Exam 11: Risk and Rates of Return

Portfolio A contains only one security,while Portfolio B contains 100 securities.Because of diversification effects,we would expect Portfolio B to have the lower relevant risk,but it is possible for Portfolio A to be less risky.

Which of the following statements is most correct?

HR Corporation has a beta of 2.0,while LR Corporation's beta is 0.5.The risk-free rate is 10%,and the required rate of return on an average stock is 15%.Now the expected rate of inflation built into r_RF falls by 3 percentage points,the real risk-free rate remains constant,the required return on the market falls to 11%,and the betas remain constant.When all of these changes are made,what will be the difference in required returns on HR's and LR's stocks?

Which of the following statements is most correct?

Hard Hat Construction's stock is currently selling at an equilibrium price of $30 per share.The firm has been experiencing a 6 percent annual growth rate.Last year's earnings per share,E₀,were $4.00,and the dividend payout ratio is 40 percent.The risk-free rate is 8 percent,and the market risk premium is 5 percent.If systematic risk (beta)increases by 50 percent,and all other factors remain constant,by how much will the stock price change? (Hint: Use four decimal places in your calculations. )

You have developed data which give (1)the average annual returns on the market for the past five years,and (2)similar information on Stocks A and B.If these data are as follows,which of the possible answers best describes the historical betas for A and B?

Which of the following is not a difficulty concerning beta and its estimation?

Oakdale Furniture Inc.has a beta coefficient of 0.7 and a required rate of return of 15 percent.The market risk premium is currently 5 percent.If the inflation premium increases by 2 percentage points,and Oakdale acquires new assets which increase its beta by 50 percent,what will be Oakdale's new required rate of return?

The only condition under which risk can be reduced to zero is to find securities that are perfectly negatively correlated (ρ = −1.0)with each other.

Inflation,recession,and high interest rates are economic events which are characterized as

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

A financial analyst has been following Fast Start Inc. ,a new high-growth company.She estimates that the current risk-free rate is 6.25 percent,the market risk premium is 5 percent,and that Fast Start's beta is 1.75.The current earnings per share (EPS₀)is $2.50.The company has a 40 percent payout ratio.The analyst estimates that the company's dividend will grow at a rate of 25 percent this year,20 percent next year,and 15 percent the following year.After three years the dividend is expected to grow at a constant rate of 7 percent a year.The company is expected to maintain its current payout ratio.The analyst believes that the stock is fairly priced.What is the current price of the stock?

Assume Stock A has a standard deviation of 0.21 while Stock B has a standard deviation of 0.10.If both Stock A and Stock B must be held in isolation,and if investors are risk averse,we can conclude that Stock A will have a greater required return.However,if the assets could be held in portfolios,it is conceivable that the required return could be higher on the low standard deviation stock.

A highly risk-averse investor is considering the addition of an asset to a 10-stock portfolio.The two securities under consideration both have an expected return equal to 15 percent.However,the distribution of possible returns associated with Asset A has a standard deviation of 12 percent,while Asset B's standard deviation is 8 percent.Both assets are correlated with the market with ρ = 0.75.Which asset should the risk-averse investor add to his/her portfolio?

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

Which of the following statements is most correct?

Which of the following statements is correct?

The systematic (market)risk associated with an individual stock is most closely identified with the

You are holding a stock which has a beta of 2.0 and is currently in equilibrium.The required return on the stock is 15 percent,and the return on an average stock is 10 percent.What would be the percentage change in the return on the stock if the return on an average stock increased by 30 percent while the risk-free rate remained unchanged?

A probability distribution is a listing of all possible outcomes,or events,with a probability assigned to each outcome.