Question 1

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Accepted Answer

A)  The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation. 
B)  The beta of the portfolio is less than the average of the betas of the individual stocks. 
C)  The beta of the portfolio is equal to the average of the betas of the individual stocks. 
D)  The beta of the portfolio is larger than the average of the betas of the individual stocks. 
E)  The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation. 
A)  The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation. 
B)  The beta of the portfolio is less than the average of the betas of the individual stocks. 
C)  The beta of the portfolio is equal to the average of the betas of the individual stocks. 
D)  The beta of the portfolio is larger than the average of the betas of the individual stocks. 
E)  The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.

Question 2

Stock X has a beta of 0.6,while Stock Y has a beta of 1.4.Which of the following statements is CORRECT?

Accepted Answer

A)  Stock Y must have a higher expected return and a higher standard deviation than Stock X. 
B)  If expected inflation increases but the market risk premium is unchanged,then the required return on both stocks will fall by the same amount. 
C)  If the market risk premium declines but expected inflation is unchanged,the required return on both stocks will decrease,but the decrease will be greater for Stock Y. 
D)  If expected inflation declines but the market risk premium is unchanged,then the required return on both stocks will decrease but the decrease will be greater for Stock Y. 
E)  A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a required return that exceeds that of the overall market. 
A)  Stock Y must have a higher expected return and a higher standard deviation than Stock X. 
B)  If expected inflation increases but the market risk premium is unchanged,then the required return on both stocks will fall by the same amount. 
C)  If the market risk premium declines but expected inflation is unchanged,the required return on both stocks will decrease,but the decrease will be greater for Stock Y. 
D)  If expected inflation declines but the market risk premium is unchanged,then the required return on both stocks will decrease but the decrease will be greater for Stock Y. 
E)  A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a required return that exceeds that of the overall market.

Question 3

The tighter the probability distribution of its expected future returns,the greater the risk of a given investment as measured by its standard deviation.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  The slope of the Security Market Line is beta. 
B)  Any stock with a negative beta must in theory have a negative required rate of return,provided rRF is positive. 
C)  If a stock's beta doubles,its required rate of return must also double. 
D)  If a stock's returns are negatively correlated with returns on most other stocks,the stock's beta will be negative. 
E)  If a stock has a beta of to 1.0,its required rate of return will be unaffected by changes in the market risk premium. 
A)  The slope of the Security Market Line is beta. 
B)  Any stock with a negative beta must in theory have a negative required rate of return,provided rRF is positive. 
C)  If a stock's beta doubles,its required rate of return must also double. 
D)  If a stock's returns are negatively correlated with returns on most other stocks,the stock's beta will be negative. 
E)  If a stock has a beta of to 1.0,its required rate of return will be unaffected by changes in the market risk premium.

Question 5

Since the market return represents the expected return on an average stock,the market return reflects a certain amount of risk.As a result,there exists a market risk premium,which is the amount over and above the risk-free rate,that is required to compensate stock investors for assuming an average amount of risk.

Accepted Answer

A) True 
 B)False

Question 6

Ann has a portfolio of 20 average stocks,and Tom has a portfolio of 2 average stocks.Assuming the market is in equilibrium,which of the following statements is CORRECT?

Accepted Answer

A)  The required return on Ann's portfolio will be lower than that on Tom's portfolio because Ann's portfolio will have less total risk. 
B)  Tom's portfolio will have more diversifiable risk,the same market risk,and thus more total risk than Ann's portfolio,but the required (and expected)returns will be the same on both portfolios. 
C)  If the two portfolios have the same beta,their required returns will be the same,but Ann's portfolio will have less market risk than Tom's. 
D)  The expected return on Jane's portfolio must be lower than the expected return on Dick's portfolio because Jane is more diversified. 
E)  Ann's portfolio will have less diversifiable risk and also less market risk than Tom's portfolio. 
A)  The required return on Ann's portfolio will be lower than that on Tom's portfolio because Ann's portfolio will have less total risk. 
B)  Tom's portfolio will have more diversifiable risk,the same market risk,and thus more total risk than Ann's portfolio,but the required (and expected)returns will be the same on both portfolios. 
C)  If the two portfolios have the same beta,their required returns will be the same,but Ann's portfolio will have less market risk than Tom's. 
D)  The expected return on Jane's portfolio must be lower than the expected return on Dick's portfolio because Jane is more diversified. 
E)  Ann's portfolio will have less diversifiable risk and also less market risk than Tom's portfolio.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,its standard deviation.

