Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Stock X has a beta of 0.6,while Stock Y has a beta of 1.4.Which of the following statements is CORRECT?

Accepted Answer

A)  A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a required return that exceeds that of the overall market. 
B)  Stock Y must have a higher expected return and a higher standard deviation than Stock X. 
C)  If expected inflation increases but the market risk premium is unchanged,then the required return on both stocks will fall by the same amount. 
D)  If the market risk premium declines but expected inflation is unchanged,the required return on both stocks will decrease,but the decrease will be greater for Stock Y. 
E)  If expected inflation declines but the market risk premium is unchanged,then the required return on both stocks will decrease but the decrease will be greater for Stock Y. 
A)  A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a required return that exceeds that of the overall market. 
B)  Stock Y must have a higher expected return and a higher standard deviation than Stock X. 
C)  If expected inflation increases but the market risk premium is unchanged,then the required return on both stocks will fall by the same amount. 
D)  If the market risk premium declines but expected inflation is unchanged,the required return on both stocks will decrease,but the decrease will be greater for Stock Y. 
E)  If expected inflation declines but the market risk premium is unchanged,then the required return on both stocks will decrease but the decrease will be greater for Stock Y.

Question 3

Over the past 89 years,we have observed 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?

Accepted Answer

A)  Small-company stocks,long-term corporate bonds,large-company stocks,long-term government bonds,U.S.Treasury bills. 
B)  Large-company stocks,small-company stocks,long-term corporate bonds,U.S.Treasury bills,long-term government bonds. 
C)  Small-company stocks,large-company stocks,long-term corporate bonds,long-term government bonds,U.S.Treasury bills. 
D)  U.S.Treasury bills,long-term government bonds,long-term corporate bonds,small-company stocks,large-company stocks. 
E)  Large-company stocks,small-company stocks,long-term corporate bonds,long-term government bonds,U.S.Treasury bills. 
A)  Small-company stocks,long-term corporate bonds,large-company stocks,long-term government bonds,U.S.Treasury bills. 
B)  Large-company stocks,small-company stocks,long-term corporate bonds,U.S.Treasury bills,long-term government bonds. 
C)  Small-company stocks,large-company stocks,long-term corporate bonds,long-term government bonds,U.S.Treasury bills. 
D)  U.S.Treasury bills,long-term government bonds,long-term corporate bonds,small-company stocks,large-company stocks. 
E)  Large-company stocks,small-company stocks,long-term corporate bonds,long-term government bonds,U.S.Treasury bills.

Question 4

If investors become less averse to risk,the slope of the Security Market Line (SML)will increase.

Accepted Answer

A) True 
 B)False

Question 5

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5.The market is in equilibrium,with required returns equaling expected returns.Which of the following statements is CORRECT?

Accepted Answer

A)  If expected inflation remains constant but the market risk premium (rM - rRF)declines,the required return of Stock LB will decline but the required return of Stock HB will increase. 
B)  If both expected inflation and the market risk premium (rM - rRF)increase,the required return on Stock HB will increase by more than that on Stock LB. 
C)  If both expected inflation and the market risk premium (rM - rRF)increase,the required returns of both stocks will increase by the same amount. 
D)  Since the market is in equilibrium,the required returns of the two stocks should be the same. 
E)  If expected inflation remains constant but the market risk premium (rM - rRF)declines,the required return of Stock HB will decline but the required return of Stock LB will increase. 
A)  If expected inflation remains constant but the market risk premium (rM - rRF)declines,the required return of Stock LB will decline but the required return of Stock HB will increase. 
B)  If both expected inflation and the market risk premium (rM - rRF)increase,the required return on Stock HB will increase by more than that on Stock LB. 
C)  If both expected inflation and the market risk premium (rM - rRF)increase,the required returns of both stocks will increase by the same amount. 
D)  Since the market is in equilibrium,the required returns of the two stocks should be the same. 
E)  If expected inflation remains constant but the market risk premium (rM - rRF)declines,the required return of Stock HB will decline but the required return of Stock LB will increase.

Question 6

Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,the standard deviation.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  When diversifiable risk has been diversified away,the inherent risk that remains is market risk,which is constant for all stocks in the market. 
B)  Portfolio diversification reduces the variability of returns on an individual stock. 
C)  Risk refers to the chance that some unfavorable event will occur,and a probability distribution is completely described by a listing of the likelihoods of unfavorable events. 
D)  The SML relates a stock's required return to its market risk.The slope and intercept of this line cannot be controlled by the firms' managers,but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs. 
E)  A stock with a beta of -1.0 has zero market risk if held in a 1-stock portfolio. 
A)  When diversifiable risk has been diversified away,the inherent risk that remains is market risk,which is constant for all stocks in the market. 
B)  Portfolio diversification reduces the variability of returns on an individual stock. 
C)  Risk refers to the chance that some unfavorable event will occur,and a probability distribution is completely described by a listing of the likelihoods of unfavorable events. 
D)  The SML relates a stock's required return to its market risk.The slope and intercept of this line cannot be controlled by the firms' managers,but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs. 
E)  A stock with a beta of -1.0 has zero market risk if held in a 1-stock portfolio.

