Exam 8: Risk and Rates of Return

When adding a randomly chosen new stock to an existing portfolio,the higher (or more positive)the degree of correlation between the new stock and stocks already in the portfolio,the less the additional stock will reduce the portfolio's risk.

Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.You have a portfolio that consists of 50% A and 50% B.Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

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.

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?

You hold a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.You plan to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80.What will the portfolio's new beta be?

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

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?

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.

Mike Flannery holds the following portfolio: ​ What is the portfolio's beta?

Which is the best measure of risk for a single asset held in isolation,and which is the best measure for an asset held in a diversified portfolio?

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?

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

The slope of the SML is determined by the value of beta.

Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%.Stock A has a beta of 0.8 and Stock B has a beta of 1.2.The correlation coefficient,r,between the two stocks is +0.6.Portfolio P has 50% invested in Stock A and 50% invested in B.Which of the following statements is CORRECT?

Jill Angel holds a $200,000 portfolio consisting of the following stocks.The portfolio's beta is 0.875. ​ If Jill replaces Stock A with another stock,E,which has a beta of 1.50,what will the portfolio's new beta be?