Question 1

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 2

Consider the following information and then calculate the required rate of return for the Global Investment Fund,which holds 4 stocks.The market's required rate of return is 13.25%,the risk-free rate is 7.00%,and the Fund's assets are as follows:
​

Accepted Answer

A)  9.58%
B)  10.09%
C)  10.62%
D)  11.18%
E)  11.77%F) A) and B)
G) B) and D)

Question 3

If investors are risk averse and hold only one stock,we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10.However,if stocks are held in portfolios,it is possible that the required return could be higher on the stock with the lower standard deviation.

Accepted Answer

A) True 
 B)False

Question 4

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

Question 5

According to the Capital Asset Pricing Model,investors are primarily concerned with portfolio risk,not the risks of individual stocks held in isolation.Thus,the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

Accepted Answer

A) True 
 B)False

Question 6

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) None of the above
G) A) and E)

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks.
B)  The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.
C)  It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock.
D)  Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount.
E)  An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.F) A) and E)
G) All of the above

Question 8

Stock A has a beta of 0.8 and Stock B has a beta of 1.2.50% of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (rM − rRF) were to increase but the risk-free rate (rRF) remained constant,which of the following would occur?

Accepted Answer

A)  The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A.
B)  The required return would decrease by the same amount for both Stock A and Stock B.
C)  The required return would increase for Stock A but decrease for Stock B.
D)  The required return on Portfolio P would remain unchanged.
E)  The required return would increase for Stock B but decrease for Stock A.F) None of the above
G) B) and C)

Question 9

Assume that you manage a $10.00 million mutual fund that has a beta of 1.05 and a 9.50% required return.The risk-free rate is 4.20%.You now receive another $5.00 million,which you invest in stocks with an average beta of 0.65.What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium,then find the new portfolio beta.)

Accepted Answer

A)  8.83%
B)  9.05%
C)  9.27%
D)  9.51%
E)  9.74%F) C) and D)
G) A) and D)

Question 10

If you plotted the returns on a given stock against those of the market,and if 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 greater than the risk-free rate for a well-diversified investor,assuming that the observed relationship is expected to continue into the future.

Accepted Answer

A) True 
 B)False

Question 11

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Accepted Answer

A) True 
 B)False

Question 12

​Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,the standard deviation.

Accepted Answer

A) True 
 B)False

Question 13

Tom Noel holds the following portfolio:
​
 Tom plans to sell Stock A and replace it with Stock E,which has a beta of 0.75.By how much will the portfolio beta change?

Accepted Answer

A)  −0.190
B)  −0.211
C)  −0.234
D)  −0.260
E)  −0.286F) A) and B)
G) All of the above

Question 14

Bae Inc.is considering an investment that has an expected return of 15% and a standard deviation of 10%.What is the investment's coefficient of variation?

Accepted Answer

A)  0.67
B)  0.73
C)  0.81
D)  0.89
E)  0.98F) B) and C)
G) B) and E)

Question 15

Nile Food's stock has a beta of 1.4,while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate,rRF,is 5.5% and the market risk premium,(rM − rRF) ,equals 4%.Which of the following statements is CORRECT?

Accepted Answer

A)  If the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for Nile since it has a higher beta.
B)  If the market risk premium increases but the risk-free rate remains unchanged, Nile's required return will increase because it has a beta greater than 1.0 but Elba's required return will decline because it has a beta less than 1.0.
C)  Since Nile's beta is twice that of Elba's, its required rate of return will also be twice that of Elba's.
D)  If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.
E)  If the market risk premium decreases but the risk-free rate remains unchanged, Nile's required return will decrease because it has a beta greater than 1.0 and Elba's will also decrease, but by more than Nile's because it has a beta less than 1.0.F) D) and E)
G) A) and E)

Question 16

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 17

Returns for the Dayton Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample,not a complete population,so the sample standard deviation formula should be used.) 
​

Accepted Answer

A)  20.08%
B)  20.59%
C)  21.11%
D)  21.64%
E)  22.18%F) None of the above
G) C) and E)

Question 18

You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B.Which of the possible answers best describes the historical betas for A and B? ​
A > 0; bB = 1. B) bA > +1; bB = 0. C) bA = 0; bB = −1. D) bA B = 0. E) bA B = 1." class="answers-bank-image d-inline" rel="preload" >

Accepted Answer

A)  bA > 0; bB = 1.
B)  bA > +1; bB = 0.
C)  bA = 0; bB = −1.
D)  bA B = 0.
E)  bA B = 1.F) A) and D)
G) A) and C)

Question 19

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5.The market is in equilibrium,with required returns equaling expected returns.Which of the following statements is CORRECT?

Accepted Answer

A)  If expected inflation remains constant but the market risk premium (rM − rRF)  declines, the required return of Stock LB will decline but the required return of Stock HB will increase.
B)  If both expected inflation and the market risk premium (rM − rRF)  increase, the required return on Stock HB will increase by more than that on Stock LB.
C)  If both expected inflation and the market risk premium (rM − rRF)  increase, the required returns of both stocks will increase by the same amount.
D)  Since the market is in equilibrium, the required returns of the two stocks should be the same.
E)  If expected inflation remains constant but the market risk premium (rM − rRF)  declines, the required return of Stock HB will decline but the required return of Stock LB will increase.F) D) and E)
G) A) and D)

Question 20

Managers should under no conditions take actions that increase their firm's risk relative to the market,regardless of how much those actions would increase the firm's expected rate of return.

