Question 1

firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A) If a stock has a beta of to 1.0, its required rate of return will be unaffected by changes in the market risk premium. 
B) The slope of the Security Market Line is beta. 
C) Any stock with a negative beta must in theory have a negative required rate of return, provided rRF is positive. 
D) If a stock's beta doubles, its required rate of return must also double. 
E) If a stock's returns are negatively correlated with returns on most other stocks, the stock's beta will be negative. 
A) If a stock has a beta of to 1.0, its required rate of return will be unaffected by changes in the market risk premium. 
B) The slope of the Security Market Line is beta. 
C) Any stock with a negative beta must in theory have a negative required rate of return, provided rRF is positive. 
D) If a stock's beta doubles, its required rate of return must also double. 
E) If a stock's returns are negatively correlated with returns on most other stocks, the stock's beta will be negative.

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A) The slope of the security market line is equal to the market risk premium. 
B) Lower beta stocks have higher required returns. 
C) A stock's beta indicates its diversifiable risk. 
D) Diversifiable risk cannot be completely diversified away. 
E) Two securities with the same stand-alone risk must have the same betas. 
A) The slope of the security market line is equal to the market risk premium. 
B) Lower beta stocks have higher required returns. 
C) A stock's beta indicates its diversifiable risk. 
D) Diversifiable risk cannot be completely diversified away. 
E) Two securities with the same stand-alone risk must have the same betas.

Question 7

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. 
A) A; A. 
B) A; B. 
C) B; A. 
D) C; A. 
E) C; B.

Question 8

"Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

Accepted Answer

A) True 
 B)False

Question 9

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?

Accepted Answer

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. 
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.

Question 10

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% 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% 
A) 14.89% 
B) 15.68% 
C) 16.50% 
D) 17.33% 
E) 18.19%

Question 11

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

Accepted Answer

A) 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. 
B) The effect of a change in the market risk premium depends on the slope of the yield curve. 
C) If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%. 
D) 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. 
E) The effect of a change in the market risk premium depends on the level of the risk-free rate. 
A) 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. 
B) The effect of a change in the market risk premium depends on the slope of the yield curve. 
C) If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%. 
D) 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. 
E) The effect of a change in the market risk premium depends on the level of the risk-free rate.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Assume that your uncle holds just one stock, East Coast Bank Both banks have had less variability than most other stocks over the past 5 years.Measured by the standard deviation of returns, by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 60% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.)

Accepted Answer

A) 3.29% 
B) 3.46% 
C) 3.65% 
D) 3.84% 
E) 4.03% 
A) 3.29% 
B) 3.46% 
C) 3.65% 
D) 3.84% 
E) 4.03%

Question 14

is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative.

Accepted Answer

A) True 
 B)False

Question 15

Mulherin's stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%.What is the required rate of return on the market? (Hint: First find the market risk premium.)

Accepted Answer

A) 10.36% 
B) 10.62% 
C) 10.88% 
D) 11.15% 
E) 11.43% 
A) 10.36% 
B) 10.62% 
C) 10.88% 
D) 11.15% 
E) 11.43%

Question 16

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%. 
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%.

Question 17

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF), declines with the net effect being that the overall required return on the market, rM, remains constant.Which of the following statements is CORRECT?

Accepted Answer

A) The required return of all stocks will increase by the amount of the increase in the risk-free rate. 
B) The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0. 
C) Since the overall return on the market stays constant, the required return on each individual stock will also remain constant. 
D) The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0. 
E) The required return of all stocks will fall by the amount of the decline in the market risk premium. 
A) The required return of all stocks will increase by the amount of the increase in the risk-free rate. 
B) The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0. 
C) Since the overall return on the market stays constant, the required return on each individual stock will also remain constant. 
D) The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0. 
E) The required return of all stocks will fall by the amount of the decline in the market risk premium.

Question 18

stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Accepted Answer

A) True 
 B)False

Question 19

Returns for the Dayton Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.)
Year Return 2011 21% 2010 -12.50% 2009 25%

Accepted Answer

A) 20.08% 
B) 20.59% 
C) 21.11% 
D) 21.64% 
E) 22.18% 
A) 20.08% 
B) 20.59% 
C) 21.11% 
D) 21.64% 
E) 22.18%

Question 20

key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both the risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio.The risk of the asset held in isolation is not relevant under the CAPM.

Accepted Answer

A) True 
 B)False

firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.

Which of the following statements is CORRECT?

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

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.

Which of the following statements is CORRECT?

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.

"Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

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

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

is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative.

Mulherin's stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%.What is the required rate of return on the market? (Hint: First find the market risk premium.)

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF), declines with the net effect being that the overall required return on the market, rM, remains constant.Which of the following statements is CORRECT?

stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Returns for the Dayton Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.) Year Return 2011 21% 2010 -12.50% 2009 25%

Overview

Statements, CF, Taxes

Financial Analysis

Time Value of Money

Bonds

Stocks

Financial Options

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Forecasting

Valuation, Governanc

Dividends

CAP Structure

Working Capital

Multinational

Filters

Exam 6: Risk and Return

firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.

Which of the following statements is CORRECT?

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

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.

Which of the following statements is CORRECT?

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.

"Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

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

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

is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative.

Mulherin's stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%.What is the required rate of return on the market? (Hint: First find the market risk premium.)

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF), declines with the net effect being that the overall required return on the market, rM, remains constant.Which of the following statements is CORRECT?

stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Returns for the Dayton Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.) Year Return 2011 21% 2010 -12.50% 2009 25%

Overview

Statements, CF, Taxes

Financial Analysis

Time Value of Money

Bonds

Stocks

Financial Options

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Forecasting

Valuation, Governanc

Dividends

CAP Structure

Working Capital

Multinational

Filters

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.