Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Accepted Answer

A) Variance; correlation coefficient. 
B) Standard deviation; correlation coefficient. 
C) Beta; variance. 
D) Coefficient of variation; beta. 
E) Beta; beta. 
A) Variance; correlation coefficient. 
B) Standard deviation; correlation coefficient. 
C) Beta; variance. 
D) Coefficient of variation; beta. 
E) Beta; beta.

Question 3

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%.The manager 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?

Accepted Answer

A) 1.68 
B) 1.76 
C) 1.85 
D) 1.94 
E) 2.04 
A) 1.68 
B) 1.76 
C) 1.85 
D) 1.94 
E) 2.04

Question 4

Portfolio A has but one security, while Portfolio B has 100 securities.Because of diversification effects, we would expect Portfolio B to have the lower risk.However, it is possible for Portfolio A to be less risky.

Accepted Answer

A) True 
 B)False

Question 5

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true, assuming the CAPM is correct.

Accepted Answer

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. 
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.

Question 6

investors become less averse to risk, the slope of the Security Market Line (SML) will increase.

Accepted Answer

A) True 
 B)False

Question 7

individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Accepted Answer

A) True 
 B)False

Question 8

a portfolio of three randomly selected stocks, which of the following could NOT be true, i.e., which statement always is false?

Accepted Answer

A) The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation. 
B) The riskiness of the portfolio is greater than the riskiness of one or two of the stocks. 
C) The beta of the portfolio is lower than the lowest of the three betas. 
D) The beta of the portfolio is lower than the highest of the three betas. 
E) None of the above statements is obviously false, because they all could be true, but not necessarily at the same time. 
A) The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation. 
B) The riskiness of the portfolio is greater than the riskiness of one or two of the stocks. 
C) The beta of the portfolio is lower than the lowest of the three betas. 
D) The beta of the portfolio is lower than the highest of the three betas. 
E) None of the above statements is obviously false, because they all could be true, but not necessarily at the same time.

Question 9

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

Accepted Answer

A) The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change. 
B) The expected return of your portfolio is likely to decline. 
C) The diversifiable risk will remain the same, but the market risk will likely decline. 
D) Both the diversifiable risk and the market risk of your portfolio are likely to decline. 
E) The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline. 
A) The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change. 
B) The expected return of your portfolio is likely to decline. 
C) The diversifiable risk will remain the same, but the market risk will likely decline. 
D) Both the diversifiable risk and the market risk of your portfolio are likely to decline. 
E) The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.

Question 10

Stock A has an expected return of 10% and a standard deviation of 20%.Stock B has an expected return of 13% and a standard deviation of 30%.The risk-free rate is 5% and the market risk premium, rM − rRF, is 6%.Assume that the market is in equilibrium.Portfolio AB has 50% invested in Stock A and 50% invested in Stock B.The returns of Stock A and Stock B are independent of one another, i.e., the correlation coefficient between them is zero.Which of the following statements is CORRECT?

Accepted Answer

A) Stock A's beta is 0.8333. 
B) Since the two stocks have zero correlation, Portfolio AB is riskless. 
C) Stock B's beta is 1.0000. 
D) Portfolio AB's required return is 11%. 
E) Portfolio AB's standard deviation is 25%. 
A) Stock A's beta is 0.8333. 
B) Since the two stocks have zero correlation, Portfolio AB is riskless. 
C) Stock B's beta is 1.0000. 
D) Portfolio AB's required return is 11%. 
E) Portfolio AB's standard deviation is 25%.

Question 11

a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

Accepted Answer

A) The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation. 
B) The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation. 
C) The beta of the portfolio is less than the average of the betas of the individual stocks. 
D) The beta of the portfolio is equal to the average of the betas of the individual stocks. 
E) The beta of the portfolio is larger than the average of the betas of the individual stocks. 
A) The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation. 
B) The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation. 
C) The beta of the portfolio is less than the average of the betas of the individual stocks. 
D) The beta of the portfolio is equal to the average of the betas of the individual stocks. 
E) The beta of the portfolio is larger than the average of the betas of the individual stocks.

Question 12

Maxwell Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return.What is the firm's expected rate of return?

Accepted Answer

A) 9.41% 
B) 9.65% 
C) 9.90% 
D) 10.15% 
E) 10.40% 
A) 9.41% 
B) 9.65% 
C) 9.90% 
D) 10.15% 
E) 10.40%

Question 13

risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM − rRF, is positive.Which of the following statements is CORRECT?

