remains constant, the required return on Stock A will increase by more than that on Stock B.E) A) and B)
F) A) and C)

Question 13

Which of the following statements is correct?

Accepted Answer

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) All of the above
F) B) and C)

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

A mutual fund manager has a $20 million portfolio with a beta of 1.00. The risk-free rate is 4.25%, and the market risk premium is 6.00%. The manager expects to receive an additional $25.50 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?

Accepted Answer

A)   1.73
B)   1.82
C)   1.91
D)   2.00E) A) and B)
F) A) and C)

Question 16

Rosenberg Inc. is considering a capital budgeting project that has an expected return of 20% and a standard deviation of 25%. What is the project's coefficient of variation?

Accepted Answer

A)   1.25
B)   1.31
C)   1.38
D)   1.45E) C) and D)
F) All of the above

Question 17

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 statement best describes the characteristics of your two-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) All of the above
F) None of the above

Question 18

Companies should under no conditions take actions that increase their 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 19

Which of the following statements is correct?

Accepted Answer

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 will be negatively correlated with returns on most other stocks in the market 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) A) and B)
F) All of the above

Question 20

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

Accepted Answer

A) True 
 B)False

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

Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is correct?

Correct Answer
verified

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM?

Correct Answer
verified

The slope of the SML is determined by investors' aversion to risk. The greater the marginal investor's risk aversion, the steeper the SML.

Correct Answer
verified

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

Correct Answer
verified

Rosenberg Inc. is considering a capital budgeting project that has an expected return of 20% and a standard deviation of 25%. What is the project's coefficient of variation?

Correct Answer
verified

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

Correct Answer
verified

A payoff matrix shows the set of possible rates of return on an investment, along with their probabilities of occurrence, and the investment's expected rate of return is found by multiplying each outcome or "state" by its probability.

Correct Answer
verified

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

Correct Answer
verified

Efficient portfolio has the best risk and expected return combination for any given level of risk or return.

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

The real risk-free rate is 2%, the expected inflation rate is 3.00%, the market risk premium is 4.70%, and Kohers Enterprises has a beta of 1.10. What is the required rate of return on Kohers' stock?

Correct Answer
verified

Which type of correlation will a completely diversified portfolio have with the market portfolio?

Correct Answer
verified

Assume that the risk-free rate is 5%. Which statement about a stock's beta is correct?

Correct Answer
verified

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.

Correct Answer
verified

Correct Answer
verified

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

Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM?

Correct AnswerverifiedShow Answer

The slope of the SML is determined by investors' aversion to risk. The greater the marginal investor's risk aversion, the steeper the SML.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Rosenberg Inc. is considering a capital budgeting project that has an expected return of 20% and a standard deviation of 25%. What is the project's coefficient of variation?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A payoff matrix shows the set of possible rates of return on an investment, along with their probabilities of occurrence, and the investment's expected rate of return is found by multiplying each outcome or "state" by its probability.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Efficient portfolio has the best risk and expected return combination for any given level of risk or return.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

The real risk-free rate is 2%, the expected inflation rate is 3.00%, the market risk premium is 4.70%, and Kohers Enterprises has a beta of 1.10. What is the required rate of return on Kohers' stock?

Correct AnswerverifiedShow Answer

Which type of correlation will a completely diversified portfolio have with the market portfolio?

Correct AnswerverifiedShow Answer

Assume that the risk-free rate is 5%. Which statement about a stock's beta is correct?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified