Question 1

The required rate of return for Firm A is

Accepted Answer

A)  8%. 
B)  12%. 
C)  16%. 
D)  Cannot be determined with information given.

Question 2

Bell Weather, Inc. has a beta of 1.25. The return on the market portfolio is 12.5%, and the risk-free rate is 5%. According to CAPM, what is the required return on this stock?

Accepted Answer

A)  20.62% 
B)  9.37% 
C)  14.38% 
D)  15.62%

Question 3

AA & Co. has a beta of .656. If the expected market return is 13.2% and the risk-free rate is 5.7%, what is the appropriate required return of AA & Co. using the CAPM model?

Accepted Answer

The answer of AA & Co. has a beta of...

Question 4

The beta of ABC Co. stock is the slope of

Accepted Answer

A)  the security market line. 
B)  the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills. 
C)  the arbitrage pricing line. 
D)  the line of best fit for a plot of ABC Co. returns against the returns of the market portfolio for the same period.

Question 5

Beta is the slope of a straight line that best fits the returns on an asset plotted against the return on

Accepted Answer

A)  inflation. 
B)  a portfolio of companies in the same industry. 
C)  a broad market index. 
D)  treasury bonds.

Question 6

Hefty stock has a beta of 1.2. If the risk-free rate is 7% and the market risk premium is 6.5%, what is the required rate of return on Hefty?

Accepted Answer

A)  14.8% 
B)  14.4% 
C)  12.4% 
D)  13.5%

Question 7

The expected return on the market portfolio is currently 11%. Battmobile Corporation stockholders require a rate of return of 23.0%, and the stock has a beta of 2.5. According to CAPM, determine the risk-free rate.

Accepted Answer

A)  17.5% 
B)  2.75% 
C)  3.0% 
D)  9.2%

Question 8

You are thinking of adding one of two investments to an already well diversified portfolio. Security A Security B
Expected return = 12% Expected return = 12%
Standard deviation of returns = 20.9% Standard deviation of returns = 10.1%
Beta = .8 Beta = 2
If you are a risk-averse investor

Accepted Answer

A)  security A is the better choice. 
B)  security B is the better choice. 
C)  either security would be acceptable. 
D)  cannot be determined with information given.

Question 9

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?

Accepted Answer

A)  1.24 
B)  1.00 
C)  1.28 
D)  1.33

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is true?

Accepted Answer

A)  A stock with a beta less than zero has no exposure to systematic risk. 
B)  A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0. 
C)  A stock with a beta less than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0. 
D)  A stock with a beta less than 1.0 has higher nondiversifiable risk than a stock with a beta of 1.0.

Question 13

Firm A's risk premium is

Accepted Answer

A)  4%. 
B)  6%. 
C)  8%. 
D)  10%.

Question 14

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?

Accepted Answer

A)  The market risk premium would increase. 
B)  Beta would increase. 
C)  The slope of the SML would increase. 
D)  The SML line would shift up.

Question 15

Long-term bonds issued by large, established corporations are commonly used to estimate the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following has a beta of 1?

Accepted Answer

A)  The 10 year T-Bond 
B)  The 1 year T-Bill 
C)  The Dow-Jones Industrial Average 
D)  The market

Question 17

In an efficient market there is no reward for accepting risk that can be eliminated through diversification.

Accepted Answer

A) True 
 B)False

Question 18

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?

Accepted Answer

A)  Project 1 
B)  Project 2 
C)  Project 3 
D)  None of the above

Question 19

Portfolio returns can be calculated as the geometric mean of the returns on the individual assets in the portfolio.

Accepted Answer

A) True 
 B)False

Question 20

The security market line (SML) intercepts the Y axis at the risk-free rate.

Accepted Answer

A) True 
 B)False

Exam 8: Risk and Return-Capital Market Theory

The required rate of return for Firm A is

Bell Weather, Inc. has a beta of 1.25. The return on the market portfolio is 12.5%, and the risk-free rate is 5%. According to CAPM, what is the required return on this stock?

AA & Co. has a beta of .656. If the expected market return is 13.2% and the risk-free rate is 5.7%, what is the appropriate required return of AA & Co. using the CAPM model?

The beta of ABC Co. stock is the slope of

Beta is the slope of a straight line that best fits the returns on an asset plotted against the return on

Hefty stock has a beta of 1.2. If the risk-free rate is 7% and the market risk premium is 6.5%, what is the required rate of return on Hefty?

The expected return on the market portfolio is currently 11%. Battmobile Corporation stockholders require a rate of return of 23.0%, and the stock has a beta of 2.5. According to CAPM, determine the risk-free rate.

You are thinking of adding one of two investments to an already well diversified portfolio. Security A Security B Expected return = 12% Expected return = 12% Standard deviation of returns = 20.9% Standard deviation of returns = 10.1% Beta = .8 Beta = 2 If you are a risk-averse investor

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

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

Which of the following statements is true?

Firm A's risk premium is

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?

Long-term bonds issued by large, established corporations are commonly used to estimate the risk-free rate.

Which of the following has a beta of 1?

In an efficient market there is no reward for accepting risk that can be eliminated through diversification.

Portfolio returns can be calculated as the geometric mean of the returns on the individual assets in the portfolio.

The security market line (SML) intercepts the Y axis at the risk-free rate.