Exam 11: Risk and Rates of Return

The Security Market Line (SML) relates risk to return, for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase, which of the following changes would be most likely to occur?

(Multiple Choice)

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Question 21

Which of the following statements is most correct?

(Multiple Choice)

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Question 22

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

(Multiple Choice)

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Question 23

Which type of risk can be eliminated through diversification?

(Multiple Choice)

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Question 24

You hold a diversified portfolio consisting of a $10,000 investment in each of 20 different common stocks .The portfolio beta is equal to 1.2.You have decided to sell one of your stocks which has a beta equal to 0.7 for $10,000.You plan to use the proceeds to purchase another stock which has a beta equal to 1.4.What will be the beta of the new portfolio?

(Multiple Choice)

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Question 25

The biggest reduction in risk would be achieved by combining two assets into a portfolio with a correlation coefficient equal to ____.

(Multiple Choice)

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Question 26

Which of the following statements about risk is false?

(Multiple Choice)

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Question 27

You are holding a stock which has a beta of 2.0 and is currently in equilibrium.The required return on the stock is 15 percent, and the return on an average stock is 10 percent.What would be the percentage change in the return on the stock if the return on an average stock increased by 30 percent while the risk-free rate remained unchanged?

(Multiple Choice)

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Question 28

The probability distribution for r_M for the coming year is as follows: If r_RF = 6.05% and Stock X has a beta of 2.0, an expected constant growth rate of 7 percent, and D₀ = $2, what market price gives the investor a return consistent with the stock's risk?

(Multiple Choice)

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Question 29

Which of the following statements is most correct?

(Multiple Choice)

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Question 30

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

(True/False)

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Question 31

The Y-axis intercept of the SML indicates the return on the individual asset when the realized return on an average stock (beta = 1.0) is zero.

(True/False)

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Question 32

Which of the following statements is most correct?

(Multiple Choice)

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Question 33

If I know for sure that the market will have a positive return over the next year, to maximize my rate of return, I should increase the beta of my portfolio.

(True/False)

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Question 34

Risk in financial assets only occurs when there is a chance that the actual return is less than expected.It is not considered risk if there is a chance that the actual return is greater than expected.

(True/False)

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Question 35

The systematic (market) risk associated with an individual stock is most closely identified with the

(Multiple Choice)

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Question 36

The realized portfolio return is the weighted average of the relative weights of securities in the portfolio multiplied by their respective expected returns.

(True/False)

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Question 37

An investor who is risk averse requires lower rates of return for assets of higher risk.

(True/False)

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Question 38

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

(True/False)

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Question 39

Market risk refers to the tendency of a stock to move with the general stock market.A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta which is greater than 1.0.

(True/False)

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Question 40

Showing 21 - 40 of 104

The Security Market Line (SML) relates risk to return, for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase, which of the following changes would be most likely to occur?

Which of the following statements is most correct?

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

Which type of risk can be eliminated through diversification?

The biggest reduction in risk would be achieved by combining two assets into a portfolio with a correlation coefficient equal to ____.

Which of the following statements about risk is false?

The probability distribution for r_M for the coming year is as follows: If r_RF = 6.05% and Stock X has a beta of 2.0, an expected constant growth rate of 7 percent, and D₀ = $2, what market price gives the investor a return consistent with the stock's risk?

Which of the following statements is most correct?

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

The Y-axis intercept of the SML indicates the return on the individual asset when the realized return on an average stock (beta = 1.0) is zero.

Which of the following statements is most correct?

If I know for sure that the market will have a positive return over the next year, to maximize my rate of return, I should increase the beta of my portfolio.

Risk in financial assets only occurs when there is a chance that the actual return is less than expected.It is not considered risk if there is a chance that the actual return is greater than expected.

The systematic (market) risk associated with an individual stock is most closely identified with the

The realized portfolio return is the weighted average of the relative weights of securities in the portfolio multiplied by their respective expected returns.

An investor who is risk averse requires lower rates of return for assets of higher risk.

Market risk refers to the tendency of a stock to move with the general stock market.A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta which is greater than 1.0.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment Concepts

Security Valuation and Selection

Filters

Exam 11: Risk and Rates of Return

The Security Market Line (SML) relates risk to return, for a given set of financial market conditions.If investors conclude that the inflation rate is going to increase, which of the following changes would be most likely to occur?

Which of the following statements is most correct?

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

Which type of risk can be eliminated through diversification?

The biggest reduction in risk would be achieved by combining two assets into a portfolio with a correlation coefficient equal to ____.

Which of the following statements about risk is false?

The probability distribution for rM for the coming year is as follows: If rRF = 6.05% and Stock X has a beta of 2.0, an expected constant growth rate of 7 percent, and D0 = $2, what market price gives the investor a return consistent with the stock's risk?

Which of the following statements is most correct?

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

The Y-axis intercept of the SML indicates the return on the individual asset when the realized return on an average stock (beta = 1.0) is zero.

Which of the following statements is most correct?

If I know for sure that the market will have a positive return over the next year, to maximize my rate of return, I should increase the beta of my portfolio.

Risk in financial assets only occurs when there is a chance that the actual return is less than expected.It is not considered risk if there is a chance that the actual return is greater than expected.

The systematic (market) risk associated with an individual stock is most closely identified with the

The realized portfolio return is the weighted average of the relative weights of securities in the portfolio multiplied by their respective expected returns.

An investor who is risk averse requires lower rates of return for assets of higher risk.

Market risk refers to the tendency of a stock to move with the general stock market.A stock with above-average market risk will tend to be more volatile than an average stock, and it will have a beta which is greater than 1.0.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment Concepts

Security Valuation and Selection

Filters

The probability distribution for r_M for the coming year is as follows: If r_RF = 6.05% and Stock X has a beta of 2.0, an expected constant growth rate of 7 percent, and D₀ = $2, what market price gives the investor a return consistent with the stock's risk?