Exam 8: Risk and Return-Capital Market Theory

If investors expected inflation to increase in the future,the SML would shift up,but the slope would remain the same.

You are considering investing in U.S.Steel.Which of the following is an example of nondiversifiable risk?

A security with a beta of zero has a required rate of return equal to the overall market rate of return.

On average,when the overall market changes by 10%,the stock of Veracity Communications changes 12%.What is Veracity's beta?

Your broker mailed you your year-end statement.You have $25,000 invested in Dow Chemical,$18,000 tied up in GM,$36,000 in Microsoft stock,and $11,000 in Nike.The betas for each of your stocks are 1.55 for Dow,1.12 for GM,2.39 for Microsoft,and .76 for Nike.What is the beta of your portfolio?

Use the following information,which describes the expected return and standard deviation for three different assets,to answer the following question(s). Portfolio X Portfolio Y Portfolio Z Expected return 9.5% 8.8% 9.5% Standard deviation 4.9% 5.5% 5.5% -If an investor must choose between investing in either portfolio X or portfolio Y,then

You are considering investing in Ford Motor Company.Which of the following is an example of diversifiable risk?

Which of the following statements is true?

The security market line (SML)relates risk to return,for a given set of market conditions.If risk aversion increases,which of the following would most likely occur?

Betas for individual stocks tend to be stable.

If there is a 20% chance we will get a 16% return,a 30% chance of getting a 14% return,a 40% chance of getting a 12% return,and a 10% chance of getting an 8% return,what is the expected rate of return?

A portfolio containing a mix of stocks,bonds,and real estate is likely to be more diversified than a portfolio made up of only one asset class.

An asset with a large standard deviation of returns can lower portfolio risk if its returns are uncorrelated with the returns on the other assets in the portfolio.

Stocks with higher betas are usually more stable than stocks with lower betas.

The market rewards assuming additional unsystematic risk with additional returns.

Briefly discuss why there is no reason to believe that the market will reward investors with additional returns for assuming unsystematic risk.

Most financial assets have correlation coefficients between 0 and 1.

The rate on six-month T-bills is currently 5%.Andvark Company stock has a beta of 1.69 and a required rate of return of 15.4%.According to CAPM,determine the return on the market portfolio.

The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.

Use the following information,which describes the possible outcomes from investing in a particular asset,to answer the following question(s). State of the Economy Probability of the States Percentage Returns Economic recession 25% 5% Moderate economic growth 55% 10% Strong economic growth 20% 13% -What is the expected rate of return on a portfolio Which consists of $9,000 invested in an S&P 500 Index fund,$32,500 in a technology fund,and $8,500 in Treasury Bills.The expected rate of return is 11% on the S&P Index fund,14% on the technology fund and 2% on the Treasury Bills.