Exam 6: Risk and Return

Returns for the Alcoff Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample,not a complete population,so the sample standard deviation formula should be used. ) Year Return 2010 21)00% 2009 −12)50% 2008 25)00%

(Multiple Choice)

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Question 61

We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

(True/False)

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Question 62

If a stock's expected return as seen by the marginal investor exceeds this investor's required return,then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

(True/False)

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Question 63

Brodkey Shoes 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?

(Multiple Choice)

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Question 64

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.

(True/False)

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Question 65

Stocks A and B are quite similar: Each has 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?

(Multiple Choice)

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Question 66

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events,and their effects on investment risk can in theory be diversified away.

(True/False)

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Question 67

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 68

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. )

(Multiple Choice)

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Question 69

If a stock's market price exceeds its intrinsic value as seen by the marginal investor,then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

(True/False)

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Question 70

Assume that investors have recently become more risk averse,so the market risk premium has increased.Also,assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur?

(Multiple Choice)

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Question 71

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

(True/False)

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Question 72

How would the Security Market Line be affected,other things held constant,if the expected inflation rate decreases and investors also become more risk averse?

(Multiple Choice)

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Question 73

Portfolio P has equal amounts invested in each of the three stocks,A,B,and C.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.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?

(Multiple Choice)

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Question 74

Suppose that Federal Reserve actions have caused an increase in the risk-free rate,r_RF.Meanwhile,investors are afraid of a recession,so the market risk premium, (r_M − r_RF),has increased.Under these conditions,with other things held constant,which of the following statements is most correct?

(Multiple Choice)

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Question 75

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 76

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

(True/False)

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Question 77

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

(Multiple Choice)

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Question 78

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 79

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

(True/False)

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Question 80

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Exam 6: Risk and Return

Returns for the Alcoff Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample,not a complete population,so the sample standard deviation formula should be used. ) Year Return 2010 21)00% 2009 −12)50% 2008 25)00%

We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

If a stock's expected return as seen by the marginal investor exceeds this investor's required return,then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Brodkey Shoes 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?

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.

Stocks A and B are quite similar: Each has 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?

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events,and their effects on investment risk can in theory be diversified away.

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. )

If a stock's market price exceeds its intrinsic value as seen by the marginal investor,then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Assume that investors have recently become more risk averse,so the market risk premium has increased.Also,assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur?

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

How would the Security Market Line be affected,other things held constant,if the expected inflation rate decreases and investors also become more risk averse?

Suppose that Federal Reserve actions have caused an increase in the risk-free rate,rRF.Meanwhile,investors are afraid of a recession,so the market risk premium, (rM − rRF),has increased.Under these conditions,with other things held constant,which of the following statements is most correct?

Which of the following statements is CORRECT?

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

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Applications to Corporate Valuation

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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Suppose that Federal Reserve actions have caused an increase in the risk-free rate,r_RF.Meanwhile,investors are afraid of a recession,so the market risk premium, (r_M − r_RF),has increased.Under these conditions,with other things held constant,which of the following statements is most correct?