Question 1

Which of the following statements is CORRECT?
​

Accepted Answer

A)  ​The slope of the SML is determined by the value of beta. 
B)  ​The SML shows the relationship between companies' required returns and their diversifiable risks.The slope and intercept of this line cannot be influenced by a firm's managers,but the position of the company on the line can be influenced by its managers. 
C)  ​Suppose you plotted the returns of a given stock against those of the market,and you found that the slope of the regression line was negative.The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well diversified investor,assuming investors expect the observed relationship to continue on into the future. 
D)  ​If investors become less risk averse,the slope of the Security Market Line will increase. 
E)  ​If a company increases its use of debt,this is likely to cause the slope of its SML to increase,indicating a higher required return on the stock. 
A)  ​The slope of the SML is determined by the value of beta. 
B)  ​The SML shows the relationship between companies' required returns and their diversifiable risks.The slope and intercept of this line cannot be influenced by a firm's managers,but the position of the company on the line can be influenced by its managers. 
C)  ​Suppose you plotted the returns of a given stock against those of the market,and you found that the slope of the regression line was negative.The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well diversified investor,assuming investors expect the observed relationship to continue on into the future. 
D)  ​If investors become less risk averse,the slope of the Security Market Line will increase. 
E)  ​If a company increases its use of debt,this is likely to cause the slope of its SML to increase,indicating a higher required return on the stock.

Question 2

The risk-free rate is 6% and the market risk premium is 5%.Your $1 million 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.Which of the following statements is CORRECT?

Accepted Answer

A)  If the stock market is efficient,your portfolio's expected return should equal the expected return on the market,which is 11%. 
B)  The required return on the market is 10%. 
C)  The portfolio's required return is less than 11%. 
D)  If the risk-free rate remains unchanged but the market risk premium increases by 2%,your portfolio's required return will increase by more than 2%. 
E)  If the market risk premium remains unchanged but expected inflation increases by 2%,your portfolio's required return will increase by more than 2%. 
A)  If the stock market is efficient,your portfolio's expected return should equal the expected return on the market,which is 11%. 
B)  The required return on the market is 10%. 
C)  The portfolio's required return is less than 11%. 
D)  If the risk-free rate remains unchanged but the market risk premium increases by 2%,your portfolio's required return will increase by more than 2%. 
E)  If the market risk premium remains unchanged but expected inflation increases by 2%,your portfolio's required return will increase by more than 2%.

Question 3

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

Accepted Answer

A)  If a stock has a negative beta,its required return under the CAPM would be less than 5%. 
B)  If a stock's beta doubled,its required return under the CAPM would also double. 
C)  If a stock's beta doubled,its required return under the CAPM would more than double. 
D)  If a stock's beta were 1.0,its required return under the CAPM would be 5%. 
E)  If a stock's beta were less than 1.0,its required return under the CAPM would be less than 5%. 
A)  If a stock has a negative beta,its required return under the CAPM would be less than 5%. 
B)  If a stock's beta doubled,its required return under the CAPM would also double. 
C)  If a stock's beta doubled,its required return under the CAPM would more than double. 
D)  If a stock's beta were 1.0,its required return under the CAPM would be 5%. 
E)  If a stock's beta were less than 1.0,its required return under the CAPM would be less than 5%.

Question 4

Tom Noel holds the following portfolio: $\begin{array}{lrl}\text { Stock }&\text { Investment }&\text { Beta }\
\mathrm{A} & \$ 150,000 & 1.40 \
\mathrm{~B} & \$ 50,000 & 0.80 \
\mathrm{C} & \$ 100,000 & 1.00 \
\mathrm{D} & \$ 75,000 & 1.20\\text { Total }&\$375,000
\end{array}$
Tom plans to sell Stock A and replace it with Stock E,which has a beta of 0.80.By how much will the portfolio beta change? Do not round your intermediate calculations.

Accepted Answer

A)  -0.240 
B)  -0.194 
C)  -0.290 
D)  -0.271 
E)  -0.230 
A)  -0.240 
B)  -0.194 
C)  -0.290 
D)  -0.271 
E)  -0.230

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)  A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio. 
B)  A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market,assuming the stocks all have the same standard deviations. 
C)  A two-stock portfolio will always have a lower beta than a one-stock portfolio. 
D)  If portfolios are formed by randomly selecting stocks,a 10-stock portfolio will always have a lower beta than a one-stock portfolio. 
E)  A stock with an above-average standard deviation must also have an above-average beta. 
A)  A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio. 
B)  A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market,assuming the stocks all have the same standard deviations. 
C)  A two-stock portfolio will always have a lower beta than a one-stock portfolio. 
D)  If portfolios are formed by randomly selecting stocks,a 10-stock portfolio will always have a lower beta than a one-stock portfolio. 
E)  A stock with an above-average standard deviation must also have an above-average beta.

Question 6

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events,and their effects on investment risk can in theory be diversified away.

Accepted Answer

A) True 
 B)False

Question 7

Nile Food's stock has a beta of 1.4,while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate,rRF,is 5.5% and the market risk premium, (rM - rRF),equals 4%.Which of the following statements is CORRECT?

Accepted Answer

A)  If the risk-free rate increases but the market risk premium remains unchanged,the required return will increase for both stocks but the increase will be larger for Nile since it has a higher beta. 
B)  If the market risk premium increases but the risk-free rate remains unchanged,Nile's required return will increase because it has a beta greater than 1.0 but Elba's required return will decline because it has a beta less than 1.0. 
C)  Since Nile's beta is twice that of Elba's,its required rate of return will also be twice that of Elba's. 
D)  If the risk-free rate increases while the market risk premium remains constant,then the required return on an average stock will increase. 
E)  If the market risk premium decreases but the risk-free rate remains unchanged,Nile's required return will decrease because it has a beta greater than 1.0 and Elba's will also decrease,but by more than Nile's because it has a beta less than 1.0. 
A)  If the risk-free rate increases but the market risk premium remains unchanged,the required return will increase for both stocks but the increase will be larger for Nile since it has a higher beta. 
B)  If the market risk premium increases but the risk-free rate remains unchanged,Nile's required return will increase because it has a beta greater than 1.0 but Elba's required return will decline because it has a beta less than 1.0. 
C)  Since Nile's beta is twice that of Elba's,its required rate of return will also be twice that of Elba's. 
D)  If the risk-free rate increases while the market risk premium remains constant,then the required return on an average stock will increase. 
E)  If the market risk premium decreases but the risk-free rate remains unchanged,Nile's required return will decrease because it has a beta greater than 1.0 and Elba's will also decrease,but by more than Nile's because it has a beta less than 1.0.

Question 8

Bob has a $50,000 stock portfolio with a beta of 1.2,an expected return of 10.8%,and a standard deviation of 25%.Becky also has a $50,000 portfolio,but it 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 Bob's and Becky's portfolios is zero.If Bob and Becky marry and combine their portfolios,which of the following best describes their combined $100,000 portfolio?

Accepted Answer

A)  The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios,10.0%. 
B)  The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios,1.0;its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios,10.0%;and its standard deviation will be less than the simple average of the two portfolios' standard deviations,25%. 
C)  The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios,10.0%. 
D)  The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations,25%. 
E)  The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations,25%. 
A)  The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios,10.0%. 
B)  The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios,1.0;its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios,10.0%;and its standard deviation will be less than the simple average of the two portfolios' standard deviations,25%. 
C)  The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios,10.0%. 
D)  The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations,25%. 
E)  The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations,25%.

Question 9

Roenfeld Corp believes the following probability distribution exists for its stock.What is the coefficient of variation on the company's stock? Do not round your intermediate calculations. $\begin{array}{llr}\text { State of } & \text { Frobability } & \text { Stock's } \
\text { the } & \text { of State } & \text { Expected } \
\text { Economy } & \text { Occurring } & \text { Return }\
\hline \text { Boom } & 0.19 & 25 \% \
\text { Normal } & 0.50 & 15 \% \
\text { Recession } & 0.31 & 5 \%
\end{array}$
?

Accepted Answer

A)  0.6565 
B)  0.6060 
C)  0.5050 
D)  0.4545 
E)  0.4292 
A)  0.6565 
B)  0.6060 
C)  0.5050 
D)  0.4545 
E)  0.4292

Question 10

In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are really interested in ex ante (future)data.

Accepted Answer

A) True 
 B)False

Question 11

Porter Inc's stock has an expected return of 12.50%,a beta of 1.25,and is in equilibrium.If the risk-free rate is 2.00%,what is the market risk premium? Do not round your intermediate calculations.

Accepted Answer

A)  10.50% 
B)  8.48% 
C)  7.98% 
D)  8.40% 
E)  6.80% 
A)  10.50% 
B)  8.48% 
C)  7.98% 
D)  8.40% 
E)  6.80%

Question 12

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant. )

Accepted Answer

A)  If the market risk premium increases by 1%,then the required return will increase for stocks that have a beta greater than 1.0,but it will decrease for stocks that have a beta less than 1.0. 
B)  The effect of a change in the market risk premium depends on the slope of the yield curve. 
C)  If the market risk premium increases by 1%,then the required return on all stocks will rise by 1%. 
D)  If the market risk premium increases by 1%,then the required return will increase by 1% for a stock that has a beta of 1.0. 
E)  The effect of a change in the market risk premium depends on the level of the risk-free rate. 
A)  If the market risk premium increases by 1%,then the required return will increase for stocks that have a beta greater than 1.0,but it will decrease for stocks that have a beta less than 1.0. 
B)  The effect of a change in the market risk premium depends on the slope of the yield curve. 
C)  If the market risk premium increases by 1%,then the required return on all stocks will rise by 1%. 
D)  If the market risk premium increases by 1%,then the required return will increase by 1% for a stock that has a beta of 1.0. 
E)  The effect of a change in the market risk premium depends on the level of the risk-free rate.