Accepted Answer

A) True 
 B)False

Question 9

Barker Corp.has a beta of 1.10,the real risk-free rate is 2.00%,investors expect a 3.00% future inflation rate,and the market risk premium is 4.70%.What is Barker's required rate of return?

Accepted Answer

A)  9.43% 
B)  9.67% 
C)  9.92% 
D)  10.17% 
E)  10.42% 
A)  9.43% 
B)  9.67% 
C)  9.92% 
D)  10.17% 
E)  10.42%

Question 10

Porter Plumbing's stock had a required return of 11.75% last year,when the risk-free rate was 5.50% and the market risk premium was 4.75%.Then an increase in investor risk aversion caused the market risk premium to rise by 2%.The risk-free rate and the firm's beta remain unchanged.What is the company's new required rate of return? (Hint: First calculate the beta,then find the required return. )

Accepted Answer

A)  14.38% 
B)  14.74% 
C)  15.11% 
D)  15.49% 
E)  15.87% 
A)  14.38% 
B)  14.74% 
C)  15.11% 
D)  15.49% 
E)  15.87%

Question 11

Recession,inflation,and high interest rates are economic events that are best characterized as being

Accepted Answer

A)  company-specific risk factors that can be diversified away. 
B)  among the factors that are responsible for market risk. 
C)  risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. 
D)  irrelevant except to governmental authorities like the Federal Reserve. 
E)  systematic risk factors that can be diversified away. 
A)  company-specific risk factors that can be diversified away. 
B)  among the factors that are responsible for market risk. 
C)  risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. 
D)  irrelevant except to governmental authorities like the Federal Reserve. 
E)  systematic risk factors that can be diversified away.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  Lower beta stocks have higher required returns. 
B)  A stock's beta indicates its diversifiable risk. 
C)  Diversifiable risk cannot be completely diversified away. 
D)  Two securities with the same stand-alone risk must have the same betas. 
E)  The slope of the security market line is equal to the market risk premium. 
A)  Lower beta stocks have higher required returns. 
B)  A stock's beta indicates its diversifiable risk. 
C)  Diversifiable risk cannot be completely diversified away. 
D)  Two securities with the same stand-alone risk must have the same betas. 
E)  The slope of the security market line is equal to the market risk premium.

Question 13

If the price of money (e.g. ,interest rates and equity capital costs)increases due to an increase in anticipated inflation,the risk-free rate will also increase.If there is no change in investors' risk aversion,then the market risk premium (rM − rRF)will remain constant.Also,if there is no change in stocks' betas,then the required rate of return on each stock as measured by the CAPM will increase by the same amount as the increase in expected inflation.

Accepted Answer

A) True 
 B)False

Question 14

Martin Ortner holds a $200,000 portfolio consisting of the following stocks:
Stock
Investment
Beta
A
$50,000
0)95
B
50,000
0)80
C
50,000
1)00
D
50,000
1)20
Total
$200,000
What is the portfolio's beta?

Accepted Answer

A)  0.938 
B)  0.988 
C)  1.037 
D)  1.089 
E)  1.143 
A)  0.938 
B)  0.988 
C)  1.037 
D)  1.089 
E)  1.143

Question 15

A stock with a beta equal to −1.0 has zero systematic (or market)risk.

Accepted Answer

A) True 
 B)False

Question 16

Sherrie Hymes holds a $200,000 portfolio consisting of the following stocks.The portfolio's beta is 0.875.
Stock
Investment
Beta
A
$50,000
0)50
B
50,000
0)80
C
50,000
1)00
D
50,000
1)20
Total
$200,000
If Sherrie replaces Stock A with another stock,E,which has a beta of 1.50,what will the portfolio's new beta be?

