Exam 8: Risk and Return-Capital Market Theory

Asset A has a required return of 18% and a beta of 1.4.The expected market return is 14%.What is the risk-free rate? Plot the security market line.

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

Which of the following statements is true?

When assets are positively correlated,they tend to rise or fall together.

Huit Industries' common stock has an expected return of 11.4% and a beta of 1.2.If the expected risk-free return is 3%,what is the expected return for the market (round your answer to the nearest .1%)?

A correlation coefficient of +1 indicates that returns on one asset can be exactly predicted from the returns on another asset.

What type of risk can investors reduce through diversification?

You are considering a portfolio of three stocks with 30% of your money invested in company X,45% of your money invested in company Y,and 25% of your money invested in company Z.If the betas for each stock are 1.22 for company X,1.46 for company Y,and 1.03 for company Z,what is the portfolio beta?

Provide an intuitive discussion of beta and its importance for measuring risk.

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% -The standard deviation of returns is

U.S.Treasury bills can be used to approximate the risk-free rate.

Beta is a measurement of the relationship between a security's returns and the general market's returns.

A stock with a beta greater than 1.0 has returns that are ________ volatile than the market,and a stock with a beta of less than 1.0 exhibits returns which are ________ volatile than those of the market portfolio.

Investing in foreign stocks is one way to improve diversification of a portfolio.

The standard deviation of a portfolio is always just the weighted average of the standard deviations of assets in the portfolio.

Which of the following is generally used to measure the market when calculating betas?

The standard deviation of returns on Warchester stock is 20% and on Shoesbury stock it is 16%.The coefficient of correlation between the stocks is .75.The standard deviation of any portfolio combining the two stocks will be less than 20%.

The market beta changes frequently with economic conditions.

The return for the market during the next period is expected to be 11.5%;the risk-free rate is 2.5%.Calculate the required rate of return for a stock with a beta of 1.5.

You are going to invest all of your funds in one of three projects with the following distribution of possible returns: Project 1 Project 2 Standard Deviation 12% Standard Deviation 19.5% Probability Return Probability Return 50% Chance 20% 30% Chance 30% 50% Chance -4% 40% Chance 10% 30% Chance -20% Project 3 Standard Deviation 12% Probability Return 10% Chance 30% 40% Chance 15% 40% Chance 10% 10% Chance -21% If you are a risk-averse investor,which one should you choose?