Exam 8: Risk and Rates of Return

Assume that you are the portfolio manager of the SF Fund,a $3 million hedge fund that contains the following stocks.The required rate of return on the market is 11.00% and the risk-free rate is 2.00%.What rate of return should investors expect (and require)on this fund? Do not round your intermediate calculations. Stock amount Beta A \ 1,075,000 1.20 B \ 675,000 0.50 \ 750,000 1.40 \ 500,000 0.75 \3 ,000,000 ?

If the returns of two firms are negatively correlated,then one of them must have a negative beta.

For markets to be in equilibrium,that is,for there to be no strong pressure for prices to depart from their current levels,

The distributions of rates of return for Companies AA and BB are given below: ? State of the Probability of Economy This State Occurring Boom 0.2 30\% -10\% Normal 0.6 10\% 5\% Recession 0.2 -5\% 50\% ? We can conclude from the above information that any rational,risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.

If investors are risk averse and hold only one stock,we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10.However,if stocks are held in portfolios,it is possible that the required return could be higher on the stock with the lower standard deviation.

The CAPM is a multi-period model that takes account of differences in securities' maturities,and it can be used to determine the required rate of return for any given level of systematic risk.

Stocks A and B each have an expected return of 12%,a beta of 1.2,and a standard deviation of 25%.The returns on the two stocks have a correlation of +0.6.Portfolio P has 50% in Stock A and 50% in Stock B.Which of the following statements is CORRECT?