Accepted Answer

A) True 
 B)False

Exam 8: Risk and Rates of Return

Correct Answer
verified

Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,the standard deviation.

Correct Answer
verified

Consider the following information and then calculate the required rate of return for the Global Investment Fund,which holds 4 stocks.The market's required rate of return is 13.25%,the risk-free rate is 7.00%,and the Fund's assets are as follows:

Correct Answer
verified

Managers should under no conditions take actions that increase their firm's risk relative to the market,regardless of how much those actions would increase the firm's expected rate of return.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Returns for the Dayton Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample,not a complete population,so the sample standard deviation formula should be used.)

Correct Answer
verified

Stock A has a beta of 0.8 and Stock B has a beta of 1.2.50% of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (r_M − r_RF) were to increase but the risk-free rate (r_RF) remained constant,which of the following would occur?

Correct Answer
verified

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

Nile Food's stock has a beta of 1.4,while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate,r_RF,is 5.5% and the market risk premium,(r_M − r_RF) ,equals 4%.Which of the following statements is CORRECT?

Correct Answer
verified

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5.The market is in equilibrium,with required returns equaling expected returns.Which of the following statements is CORRECT?

Correct Answer
verified

According to the Capital Asset Pricing Model,investors are primarily concerned with portfolio risk,not the risks of individual stocks held in isolation.Thus,the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

Correct Answer
verified

Correct Answer
verified

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Correct Answer
verified

Tom Noel holds the following portfolio: Tom plans to sell Stock A and replace it with Stock E,which has a beta of 0.75.By how much will the portfolio beta change?

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

You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B.Which of the possible answers best describes the historical betas for A and B?

Correct Answer
verified

Bae Inc.is considering an investment that has an expected return of 15% and a standard deviation of 10%.What is the investment's coefficient of variation?

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

Correct Answer
verified

Exam 8: Risk and Rates of Return

Correct AnswerverifiedShow Answer

​Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,the standard deviation.

Correct AnswerverifiedShow Answer

Consider the following information and then calculate the required rate of return for the Global Investment Fund,which holds 4 stocks.The market's required rate of return is 13.25%,the risk-free rate is 7.00%,and the Fund's assets are as follows: ​

Correct AnswerverifiedShow Answer

Managers should under no conditions take actions that increase their firm's risk relative to the market,regardless of how much those actions would increase the firm's expected rate of return.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Returns for the Dayton Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample,not a complete population,so the sample standard deviation formula should be used.) ​

Correct AnswerverifiedShow Answer

Stock A has a beta of 0.8 and Stock B has a beta of 1.2.50% of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (rM − rRF) were to increase but the risk-free rate (rRF) remained constant,which of the following would occur?

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

Nile Food's stock has a beta of 1.4,while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate,rRF,is 5.5% and the market risk premium,(rM − rRF) ,equals 4%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5.The market is in equilibrium,with required returns equaling expected returns.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

According to the Capital Asset Pricing Model,investors are primarily concerned with portfolio risk,not the risks of individual stocks held in isolation.Thus,the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Correct AnswerverifiedShow Answer

Tom Noel holds the following portfolio: ​ Tom plans to sell Stock A and replace it with Stock E,which has a beta of 0.75.By how much will the portfolio beta change?

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

You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B.Which of the possible answers best describes the historical betas for A and B? ​

Correct AnswerverifiedShow Answer

Bae Inc.is considering an investment that has an expected return of 15% and a standard deviation of 10%.What is the investment's coefficient of variation?

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

Correct AnswerverifiedShow Answer

Correct Answer
verified

Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,the standard deviation.

Correct Answer
verified

Consider the following information and then calculate the required rate of return for the Global Investment Fund,which holds 4 stocks.The market's required rate of return is 13.25%,the risk-free rate is 7.00%,and the Fund's assets are as follows:

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Returns for the Dayton Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample,not a complete population,so the sample standard deviation formula should be used.)

Correct Answer
verified

Stock A has a beta of 0.8 and Stock B has a beta of 1.2.50% of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (r_M − r_RF) were to increase but the risk-free rate (r_RF) remained constant,which of the following would occur?

Correct Answer
verified

Correct Answer
verified

Nile Food's stock has a beta of 1.4,while Elba Eateries' stock has a beta of 0.7.Assume that the risk-free rate,r_RF,is 5.5% and the market risk premium,(r_M − r_RF) ,equals 4%.Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Tom Noel holds the following portfolio: Tom plans to sell Stock A and replace it with Stock E,which has a beta of 0.75.By how much will the portfolio beta change?

Correct Answer
verified

Correct Answer
verified

You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B.Which of the possible answers best describes the historical betas for A and B?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified