Martin Ortner holds a $200,000 portfolio consisting of the following stocks: $\begin{array}{crr}\text { Stock }&\text { Investment }&\text { Beta }\\ \text { A } & \$ 50,000 & 0.95 \\ \text { B } & 50,000 & 0.80 \\ \text { C } & 50,000 & 1.00 \\ \text { D } & 50,000 & 1.20 \\ \text { Total } & \$ 200,000 & \end{array}$ What is the portfolio's beta?

A) 0.938 B) 0.988 C) 1.037 D) 1.089 E) 1.143 A) 0.938 B) 0.988 C) 1.037 D) 1.089 E) 1.143

Exam 6: Risk and Return

Gretta's 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.The risk-free rate is 6% and the market risk premium is 5%.Which of the following statements is CORRECT?

(Multiple Choice)

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Question 41

Recession, inflation, and high interest rates are economic events that are best characterized as being

(Multiple Choice)

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Question 42

Assume that in recent years both expected inflation and the market risk premium (r_M − r_RF) 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?

(Multiple Choice)

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Question 43

Freedman Flowers' 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?

(Multiple Choice)

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Question 44

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 45

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

(Multiple Choice)

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Question 46

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

(True/False)

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Question 47

Two conditions are used to determine whether or not a stock is in equilibrium: (1) Does the stock's market price equal its intrinsic value as seen by the marginal investor, and (2) does the expected return on the stock as seen by the marginal investor equal this investor's required return? If either of these conditions, but not necessarily both, holds, then the stock is said to be in equilibrium.

(True/False)

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Question 48

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 49

In historical data, we see that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns.This observation supports the notion that there is a positive correlation between risk and return.Which of the following answers correctly ranks investments from highest to lowest risk (and return), where the security with the highest risk is shown first, the one with the lowest risk last?

(Multiple Choice)

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Question 50

Stuart Company's manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below.What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population, not a sample.) Economic Conditions prob. Return Strong 30\% 32.0\% Normal 40\% 10.0\% Weak 30\% -16.0\%

(Multiple Choice)

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Question 51

Martin Ortner holds a $200,000 portfolio consisting of the following stocks: Stock Investment Beta A \ 50,000 0.95 B 50,000 0.80 C 50,000 1.00 D 50,000 1.20 Total \ 200,000 What is the portfolio's beta?

(Multiple Choice)

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Question 52

Stock A's beta is 1.7 and Stock B's beta is 0.7.Which of the following statements must be true, assuming the CAPM is correct.

(Multiple Choice)

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Question 53

Portfolio AB was created by investing in a combination of Stocks A and B.Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?

(Multiple Choice)

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Question 54

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

(Multiple Choice)

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Question 55

Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium.If the risk-free rate is 5.00%, what is the market risk premium?

(Multiple Choice)

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Question 56

If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

(True/False)

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Question 57

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 (r_M − r_RF) were to increase but the risk-free rate (r_RF) remained constant, which of the following would occur?

(Multiple Choice)

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Question 58

The CAPM is built on historic conditions, although in most cases we use expected future data in applying it.Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility.This is one of the strengths of the CAPM.

(True/False)

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Question 59

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

(True/False)

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Question 60

Showing 41 - 60 of 146

Exam 6: Risk and Return

Gretta's 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.The risk-free rate is 6% and the market risk premium is 5%.Which of the following statements is CORRECT?

Recession, inflation, and high interest rates are economic events that are best characterized as being

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?

Freedman Flowers' 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?

Which of the following statements is CORRECT?

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

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

Which of the following statements is CORRECT?

Martin Ortner holds a $200,000 portfolio consisting of the following stocks: Stock Investment Beta A \ 50,000 0.95 B 50,000 0.80 C 50,000 1.00 D 50,000 1.20 Total \ 200,000 What is the portfolio's beta?

Stock A's beta is 1.7 and Stock B's beta is 0.7.Which of the following statements must be true, assuming the CAPM is correct.

Portfolio AB was created by investing in a combination of Stocks A and B.Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is CORRECT?

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium.If the risk-free rate is 5.00%, what is the market risk premium?

If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

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?

The CAPM is built on historic conditions, although in most cases we use expected future data in applying it.Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility.This is one of the strengths of the CAPM.

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

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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Assume that in recent years both expected inflation and the market risk premium (r_M − r_RF) 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?

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 (r_M − r_RF) were to increase but the risk-free rate (r_RF) remained constant, which of the following would occur?