Question 8

You have the following data on (1)the average annual returns of the market for the past 5 years and (2)similar information on Stocks A and B.Which of the possible answers best describes the historical betas for A and B? $$\begin{array} { c r r r } 
\text { Years } & \text { Market } & \text { Stock A } & \text { Stock B } \
1 & 0.03 & 0.16 & 0.05 \
2 & - 0.05 & 0.20 & 0.05 \
3 & 0.01 & 0.18 & 0.05 \
4 & - 0.10 & 0.25 & 0.05 \
5 & 0.06 & 0.14 & 0.05
\end{array}$$

Accepted Answer

A) bA > 0;bB = 1. B) bA > +1;bB = 0. C) bA = 0;bB = -1. D) bA < 0;bB = 0. E) bA < -1;bB = 1. A) bA > 0;bB = 1. B) bA > +1;bB = 0. C) bA = 0;bB = -1. D) bA < 0;bB = 0. E) bA < -1;bB = 1.

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)  If a company's beta doubles,then its required rate of return will also double. 
B)  Other things held constant,if investors suddenly become convinced that there will be deflation in the economy,then the required returns on all stocks should increase. 
C)  If a company's beta were cut in half,then its required rate of return would also be halved. 
D)  If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount,then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase. 
E)  If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount,then the required rate of return on an average stock will remain unchanged,but required returns on stocks with betas less than 1.0 will rise. 
A)  If a company's beta doubles,then its required rate of return will also double. 
B)  Other things held constant,if investors suddenly become convinced that there will be deflation in the economy,then the required returns on all stocks should increase. 
C)  If a company's beta were cut in half,then its required rate of return would also be halved. 
D)  If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount,then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase. 
E)  If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount,then the required rate of return on an average stock will remain unchanged,but required returns on stocks with betas less than 1.0 will rise.

Question 10

Bill Dukes has $100,000 invested in a 2-stock portfolio.$62,500 is invested in Stock X and the remainder is invested in Stock Y.X's beta is 1.50 and Y's beta is 0.70.What is the portfolio's beta? Do not round your intermediate calculations.Round the final answer to 2 decimal places.

Accepted Answer

A)  1.14 
B)  0.90 
C)  1.44 
D)  1.20 
E)  1.56 
A)  1.14 
B)  0.90 
C)  1.44 
D)  1.20 
E)  1.56

Question 11

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5.Which of the following statements must be true,according to the CAPM?

Accepted Answer

A)  If you invest $50,000 in Stock X and $50,000 in Stock Y,your 2-stock portfolio would have a beta significantly lower than 1.0,provided the returns on the two stocks are not perfectly correlated. 
B)  Stock Y's realized return during the coming year will be higher than Stock X's return. 
C)  If the expected rate of inflation increases but the market risk premium is unchanged,the required returns on the two stocks should increase by the same amount. 
D)  Stock Y's return has a higher standard deviation than Stock X. 
E)  If the market risk premium declines,but the risk-free rate is unchanged,Stock X will have a larger decline in its required return than will Stock Y. 
A)  If you invest $50,000 in Stock X and $50,000 in Stock Y,your 2-stock portfolio would have a beta significantly lower than 1.0,provided the returns on the two stocks are not perfectly correlated. 
B)  Stock Y's realized return during the coming year will be higher than Stock X's return. 
C)  If the expected rate of inflation increases but the market risk premium is unchanged,the required returns on the two stocks should increase by the same amount. 
D)  Stock Y's return has a higher standard deviation than Stock X. 
E)  If the market risk premium declines,but the risk-free rate is unchanged,Stock X will have a larger decline in its required return than will Stock Y.

Question 12

Stock A has a beta of 0.8,Stock B has a beta of 1.0,and Stock C has a beta of 1.2.Portfolio P has 1/3 of its value invested in each stock.Each stock has a standard deviation of 25%,and their returns are independent of one another,i.e. ,the correlation coefficients between each pair of stocks is zero.Assuming the market is in equilibrium,which of the following statements is CORRECT?

Accepted Answer

A)  Portfolio P's expected return is greater than the expected return on Stock B. 
B)  Portfolio P's expected return is equal to the expected return on Stock A. 
C)  Portfolio P's expected return is less than the expected return on Stock B. 
D)  Portfolio P's expected return is equal to the expected return on Stock B. 
E)  Portfolio P's expected return is greater than the expected return on Stock C. 
A)  Portfolio P's expected return is greater than the expected return on Stock B. 
B)  Portfolio P's expected return is equal to the expected return on Stock A. 
C)  Portfolio P's expected return is less than the expected return on Stock B. 
D)  Portfolio P's expected return is equal to the expected return on Stock B. 
E)  Portfolio P's expected return is greater than the expected return on Stock C.

Question 13

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Accepted Answer

A) True 
 B)False

Question 14

Bae Inc.is considering an investment that has an expected return of 45% and a standard deviation of 10%.What is the investment's coefficient of variation? Do not round your intermediate calculations.Round the final answer to 2 decimal places.

