Question 1

Stock X has a beta of 0.6, while Stock Y has a beta of 1.4. Which of the following statements is CORRECT?

Accepted Answer

A)   A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a required return that exceeds that of the overall market.
B)   Stock Y must have a higher expected return and a higher standard deviation than Stock X.
C)   If expected inflation increases but the market risk premium is unchanged, then the required return on both stocks will fall by the same amount.
D)   If the market risk premium declines but expected inflation is unchanged, the required return on both stocks will decrease, but the decrease will be greater for Stock Y.E) None of the above
F) B) and D)

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)   The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.
B)   If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio.
C)   The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future.
D)   The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.
E)   It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free)  rate of return, rRF.F) C) and E)
G) B) and C)

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   If a company with a high beta merges with a low-beta company, the best estimate of the new merged company's beta is 1.0.
B)   Logically, it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks, especially if the projects are closely associated with research and development activities.
C)   The beta of an "average stock," which is also "the market beta," can change over time, sometimes drastically.
D)   If a newly issued stock does not have a past history that can be used for calculating beta, then we should always estimate that its beta will turn out to be 1.0. This is especially true if the company finances with more debt than the average firm.
E)   During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects, the calculated historical beta may be drastically different from the beta that will exist in the future.F) All of the above
G) B) and C)

Question 4

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct.

Accepted Answer

A)   Stock A would be a more desirable addition to a portfolio then Stock B.
B)   In equilibrium, the expected return on Stock B will be greater than that on Stock A.
C)   When held in isolation, Stock A has more risk than Stock B.
D)   Stock B would be a more desirable addition to a portfolio than A.
E)   In equilibrium, the expected return on Stock A will be greater than that on B.F) B) and D)
G) A) and E)

Question 5

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF) , declines with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT?

Accepted Answer

A)   The required return of all stocks will increase by the amount of the increase in the risk-free rate.
B)   The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0.
C)   Since the overall return on the market stays constant, the required return on each individual stock will also remain constant.
D)   The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0.E) C) and D)
F) All of the above

Question 6

The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

Accepted Answer

A) True 
 B)False

Question 7

Over the past 75 years, we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following answers correctly ranks investments from highest to lowest risk (and return) , where the security with the highest risk is shown first, the one with the lowest risk last?

Accepted Answer

A)   Small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, U.S. Treasury bills.
B)   Large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds.
C)   Small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills.
D)   U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks.
E)   Large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills.F) A) and B)
G) A) and E)

Question 8

A mutual fund manager has a $40 million portfolio with a beta of 1.00. The risk-free rate is 4.25%, and the market risk premium is 6.00%. The manager expects to receive an additional $60 million which she plans to invest in additional stocks. After investing the additional funds, she wants the fund's required and expected return to be 13.00%. What must the average beta of the new stocks be to achieve the target required rate of return?

Accepted Answer

A)   1.68
B)   1.76
C)   1.85
D)   1.94
E)   2.04F) C) and D)
G) A) and E)

Question 9

The CAPM is a multi-period model that takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

Accepted Answer

A) True 
 B)False

Question 10

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Accepted Answer

A) True 
 B)False

Question 11

Assume that you are the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require)  on this fund?

Accepted Answer

A)   10.56%
B)   10.83%
C)   11.11%
D)   11.38%
E)   11.67%F) C) and E)
G) All of the above

Question 12

The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Accepted Answer

A) True 
 B)False

Question 13

Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3. Portfolio P has 50% invested in both A and B. Which of the following would occur if the market risk premium increased by 1% but the risk- free rate remained constant?

Accepted Answer

A)   The required return on Portfolio P would increase by 1%.
B)   The required return on both stocks would increase by 1%.
C)   The required return on Portfolio P would remain unchanged.
D)   The required return on Stock A would increase by more than 1%, while the return on Stock B would increase by less than 1%.
E)   The required return for Stock A would fall, but the required return for Stock B would increase.F) B) and C)
G) C) and D)

Question 14

Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.

Accepted Answer

A) True 
 B)False

Question 15

Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. You have a portfolio that consists of 50% A and 50% B. Which of the following statements is CORRECT?

Accepted Answer

A)   The portfolio's beta is less than 1.2.
B)   The portfolio's expected return is 15%.
C)   The portfolio's standard deviation is greater than 20%.
D)   The portfolio's beta is greater than 1.2.E) B) and C)
F) A) and D)

Question 16

Choudhary Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

Accepted Answer

A)   0.2839
B)   0.3069
C)   0.3299
D)   0.3547
E)   0.3813F) A) and B)
G) B) and D)

Question 17

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Accepted Answer

A) True 
 B)False

Question 18

Data for Dana Industries is shown below. Now Dana assets that cause its beta to increase by 30%. In inflation increases by 2.00%. What is the stock's return?

Accepted Answer

A)    14.00 14.00 14.00  \&
B)    14.70 s 14.70 \mathrm{~s} 14.70 s 
C)    6.15.448 6.15 .448 6.15.448 
D)    16.21 16.21 16.21  웅
E)    17.02% 17.02 \% 17.02%   F) A) and E)
G) None of the above

Question 19

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

Accepted Answer

A)   The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change.
B)   The expected return of your portfolio is likely to decline.
C)   The diversifiable risk will remain the same, but the market risk will likely decline.
D)   Both the diversifiable risk and the market risk of your portfolio are likely to decline.
E)   The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.F) A) and B)
G) A) and C)

Question 20

One key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both the risk and the expected return of the asset, assuming that the asset is held in a
well-diversified portfolio. The risk of the asset held in isolation is not relevant under the CAPM.

Accepted Answer

A) True 
 B)False

Exam 6: Risk, Return, and the Capital Asset Pricing Model

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

Correct Answer
verified

The CAPM is a multi-period model that takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

Correct Answer
verified

Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.

Correct Answer
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Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct.

Correct Answer
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Correct Answer
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Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3. Portfolio P has 50% invested in both A and B. Which of the following would occur if the market risk premium increased by 1% but the risk- free rate remained constant?

Correct Answer
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The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Stock X has a beta of 0.6, while Stock Y has a beta of 1.4. Which of the following statements is CORRECT?

Correct Answer
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The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Correct Answer
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Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. You have a portfolio that consists of 50% A and 50% B. Which of the following statements is CORRECT?

Correct Answer
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Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF) , declines with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT?

Correct Answer
verified

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Correct Answer
verified

Choudhary Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

Correct Answer
verified

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

Correct Answer
verified

Correct Answer
verified

Assume that you are the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require) on this fund?

Correct Answer
verified

Exam 6: Risk, Return, and the Capital Asset Pricing Model

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

Correct AnswerverifiedShow Answer

The CAPM is a multi-period model that takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

Correct AnswerverifiedShow Answer

Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.

Correct AnswerverifiedShow Answer

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct.

Correct AnswerverifiedShow Answer

Data for Dana Industries is shown below. Now Dana assets that cause its beta to increase by 30%. In inflation increases by 2.00%. What is the stock's return?

Correct AnswerverifiedShow Answer

Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3. Portfolio P has 50% invested in both A and B. Which of the following would occur if the market risk premium increased by 1% but the risk- free rate remained constant?

Correct AnswerverifiedShow Answer

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Stock X has a beta of 0.6, while Stock Y has a beta of 1.4. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Correct AnswerverifiedShow Answer

Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. You have a portfolio that consists of 50% A and 50% B. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF) , declines with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Correct AnswerverifiedShow Answer

Choudhary Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

Correct AnswerverifiedShow Answer

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assume that you are the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require) on this fund?

Correct AnswerverifiedShow Answer

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