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 5.00%.What rate of return should investors expect (and require)on this fund? ​

Assume that to cool off the economy and decrease expectations for inflation,the Federal Reserve tightened the money supply,causing an increase in the risk-free rate,r_RF.Investors also became concerned that the Fed's actions would lead to a recession,and that led to an increase in the market risk premium,(r_M − r_RF).Under these conditions,with other things held constant,which of the following statements is most correct?

Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y.Both stocks have an expected return of 15%,betas of 1.6,and standard deviations of 30%.The returns of the two stocks are independent,so the correlation coefficient between them,r_XY,is zero.Which of the following statements best describes the characteristics of your 2-stock portfolio?

The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

You observe the following information regarding Companies X and Y: •Company X has a higher expected return than Company Y. •Company X has a lower standard deviation of returns than Company Y. •Company X has a higher beta than Company Y. ​ Given this information,which of the following statements is CORRECT?

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