Accepted Answer

A)  0.22 
B)  0.27 
C)  0.20 
D)  0.26 
E)  0.23 
A)  0.22 
B)  0.27 
C)  0.20 
D)  0.26 
E)  0.23

Question 15

Linke Motors has a beta of 1.30,the T-bill rate is 3.00%,and the T-bond rate is 6.5%.The annual return on the stock market during the past 3 years was 15.00%,but investors expect the annual future stock market return to be 10.00%.Based on the SML,what is the firm's required return? Do not round your intermediate calculations.

Accepted Answer

A)  11.05% 
B)  13.48% 
C)  12.71% 
D)  10.17% 
E)  10.50% 
A)  11.05% 
B)  13.48% 
C)  12.71% 
D)  10.17% 
E)  10.50%

Question 16

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Accepted Answer

A) True 
 B)False

Question 17

A mutual fund manager has a $40.00 million portfolio with a beta of 1.00.The risk-free rate is 4.25%,and the market risk premium is 6.00%.The manager expects to receive an additional $29.50 million which she plans to invest in additional stocks.After investing the additional funds,she wants the fund's required and expected return to be 13.00%.What must the average beta of the new stocks be to achieve the target required rate of return? Do not round your intermediate calculations.

Accepted Answer

A)  2.08 
B)  2.18 
C)  2.60 
D)  1.66 
E)  1.87 
A)  2.08 
B)  2.18 
C)  2.60 
D)  1.66 
E)  1.87

Question 18

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Accepted Answer

A) True 
 B)False

Question 19

Inflation,recession,and high interest rates are economic events that are best characterized as being

Accepted Answer

A)  systematic risk factors that can be diversified away. 
B)  company-specific risk factors that can be diversified away. 
C)  among the factors that are responsible for market risk. 
D)  risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. 
E)  irrelevant except to governmental authorities like the Federal Reserve. 
A)  systematic risk factors that can be diversified away. 
B)  company-specific risk factors that can be diversified away. 
C)  among the factors that are responsible for market risk. 
D)  risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. 
E)  irrelevant except to governmental authorities like the Federal Reserve.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A)  If a company with a high beta merges with a low-beta company,the best estimate of the new merged company's beta is 1.0. 
B)  Logically,it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks,especially if the projects are closely associated with research and development activities. 
C)  The beta of an "average stock," which is also "the market beta," can change over time,sometimes drastically. 
D)  If a newly issued stock does not have a past history that can be used for calculating beta,then we should always estimate that its beta will turn out to be 1.0.This is especially true if the company finances with more debt than the average firm. 
E)  During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects,the calculated historical beta may be drastically different from the beta that will exist in the future. 
A)  If a company with a high beta merges with a low-beta company,the best estimate of the new merged company's beta is 1.0. 
B)  Logically,it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks,especially if the projects are closely associated with research and development activities. 
C)  The beta of an "average stock," which is also "the market beta," can change over time,sometimes drastically. 
D)  If a newly issued stock does not have a past history that can be used for calculating beta,then we should always estimate that its beta will turn out to be 1.0.This is especially true if the company finances with more debt than the average firm. 
E)  During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects,the calculated historical beta may be drastically different from the beta that will exist in the future.

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

Stock X has a beta of 0.6,while Stock Y has a beta of 1.4.Which of the following statements is CORRECT?

If investors become less averse to risk,the slope of the Security Market Line (SML)will increase.

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5.The market is in equilibrium,with required returns equaling expected returns.Which of the following statements is CORRECT?

Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,the standard deviation.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Bill Dukes has $100,000 invested in a 2-stock portfolio.$62,500 is invested in Stock X and the remainder is invested in Stock Y.X's beta is 1.50 and Y's beta is 0.70.What is the portfolio's beta? Do not round your intermediate calculations.Round the final answer to 2 decimal places.

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5.Which of the following statements must be true,according to the CAPM?

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Bae Inc.is considering an investment that has an expected return of 45% and a standard deviation of 10%.What is the investment's coefficient of variation? Do not round your intermediate calculations.Round the final answer to 2 decimal places.

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Inflation,recession,and high interest rates are economic events that are best characterized as being

Which of the following statements 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

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

Stock X has a beta of 0.6,while Stock Y has a beta of 1.4.Which of the following statements is CORRECT?

If investors become less averse to risk,the slope of the Security Market Line (SML)will increase.

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5.The market is in equilibrium,with required returns equaling expected returns.Which of the following statements is CORRECT?

Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,the standard deviation.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Bill Dukes has $100,000 invested in a 2-stock portfolio.$62,500 is invested in Stock X and the remainder is invested in Stock Y.X's beta is 1.50 and Y's beta is 0.70.What is the portfolio's beta? Do not round your intermediate calculations.Round the final answer to 2 decimal places.

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5.Which of the following statements must be true,according to the CAPM?

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Bae Inc.is considering an investment that has an expected return of 45% and a standard deviation of 10%.What is the investment's coefficient of variation? Do not round your intermediate calculations.Round the final answer to 2 decimal places.

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Inflation,recession,and high interest rates are economic events that are best characterized as being

Which of the following statements 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