Exam 8: Risk and Rates of Return

Stock A has a beta of 0.7,whereas Stock B has a beta of 1.3.Portfolio P has 50% invested in both A and B.Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?

The coefficient of variation,calculated as the standard deviation of expected returns divided by the expected return,is a standardized measure of the risk per unit of expected return.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Stock A's stock has a beta of 1.30,and its required return is 12.00%.Stock B's beta is 0.80.If the risk-free rate is 4.75%,what is the required rate of return on B's stock? (Hint: First find the market risk premium.)

Which of the following statements is CORRECT?

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information,which of the following statements is CORRECT?

Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets.The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders.

Jim Angel holds a $200,000 portfolio consisting of the following stocks: ​ What is the portfolio's beta?

Porter Inc's stock has an expected return of 12.25%,a beta of 1.25,and is in equilibrium.If the risk-free rate is 5.00%,what is the market risk premium?

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 equal amounts invested in each of the three stocks.Each of the stocks has a standard deviation of 25%.The returns on the three stocks are independent of one another (i.e.,the correlation coefficients all equal zero).Assume that there is an increase in the market risk premium,but the risk-free rate remains unchanged.Which of the following statements is CORRECT?

You have the following data on three stocks: ​ If you are a strict risk minimizer,you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

Assume that in recent years both expected inflation and the market risk premium (r_M − r_RF)have declined.Assume also that all stocks have positive betas.Which of the following would be most likely to have occurred as a result of these changes?

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 13.00%.Based on the SML,what is the firm's required return?

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?

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

Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

Cheng Inc.is considering a capital budgeting project that has an expected return of 25% and a standard deviation of 30%.What is the project's coefficient of variation?

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.

One key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both the risk and the expected return of the asset,assuming that the asset is held in a well-diversified portfolio.The risk of the asset held in isolation is not relevant under the CAPM.