Exam 6: Risk and Return

When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.

Which of the following statements is CORRECT?

Which of the following are the factors for the Fama-French model?

We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

One 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.

The $10.00 million mutual fund Henry manages has a beta of 1.05 and a 9.50% required return.The risk-free rate is 4.20%.Henry now receives another $5.00 million, which he invests in stocks with an average beta of 0.65.What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium, then find the new portfolio beta.)

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?

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

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?

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Assume that the risk-free rate remains constant, but the market risk premium declines.Which of the following is most likely to occur?

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

Which of the following statements is CORRECT?

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.

Charlie and Lucinda each have $50,000 invested in stock portfolios.Charlie's has a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%.Lucinda's has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%.The correlation coefficient, r, between Charlie's and Lucinda's portfolios is zero.If Charlie and Lucinda marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?

Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)

Returns for the Alcoff 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 2010 21.00\% 2009 -12.50\% 2008 25.00\%

Suppose that during the coming year, the risk free rate, r_RF, is expected to remain the same, while the market risk premium (r_M − r_RF), is expected to fall.Given this forecast, which of the following statements is CORRECT?

Gardner Electric has a beta of 0.88 and an expected dividend growth rate of 4.00% per year.The T-bill rate is 4.00%, and the T-bond rate is 5.25%.The annual return on the stock market during the past 4 years was 10.25%.Investors expect the average annual future return on the market to be 12.50%.Using the SML, what is the firm's required rate of return?

An 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.