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

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.

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

Suppose you hold a portfolio consisting of a $10,000 investment in each of 8 different common stocks.The portfolio's beta is 1.25.Now suppose you decided to sell one of your stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.55.What would the portfolio's new beta be? Do not round your intermediate calculations.

Accepted Answer

A)  1.60 
B)  1.32 
C)  1.58 
D)  1.61 
E)  1.38 
A)  1.60 
B)  1.32 
C)  1.58 
D)  1.61 
E)  1.38

Question 18

Stock X has a beta of 0.7 and Stock Y has a beta of 1.3.The standard deviation of each stock's returns is 20%.The stocks' returns are independent of each other,i.e. ,the correlation coefficient,r,between them is zero.Portfolio P consists of 50% X and 50% Y.Given this information,which of the following statements is CORRECT?

Accepted Answer

A)  Portfolio P has a standard deviation of 20%. 
B)  The required return on Portfolio P is equal to the market risk premium (rM - rRF). 
C)  Portfolio P has a beta of 0.7. 
D)  Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate,rRF. 
E)  Portfolio P has the same required return as the market (rM). 
A)  Portfolio P has a standard deviation of 20%. 
B)  The required return on Portfolio P is equal to the market risk premium (rM - rRF). 
C)  Portfolio P has a beta of 0.7. 
D)  Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate,rRF. 
E)  Portfolio P has the same required return as the market (rM).

Question 19

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?

Accepted Answer

A)  The diversifiable risk of your portfolio will likely decline,but the expected market risk should not change. 
B)  The expected return of your portfolio is likely to decline. 
C)  The diversifiable risk will remain the same,but the market risk will likely decline. 
D)  Both the diversifiable risk and the market risk of your portfolio are likely to decline. 
E)  The total risk of your portfolio should decline,and as a result,the expected rate of return on the portfolio should also decline. 
A)  The diversifiable risk of your portfolio will likely decline,but the expected market risk should not change. 
B)  The expected return of your portfolio is likely to decline. 
C)  The diversifiable risk will remain the same,but the market risk will likely decline. 
D)  Both the diversifiable risk and the market risk of your portfolio are likely to decline. 
E)  The total risk of your portfolio should decline,and as a result,the expected rate of return on the portfolio should also decline.

Question 20

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true,assuming the CAPM is correct.

Accepted Answer

A)  Stock A would be a more desirable addition to a portfolio then Stock B. 
B)  In equilibrium,the expected return on Stock B will be greater than that on Stock A. 
C)  When held in isolation,Stock A has more risk than Stock B. 
D)  Stock B would be a more desirable addition to a portfolio than A. 
E)  In equilibrium,the expected return on Stock A will be greater than that on B. 
A)  Stock A would be a more desirable addition to a portfolio then Stock B. 
B)  In equilibrium,the expected return on Stock B will be greater than that on Stock A. 
C)  When held in isolation,Stock A has more risk than Stock B. 
D)  Stock B would be a more desirable addition to a portfolio than A. 
E)  In equilibrium,the expected return on Stock A will be greater than that on B.

Which of the following statements is CORRECT?

The risk-free rate is 6% and the market risk premium is 5%.Your $1 million 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.Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events,and their effects on investment risk can in theory be diversified away.

Nile Food's stock has a beta of 1.4,while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate,r_RF,is 5.5% and the market risk premium, (r_M - r_RF),equals 4%.Which of the following statements is CORRECT?

In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are really interested in ex ante (future)data.

Porter Inc's stock has an expected return of 12.50%,a beta of 1.25,and is in equilibrium.If the risk-free rate is 2.00%,what is the market risk premium? Do not round your intermediate calculations.

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant. )

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.

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.

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?

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.

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?

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true,assuming the CAPM is correct.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Mergers and Acquisitions

Filters

Exam 8: Risk and Rates of Return

Which of the following statements is CORRECT? ​

The risk-free rate is 6% and the market risk premium is 5%.Your $1 million 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.Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events,and their effects on investment risk can in theory be diversified away.

Nile Food's stock has a beta of 1.4,while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate,rRF,is 5.5% and the market risk premium, (rM - rRF),equals 4%.Which of the following statements is CORRECT?

In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are really interested in ex ante (future)data.

Porter Inc's stock has an expected return of 12.50%,a beta of 1.25,and is in equilibrium.If the risk-free rate is 2.00%,what is the market risk premium? Do not round your intermediate calculations.

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant. )

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.

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.

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?

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.

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?

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true,assuming the CAPM is correct.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Mergers and Acquisitions

Filters

Which of the following statements is CORRECT?

Nile Food's stock has a beta of 1.4,while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate,r_RF,is 5.5% and the market risk premium, (r_M - r_RF),equals 4%.Which of the following statements is CORRECT?