Accepted Answer

A)  1.07 
B)  1.13 
C)  1.18 
D)  1.24 
E)  1.30 
A)  1.07 
B)  1.13 
C)  1.18 
D)  1.24 
E)  1.30

Question 17

Stock A's beta is 1.7 and Stock B's beta is 0.7.Which of the following statements must be true,assuming the CAPM is correct.

Accepted Answer

A)  In equilibrium,the expected return on Stock B will be greater than that on Stock A. 
B)  When held in isolation,Stock A has more risk than Stock B. 
C)  Stock B would be a more desirable addition to a portfolio than A. 
D)  In equilibrium,the expected return on Stock A will be greater than that on B. 
E)  Stock A would be a more desirable addition to a portfolio then Stock B. 
A)  In equilibrium,the expected return on Stock B will be greater than that on Stock A. 
B)  When held in isolation,Stock A has more risk than Stock B. 
C)  Stock B would be a more desirable addition to a portfolio than A. 
D)  In equilibrium,the expected return on Stock A will be greater than that on B. 
E)  Stock A would be a more desirable addition to a portfolio then Stock B.

Question 18

The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by a manager's actions.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  Logically,it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks,especially if the projects are closely associated with research and development activities. 
B)  The beta of an "average stock," which is also "the market beta," can change over time,sometimes drastically. 
C)  If a newly issued stock does not have a past history that can be used for calculating beta,then we should always estimate that its beta will turn out to be 1.0.This is especially true if the company finances with more debt than the average firm. 
D)  During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects,the calculated historical beta may be drastically different from the beta that will exist in the future. 
E)  If a company with a high beta merges with a low-beta company,the best estimate of the new merged company's beta is 1.0. 
A)  Logically,it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks,especially if the projects are closely associated with research and development activities. 
B)  The beta of an "average stock," which is also "the market beta," can change over time,sometimes drastically. 
C)  If a newly issued stock does not have a past history that can be used for calculating beta,then we should always estimate that its beta will turn out to be 1.0.This is especially true if the company finances with more debt than the average firm. 
D)  During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects,the calculated historical beta may be drastically different from the beta that will exist in the future. 
E)  If a company with a high beta merges with a low-beta company,the best estimate of the new merged company's beta is 1.0.

Question 20

Which of the following are the factors for the Fama-French model?

Accepted Answer

A)  The excess market return,a debt factor,and a book-to-market factor. 
B)  The excess market return,a size factor,and a debt. 
C)  A debt factor,a size factor,and a book-to-market factor. 
D)  The excess market return,an industrial production factor,and a book-to-market factor. 
E)  The excess market return,a size factor,and a book-to-market factor. 
A)  The excess market return,a debt factor,and a book-to-market factor. 
B)  The excess market return,a size factor,and a debt. 
C)  A debt factor,a size factor,and a book-to-market factor. 
D)  The excess market return,an industrial production factor,and a book-to-market factor. 
E)  The excess market return,a size factor,and a book-to-market factor.

Exam 6: Risk and Return

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Stock X has a beta of 0.6,while Stock Y has a beta of 1.4.Which of the following statements is CORRECT?

The tighter the probability distribution of its expected future returns,the greater the risk of a given investment as measured by its standard deviation.

Which of the following statements is CORRECT?

Ann has a portfolio of 20 average stocks,and Tom has a portfolio of 2 average stocks.Assuming the market is in equilibrium,which of the following statements is CORRECT?

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

Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,its standard deviation.

Barker Corp.has a beta of 1.10,the real risk-free rate is 2.00%,investors expect a 3.00% future inflation rate,and the market risk premium is 4.70%.What is Barker's required rate of return?

Recession,inflation,and high interest rates are economic events that are best characterized as being

Which of the following statements is CORRECT?

Martin Ortner holds a $200,000 portfolio consisting of the following stocks: Stock Investment Beta A $50,000 0)95 B 50,000 0)80 C 50,000 1)00 D 50,000 1)20 Total $200,000 What is the portfolio's beta?

A stock with a beta equal to −1.0 has zero systematic (or market)risk.

Stock A's beta is 1.7 and Stock B's beta is 0.7.Which of the following statements must be true,assuming the CAPM is correct.

The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by a manager's actions.

Which of the following statements is CORRECT?

Which of the following are the factors for the Fama-French model?

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

Filters