Accepted Answer

A) If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's. 
B) Stock B's required rate of return is twice that of Stock A. 
C) If Stock A's required return is 11%, then the market risk premium is 5%. 
D) If Stock B's required return is 11%, then the market risk premium is 5%. 
E) If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's. 
A) If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's. 
B) Stock B's required rate of return is twice that of Stock A. 
C) If Stock A's required return is 11%, then the market risk premium is 5%. 
D) If Stock B's required return is 11%, then the market risk premium is 5%. 
E) If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.

Question 14

Portfolio A has but one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value.Because of its diversification, Portfolio B will by definition be riskless.

Accepted Answer

A) True 
 B)False

Question 15

stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Accepted Answer

A) True 
 B)False

Question 16

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information, which of the following statements is CORRECT?

Accepted Answer

A) An index fund with beta = 1.0 should have a required return of 11%. 
B) If a stock has a negative beta, its required return must also be negative. 
C) An index fund with beta = 1.0 should have a required return less than 11%. 
D) If a stock's beta doubles, its required return must also double. 
E) An index fund with beta = 1.0 should have a required return greater than 11%. 
A) An index fund with beta = 1.0 should have a required return of 11%. 
B) If a stock has a negative beta, its required return must also be negative. 
C) An index fund with beta = 1.0 should have a required return less than 11%. 
D) If a stock's beta doubles, its required return must also double. 
E) An index fund with beta = 1.0 should have a required return greater than 11%.

Question 17

risk-free rate is 6% and the market risk premium is 5%.Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8.Which of the following statements is CORRECT?

Accepted Answer

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%. 
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%.

Question 18

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

Accepted Answer

A) The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas. 
B) The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas. 
C) The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0. 
D) Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0. 
E) The required returns on all stocks have fallen by the same amount. 
A) The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas. 
B) The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas. 
C) The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0. 
D) Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0. 
E) The required returns on all stocks have fallen by the same amount.

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 must have been negatively correlated with returns on most other stocks 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 re-balance your portfolio to include more high-beta stocks. 
E) If the market risk premium remains constant, but the risk-free rate declines, then the required returns on low-beta stocks will rise while those on high-beta stocks will decline. 
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 must have been negatively correlated with returns on most other stocks 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 re-balance your portfolio to include more high-beta stocks. 
E) If the market risk premium remains constant, but the risk-free rate declines, then the required returns on low-beta stocks will rise while those on high-beta stocks will decline.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A) If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0.Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds. 
B) 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. 
C) 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.Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk. 
D) There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML. 
E) 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. 
A) If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0.Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds. 
B) 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. 
C) 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.Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk. 
D) There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML. 
E) 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.

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

Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Portfolio A has but one security, while Portfolio B has 100 securities.Because of diversification effects, we would expect Portfolio B to have the lower risk.However, it is possible for Portfolio A to be less risky.

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true, assuming the CAPM is correct.

investors become less averse to risk, the slope of the Security Market Line (SML) will increase.

individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

a portfolio of three randomly selected stocks, which of the following could NOT be true, i.e., which statement always is false?

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

Maxwell Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return.What is the firm's expected rate of return?

risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM − rRF, is positive.Which of the following statements is CORRECT?

Portfolio A has but one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value.Because of its diversification, Portfolio B will by definition be riskless.

stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information, which of the following statements is CORRECT?

risk-free rate is 6% and the market risk premium is 5%.Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8.Which of the following statements is CORRECT?

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

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

Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Portfolio A has but one security, while Portfolio B has 100 securities.Because of diversification effects, we would expect Portfolio B to have the lower risk.However, it is possible for Portfolio A to be less risky.

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true, assuming the CAPM is correct.

investors become less averse to risk, the slope of the Security Market Line (SML) will increase.

individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

a portfolio of three randomly selected stocks, which of the following could NOT be true, i.e., which statement always is false?

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

Maxwell Inc.'s stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return.What is the firm's expected rate of return?

risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM − rRF, is positive.Which of the following statements is CORRECT?

Portfolio A has but one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value.Because of its diversification, Portfolio B will by definition be riskless.

stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information, which of the following statements is CORRECT?

risk-free rate is 6% and the market risk premium is 5%.Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8.Which of the following statements is CORRECT?

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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