Exam 6: Risk and Return

Since the market return represents the expected return on an average stock, the market return reflects a certain amount of risk.As a result, there exists a market risk premium, which is the amount over and above the risk-free rate, that is required to compensate stock investors for assuming an average amount of risk.

You observe the following information regarding Companies X and Y: ∙ Company X has a higher expected return than Company Y. ∙ Company X has a lower standard deviation of returns than Company Y. ∙ Company X has a higher beta than Company Y. Given this information, which of the following statements is CORRECT?

Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.Your portfolio consists of 50% A and 50% B.Which of the following statements is CORRECT?

We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.

Market risk refers to the tendency of a stock to move with the general stock market.A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

If markets are in equilibrium, which of the following conditions will exist?

Consider the following information and then calculate the required rate of return for the Universal Investment Fund, which holds 4 stocks.The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows: Stock Investment B eta A \ 200,000 1.50 B \ 300,000 -0.50 C \ 500,000 1.25 D \ 1,000,000 0.75

Suppose that Federal Reserve actions have caused an increase in the risk-free rate, r_RF.Meanwhile, investors are afraid of a recession, so the market risk premium, (r_M − r_RF), has increased.Under these conditions, with other things held constant, which of the following statements is most correct?

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

You are considering investing in one of the these three stocks: Stock Standard Deviation Beta A 20\% 0.59 B 10\% 0.61 C 12\% 1.29 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.

According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation.Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

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

Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80.What will the portfolio's new beta be?

Shirley Paul's 2-stock portfolio has a total value of $100,000.$37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42.What is her portfolio's beta?

If the price of money (e.g., interest rates and equity capital costs) increases due to an increase in anticipated inflation, the risk-free rate will also increase.If there is no change in investors' risk aversion, then the market risk premium (r_M − r_RF) will remain constant.Also, if there is no change in stocks' betas, then the required rate of return on each stock as measured by the CAPM will increase by the same amount as the increase in expected inflation.

A 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.