Question 1

Inflation, recession, and high interest rates are economic events that are best characterized as being

Accepted Answer

A)  systematic risk factors that can be diversified away. 
B)  company-specific risk factors that can be diversified away. 
C)  among the factors that are responsible for market risk. 
D)  risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. 
E)  irrelevant except to governmental authorities like the Federal Reserve. 
A)  systematic risk factors that can be diversified away. 
B)  company-specific risk factors that can be diversified away. 
C)  among the factors that are responsible for market risk. 
D)  risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. 
E)  irrelevant except to governmental authorities like the Federal Reserve.

Question 2

Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks. 
B)  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. 
C)  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. 
D)  The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks. 
E)  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, rRF. 
A)  The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks. 
B)  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. 
C)  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. 
D)  The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks. 
E)  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, rRF.

Question 7

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 8

Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation.

Accepted Answer

A) True 
 B)False

Question 9

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM − rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

Accepted Answer

A)  The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A. 
B)  The required return would decrease by the same amount for both Stock A and Stock B. 
C)  The required return would increase for Stock A but decrease for Stock B. 
D)  The required return on Portfolio P would remain unchanged. 
E)  The required return would increase for Stock B but decrease for Stock A. 
A)  The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A. 
B)  The required return would decrease by the same amount for both Stock A and Stock B. 
C)  The required return would increase for Stock A but decrease for Stock B. 
D)  The required return on Portfolio P would remain unchanged. 
E)  The required return would increase for Stock B but decrease for Stock A.

Question 10

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)  Beta is measured by the slope of the security market line. 
B)  If the risk-free rate rises, then the market risk premium must also rise. 
C)  If a company's beta is halved, then its required return will also be halved. 
D)  If a company's beta doubles, then its required return will also double. 
E)  The slope of the security market line is equal to the market risk premium, (rM − rRF). 
A)  Beta is measured by the slope of the security market line. 
B)  If the risk-free rate rises, then the market risk premium must also rise. 
C)  If a company's beta is halved, then its required return will also be halved. 
D)  If a company's beta doubles, then its required return will also double. 
E)  The slope of the security market line is equal to the market risk premium, (rM − rRF).

Question 12

Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is CORRECT?

Accepted Answer

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. 
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.

Inflation, recession, and high interest rates are economic events that are best characterized as being

Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.

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

Which of the following statements is CORRECT?

Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders.

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?

Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation.

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM − rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Which of the following statements is CORRECT?

Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is CORRECT?

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters

Exam 8: Risk and Return

Inflation, recession, and high interest rates are economic events that are best characterized as being

Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.

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

Which of the following statements is CORRECT?

Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders.

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?

Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation.

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM − rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Which of the following statements is CORRECT?

Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is CORRECT?

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters