Question 1

The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

Accepted Answer

A) True 
 B)False

Question 2

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 3

Which of the following statements is CORRECT?

Accepted Answer

A)   The slope of the SML is determined by the value of beta.
B)   The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers.
C)   Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well diversified investor, assuming investors expect the observed relationship to continue on into the future.
D)   If investors become less risk averse, the slope of the Security Market Line will increase.
E)   If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock.F) None of the above
G) B) and D)

Question 4

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

Accepted Answer

A)   If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
B)   The effect of a change in the market risk premium depends on the slope of the yield curve.
C)   If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
D)   If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
E)   The effect of a change in the market risk premium depends on the level of the risk-free rate.F) B) and C)
G) B) and E)

Question 5

For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

Accepted Answer

A)   The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.
B)   The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.
C)   The beta of the portfolio is less than the weighted average of the betas of the individual stocks.
D)   The beta of the portfolio is equal to the weighted average of the betas of the individual stocks.
E)   The beta of the portfolio is larger than the weighted average of the betas of the individual stocks.F) B) and C)
G) A) and E)

Question 6

You have the following data on three stocks: If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

Accepted Answer

A)   A; A.
B)   A; B.
C)   B; A.
D)   C; A.
E)   C; B.F) None of the above
G) A) and B)

Question 7

If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

Accepted Answer

A) True 
 B)False

Question 8

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 9

Carson Inc.'s manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population, not a sample.)

Accepted Answer

A)   17.69%
B)   18.62%
C)   19.55%
D)   20.52%
E)   21.55%F) A) and C)
G) A) and E)

Question 10

If you plotted the returns of a company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.

Accepted Answer

A) True 
 B)False

Question 11

Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)

Accepted Answer

A)   2.75%
B)   2.89%
C)   3.05%
D)   3.21%
E)   3.38%F) A) and B)
G) B) and D)

Question 12

Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

Accepted Answer

A)   Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.
B)   Adding more such stocks will increase the portfolio's expected rate of return.
C)   Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.
D)   Adding more such stocks will have no effect on the portfolio's risk.
E)   Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk.F) None of the above
G) B) and D)

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)   When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.
B)   Portfolio diversification reduces the variability of returns on an individual stock.
C)   Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihoods of unfavorable events.
D)   The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs.
E)   A stock with a beta of -1.0 has zero market risk if held in a 1-stock portfolio.F) C) and D)
G) A) and B) D

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)   Beta is measured by the slope of the security market line.
B)   If the risk-free rate rises, then the market risk premium must also rise.
C)   If a company's beta is halved, then its required return will also be halved.
D)   If a company's beta doubles, then its required return will also double.
E)   The slope of the security market line is equal to the market risk premium, (rM − rRF) .F) A) and D)
G) None of the above

Question 15

The distributions of rates of return for Companies AA and BB are given below: We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.

Accepted Answer

A) True 
 B)False  False

Question 16

Stocks A, B, and C all have an expected return of 10% and a standard deviation of 25%. Stocks A and B have returns that are independent of one another, i.e., their correlation coefficient, r, equals zero. Stocks A and C have returns that are negatively correlated with one another, i.e., r is less than 0. Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B. Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C. Which of the following statements is CORRECT?

Accepted Answer

A)   Portfolio AC has an expected return that is less than 10%.
B)   Portfolio AC has an expected return that is greater than 25%.
C)   Portfolio AB has a standard deviation that is greater than 25%.
D)   Portfolio AB has a standard deviation that is equal to 25%.
E)   Portfolio AC has a standard deviation that is less than 25%.F) A) and E)
G) C) and E)

Question 17

Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Accepted Answer

A)   Variance; correlation coefficient.
B)   Standard deviation; correlation coefficient.
C)   Beta; variance.
D)   Coefficient of variation; beta.
E)   Beta; beta.F) D) and E)
G) A) and E) D

Question 18

Cooley Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?

Accepted Answer

A)   11.36%
B)   11.65%
C)   11.95%
D)   12.25%
E)   12.55%F) B) and D)
G) A) and E)

Question 19

Since the market return represents the expected return on an average stock, the market return reflects a certain amount of risk. As a result, there exists a market risk premium, which is the amount over and above the risk-free rate, that is required to compensate stock investors for assuming an average amount of risk.

Accepted Answer

A) True 
 B)False

Question 20

Portfolio A has but one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless.

Accepted Answer

A) True 
 B)False

Exam 8: Risk and Return

The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

Correct Answer
verified

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
verified

Which of the following statements is CORRECT?

Correct Answer
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Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

Correct Answer
verified

For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

Correct Answer
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You have the following data on three stocks: If you are a strict risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.

Correct Answer
verified

If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable 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
verified

Correct Answer
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Correct Answer
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Correct Answer
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Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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D

Which of the following statements is CORRECT?

Correct Answer
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The distributions of rates of return for Companies AA and BB are given below: We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.

Correct Answer
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False

Correct Answer
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Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Correct Answer
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D

Cooley Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?

Correct Answer
verified

Correct Answer
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Portfolio A has but one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless.

Correct Answer
verified

Exam 8: Risk and Return

The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

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

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

Correct AnswerverifiedShow Answer

For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

Correct AnswerverifiedShow Answer

You have the following data on three stocks: If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

Correct AnswerverifiedShow Answer

If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable 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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedD

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

The distributions of rates of return for Companies AA and BB are given below: We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.

Correct AnswerverifiedFalse

Correct AnswerverifiedShow Answer

Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Correct AnswerverifiedD

Cooley Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Portfolio A has but one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless.

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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You have the following data on three stocks: If you are a strict risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.

Correct Answer
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Correct Answer
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Correct Answer
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D

Correct Answer
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False

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D

Correct Answer
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Correct Answer
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