Exam 8: Risk and Rates of Return

Jill Angel holds a $200,000 portfolio consisting of the following stocks.The portfolio's beta is 0.88. Stock Investment Beta A \ 50,000 0.50 \ 50,000 0.80 \ 50,000 1.00 \ 50,000 1.20 Total \2 00,000 If Jill replaces Stock A with another stock,E,which has a beta of 1.45,what will the portfolio's new beta be? Do not round your intermediate calculations.

The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by a manager's actions.

Which of the following statements is CORRECT?

Jim Angel holds a $200,000 portfolio consisting of the following stocks: Stock Investment Beta A \ 50,000 1.20 B \ 50,000 0.80 C \ 50,000 1.00 D \ 50,000 1.20 Total \2 00,000 What is the portfolio's beta? Do not round your intermediate calculations.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Stock A's stock has a beta of 1.30,and its required return is 13.75%.Stock B's beta is 0.80.If the risk-free rate is 2.75%,what is the required rate of return on B's stock? (Hint: First find the market risk premium. )Do not round your intermediate calculations.

Which of the following is NOT a potential problem when estimating and using betas,i.e. ,which statement is FALSE?

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 best describes what you should expect if you randomly select stocks and add them to your portfolio?

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.

Someone who is risk averse has a general dislike for risk and a preference for certainty.If risk aversion exists in the market,then investors in general are willing to accept somewhat lower returns on less risky securities.Different investors have different degrees of risk aversion,and the end result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return)than investors who have more tolerance for risk.

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.

Stock A has an expected return of 12%,a beta of 1.2,and a standard deviation of 20%.Stock B also has a beta of 1.2,but its expected return is 10% and its standard deviation is 15%.Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B.The correlation between the two stocks' returns is zero (that is,rA,B = 0).Which of the following statements is CORRECT?

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.

Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y.Both stocks have an expected return of 15%,betas of 1.6,and standard deviations of 30%.The returns of the two stocks are independent,so the correlation coefficient between them,rXY,is zero.Which of the following statements best describes the characteristics of your 2-stock portfolio?

Company A has a beta of 0.70,while Company B's beta is 1.45.The required return on the stock market is 9.00%,and the risk-free rate is 2.25%.What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium,then find the required returns on the stocks. )Do not round your intermediate calculations.

Stock A has a beta = 0.8,while Stock B has a beta = 1.6.Which of the following statements is CORRECT?

Carson Inc.'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. )Do not round your intermediate calculations. Economic Conditions Prob. Return Strong 30\% 40.0\% Normal 40\% 10.0\% Weak 30\% -16.0\% ?

Nagel Equipment 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 14.75%.Using the SML,what is the firm's required rate of return? Do not round your intermediate calculations.