Exam 8: Risk and Return-Capital Market Theory

The Elvis Alive Corporation, makers of Elvis memorabilia, has a beta of 2.35. The return on the market portfolio is 12%, and the risk-free rate is 2.5%. According to CAPM, what is the risk premium on a stock with a beta of 1.0?

Tanzlin Manufacturing's common stock has a beta of 1.5. If the expected risk-free return is 2% and the expected return on the market is 14%, what is the expected return on the stock?

The expected return on MSFT next year is 12% with a standard deviation of 20%. The expected return on AAPL next year is 24% with a standard deviation of 30%. If James makes equal investments in MSFT and AAPL, what is the expected return on his portfolio?

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

Siebling Manufacturing Company's common stock has a beta of .8. If the expected risk-free return is 2% and the market offers a premium of 8% over the risk-free rate, what is the expected return on Siebling's common stock?

An investor will get maximum risk reduction by combining assets that are

The market beta changes frequently with economic conditions.

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.

Betas for individual stocks tend to be stable.

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

Which of the following has a beta of zero?

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

You are considering buying some stock in Continental Grain. Which of the following is an example of nondiversifiable risk?

The expected return on VZ next year is 12% with a standard deviation of 20%. The expected return on ANT next year is 24% with a standard deviation of 30%. The correlation between the two stocks is .6. If Emily makes equal investments in VZ and ANT, what is the standard deviation of her portfolio?

It is impossible to eliminate all risk through diversification.

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

A stock with a beta of 1.0 would on average earn the risk-free rate.

If investors became more risk averse The SML would shift downward and the slope of the SML would fall.

For the most part, there has been a positive relation between risk and return historically.