Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  richard roll has argued that it is possible to test the capm to see if it is correct. 
B)  tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the capm. 
C)  tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable. 
D)  the most widely cited study of the validity of the capm is one performed by modigliani and miller. 
E)  tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time. 
A)  richard roll has argued that it is possible to test the capm to see if it is correct. 
B)  tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the capm. 
C)  tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable. 
D)  the most widely cited study of the validity of the capm is one performed by modigliani and miller. 
E)  tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.

Question 2

The Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1) stock is zero.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is NOT a potential problem with beta and its estimation?

Accepted Answer

A)  sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different than the "true" or "expected future" beta. 
B)  the beta of "the market," can change over time, sometimes drastically. 
C)  sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. 
D)  there is a wide confidence interval around a typical stock's estimated beta. 
E)  sometimes a security or project does not have a past history which can be used as a basis for calculating beta. 
A)  sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different than the "true" or "expected future" beta. 
B)  the beta of "the market," can change over time, sometimes drastically. 
C)  sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. 
D)  there is a wide confidence interval around a typical stock's estimated beta. 
E)  sometimes a security or project does not have a past history which can be used as a basis for calculating beta.

Question 4

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)

Accepted Answer

A)  stock b must be a more desirable addition to a portfolio than stock a. 
B)  stock a must be a more desirable addition to a portfolio than stock b. 
C)  the expected return on stock a should be greater than that on stock b. 
D)  the expected return on stock b should be greater than that on stock a. 
E)  when held in isolation, stock a has greater risk than stock b. 
A)  stock b must be a more desirable addition to a portfolio than stock a. 
B)  stock a must be a more desirable addition to a portfolio than stock b. 
C)  the expected return on stock a should be greater than that on stock b. 
D)  the expected return on stock b should be greater than that on stock a. 
E)  when held in isolation, stock a has greater risk than stock b.

Question 5

Security A has an expected return of 12.4% with a standard deviation of 15%, and a correlation with the market of 0.85. Security B has an expected return of -0.73% with a standard deviation of 20%, and a correlation with the market of -0.67. The standard deviation of rM is 12%.
a. To someone who acts in accordance with the CAPM, which security is more risky, A or Bσ Whyσ (Hint: No calculations are necessary to answer this question; it is easy.)
b. What are the beta coefficients of A and Bσ Calculations are necessary.
c. If the risk-free rate is 6%, what is the value of rMσ

Accepted Answer

a.The very fact that @#LAT-DLM& inticates that Sec

Question 6

Suppose that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Talcott Inc.'s beta is 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years. Calculate the required rate of return for Talcot Inc.

Accepted Answer

A)  10.29% 
B)  10.83% 
C)  11.40% 
D)  12.00% 
E)  12.60% 
A)  10.29% 
B)  10.83% 
C)  11.40% 
D)  12.00% 
E)  12.60%

Question 7

Your mother's well-diversified portfolio has an expected return of 12.0% and a beta of 1.20. She is in the process of buying 100 shares of Safety Corp. at $10 a share and adding it to her portfolio. Safety has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return and beta on the portfolio be after the purchase of the Safety stock?
Rp bp

Accepted Answer

A)  11.69%; 1.22 
B)  12.30%; 1.28 
C)  12.92%; 1.34 
D)  13.56%; 1.41 
E)  14.24%; 1.48 
A)  11.69%; 1.22 
B)  12.30%; 1.28 
C)  12.92%; 1.34 
D)  13.56%; 1.41 
E)  14.24%; 1.48

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

If the returns of two firms are negatively correlated, then one of them must have a negative beta.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A)  standard deviation; correlation coefficient. 
B)  beta; variance. 
C)  coefficient of variation; beta. 
D)  beta; beta. 
E)  variance; correlation coefficient. 
A)  standard deviation; correlation coefficient. 
B)  beta; variance. 
C)  coefficient of variation; beta. 
D)  beta; beta. 
E)  variance; correlation coefficient.

Question 11

You are given the following returns on "the market" and Stock F during the last three years. We could calculate beta using data for Years 1 and 2 and then, after Year 3, calculate a new beta for Years 2 and 3. How different are those two betas, i.e., what's the value of beta 2 - beta 1? (Hint: You can find betas using the Rise-Over-Run method, or using your calculator's regression function.) $\begin{array}{lr}
\text { Year } &\text { Market } & \text { Stock F } \
1&6.10 \%& 6.50 \% \
2&12.90 \% & -3.70 \% \
3&16.20 \% & 21.71 \%
\end{array}$

Accepted Answer

A)  7.89 
B)  8.30 
C)  8.74 
D)  9.20 
E)  9.66 
A)  7.89 
B)  8.30 
C)  8.74 
D)  9.20 
E)  9.66

Question 12

If you plotted the returns of Selleck & Company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on Selleck's stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.

Accepted Answer

A) True 
 B)False

Question 13

You plan to invest in Stock X, Stock Y, or some combination of the two. The expected return for X is 10% and σX = 5%. The expected return for Y is 12% and σY = 6%. The correlation coefficient, rXY, is 0.75.
a. Calculate rp and σp for 100%, 75%, 50%, 25%, and 0% in Stock X.
b. Use the values you calculated for rp and σp to graph the attainable set of portfolios. Which part of the attainable set is efficientσ Also, draw in a set of hypothetical indifference curves to show how an investor might select a portfolio comprised of Stocks X and Y. Let an indifference curve be tangent to the efficient set at the point where rp = 11%.
c. Now suppose we add a riskless asset to the investment possibilities. What effects will this have on the construction of portfoliosσ
d. Suppose rM = 12%, σM = 4%, and rRF = 6%. What would be the required and expected return on a portfolio with σP = 10%σ
e. Suppose the correlation of Stock X with the market, rXM, is 0.8, while rYM = 0.9. Use this information, along with data given previously, to determine Stock X's and Stock Y's beta coefficients.
f. What is the required rate of return on Stocks X and Yσ Do these stocks appear to be in equilibriumσ If not, what would happen to bring about an equilibriumσ

Accepted Answer

None

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  the slope of the cml is (m- rrf)/bm. 
B)  all portfolios that lie on the cml to the right of σm are inefficient. 
C)  all portfolios that lie on the cml to the left of σm are inefficient. 
D)  the slope of the cml is (m - rrf)/σm. 
E)  the capital market line (cml) is a curved line that connects the risk-free rate and the market portfolio. 
A)  the slope of the cml is (m- rrf)/bm. 
B)  all portfolios that lie on the cml to the right of σm are inefficient. 
C)  all portfolios that lie on the cml to the left of σm are inefficient. 
D)  the slope of the cml is (m - rrf)/σm. 
E)  the capital market line (cml) is a curved line that connects the risk-free rate and the market portfolio.

Question 15

Assume an economy in which there are three securities: Stock A with rA = 10% and σA = 10%; Stock B with rB = 15% and σB = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0). Which of the following statements is most CORRECT?

Accepted Answer

A)  the expected return on the investor's portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (sd) of approximately 10%. 
B)  the expected return on the investor's portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (sd) that is between 10% and 20%. 
C)  the investor's risk/return indifference curve will be tangent to the cml at a point where the expected return is in the range of 7% to 10%. 
D)  since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%. 
E)  the expected return on the investor's portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (sd) of approximately 20%. 
A)  the expected return on the investor's portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (sd) of approximately 10%. 
B)  the expected return on the investor's portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (sd) that is between 10% and 20%. 
C)  the investor's risk/return indifference curve will be tangent to the cml at a point where the expected return is in the range of 7% to 10%. 
D)  since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%. 
E)  the expected return on the investor's portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (sd) of approximately 20%.

Which of the following statements is CORRECT?

The Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1) stock is zero.

Which of the following is NOT a potential problem with beta and its estimation?

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)

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

If the returns of two firms are negatively correlated, then one of them must have a negative beta.

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

Which of the following statements is CORRECT?

Assume an economy in which there are three securities: Stock A with rA = 10% and σA = 10%; Stock B with rB = 15% and σB = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0). Which of the following statements is most CORRECT?

An Overview of Financial Management and the Financial Environment

Risk and Return-Part I

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

Real Options

Distributions to Shareholders-Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings-Investment Banking: and Financial Restructuring

Lease Financing

Hybrid Financing Preferred Stock-Warrants and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Enterprise Risk Management

Bankruptcy-Reorganization and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: A review

Pension Plan Management

Financial Management in Not for Profit Businesses

Filters

Exam 3: Risk and Return-Part II

Which of the following statements is CORRECT?

The Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1) stock is zero.

Which of the following is NOT a potential problem with beta and its estimation?

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)

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

If the returns of two firms are negatively correlated, then one of them must have a negative beta.

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

Which of the following statements is CORRECT?

Assume an economy in which there are three securities: Stock A with rA = 10% and σA = 10%; Stock B with rB = 15% and σB = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0). Which of the following statements is most CORRECT?

An Overview of Financial Management and the Financial Environment

Risk and Return-Part I

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

Real Options

Distributions to Shareholders-Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings-Investment Banking: and Financial Restructuring

Lease Financing

Hybrid Financing Preferred Stock-Warrants and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Enterprise Risk Management

Bankruptcy-Reorganization and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: A review

Pension Plan Management

Financial Management in Not for Profit Businesses

Filters