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Which of the following statements is CORRECT? ​


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) A) and D)
G) B) and E)

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We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

A) True
B) False

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If the price of money (e.g. ,interest rates and equity capital costs)increases due to an increase in anticipated inflation,the risk-free rate will also increase.If there is no change in investors' risk aversion,then the market risk premium (rM - rRF)will remain constant.Also,if there is no change in stocks' betas,then the required rate of return on each stock as measured by the CAPM will increase by the same amount as the increase in expected inflation.

A) True
B) False

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Which of the following statements is CORRECT?


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) A) and E)
G) B) and E)

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Jim Angel holds a $200,000 portfolio consisting of the following stocks: Jim Angel holds a $200,000 portfolio consisting of the following stocks: What is the portfolio's beta? Do not round your intermediate calculations. A) 1.239 B) 1.040 C) 0.861 D) 0.809 E) 1.050 What is the portfolio's beta? Do not round your intermediate calculations.


A) 1.239
B) 1.040
C) 0.861
D) 0.809
E) 1.050

F) A) and B)
G) A) and E)

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Assume that your uncle holds just one stock,East Coast Bank (ECB) ,which he thinks has very little risk.You agree that the stock is relatively safe,but you want to demonstrate that his risk would be even lower if he were more diversified.You obtain the following returns data for West Coast Bank (WCB) .Both banks have had less variability than most other stocks over the past 5 years.Measured by the standard deviation of returns,by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 54% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula. ) Do not round your intermediate calculations. Assume that your uncle holds just one stock,East Coast Bank (ECB) ,which he thinks has very little risk.You agree that the stock is relatively safe,but you want to demonstrate that his risk would be even lower if he were more diversified.You obtain the following returns data for West Coast Bank (WCB) .Both banks have had less variability than most other stocks over the past 5 years.Measured by the standard deviation of returns,by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 54% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula. ) Do not round your intermediate calculations. ​ ​ A) 3.59% B) 4.27% C) 2.99% D) 3.99% E) 4.51% ​ Assume that your uncle holds just one stock,East Coast Bank (ECB) ,which he thinks has very little risk.You agree that the stock is relatively safe,but you want to demonstrate that his risk would be even lower if he were more diversified.You obtain the following returns data for West Coast Bank (WCB) .Both banks have had less variability than most other stocks over the past 5 years.Measured by the standard deviation of returns,by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 54% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula. ) Do not round your intermediate calculations. ​ ​ A) 3.59% B) 4.27% C) 2.99% D) 3.99% E) 4.51% ​


A) 3.59%
B) 4.27%
C) 2.99%
D) 3.99%
E) 4.51%

F) A) and B)
G) C) and D)

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Jane has a portfolio of 20 average stocks,and Dick has a portfolio of 2 average stocks.Assuming the market is in equilibrium,which of the following statements is CORRECT?


A) Jane's portfolio will have less diversifiable risk and also less market risk than Dick's portfolio.
B) The required return on Jane's portfolio will be lower than that on Dick's portfolio because Jane's portfolio will have less total risk.
C) Dick's portfolio will have more diversifiable risk,the same market risk,and thus more total risk than Jane's portfolio,but the required (and expected) returns will be the same on both portfolios.
D) If the two portfolios have the same beta,their required returns will be the same,but Jane's portfolio will have less market risk than Dick's.
E) The expected return on Jane's portfolio must be lower than the expected return on Dick's portfolio because Jane is more diversified.

F) A) and E)
G) A) and C)

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In a portfolio of three randomly selected stocks,which of the following could NOT be true,i.e. ,which statement is false?


A) The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.
B) The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
C) The beta of the portfolio is lower than the lowest of the three betas.
D) The beta of the portfolio is higher than the highest of the three betas.
E) The beta of the portfolio is calculated as a weighted average of the individual stocks' betas.

F) A) and B)
G) C) and E)

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Stock A has an expected return of 10% and a standard deviation of 20%.Stock B has an expected return of 13% and a standard deviation of 30%.The risk-free rate is 5% and the market risk premium,rM - rRF,is 6%.Assume that the market is in equilibrium.Portfolio AB has 50% invested in Stock A and 50% invested in Stock B.The returns of Stock A and Stock B are independent of one another,i.e. ,the correlation coefficient between them is zero.Which of the following statements is CORRECT?


A) Stock A's beta is 0.8333.
B) Since the two stocks have zero correlation,Portfolio AB is riskless.
C) Stock B's beta is 1.0000.
D) Portfolio AB's required return is 11%.
E) Portfolio AB's standard deviation is 25%.

F) A) and B)
G) B) and E)

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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?


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) B) and D)
G) B) and C)

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The distributions of rates of return for Companies AA and BB are given below: ​ 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. ​ 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.

A) True
B) False

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Stock A's stock has a beta of 1.30,and its required return is 13.75%.Stock B's beta is 0.80.If the risk-free rate is 2.75%,what is the required rate of return on B's stock? (Hint: First find the market risk premium. ) Do not round your intermediate calculations.


A) 9.33%
B) 9.52%
C) 10.66%
D) 11.33%
E) 8.57%

F) A) and B)
G) A) and C)

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Risk-averse investors require higher rates of return on investments whose returns are highly uncertain,and most investors are risk averse.

A) True
B) False

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CCC Corp has a beta of 1.5 and is currently in equilibrium.The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%.Now the required return on an average stock increases by 30.0% (not percentage points) .Neither betas nor the risk-free rate change.What would CCC's new required return be? Do not round your intermediate calculations.


A) 16.34%
B) 18.15%
C) 14.19%
D) 16.50%
E) 14.69%

F) C) and D)
G) A) and B)

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Bob has a $50,000 stock portfolio with a beta of 1.2,an expected return of 10.8%,and a standard deviation of 25%.Becky also has a $50,000 portfolio,but it has a beta of 0.8,an expected return of 9.2%,and a standard deviation that is also 25%.The correlation coefficient,r,between Bob's and Becky's portfolios is zero.If Bob and Becky marry and combine their portfolios,which of the following best describes their combined $100,000 portfolio?


A) The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios,10.0%.
B) The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios,1.0;its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios,10.0%;and its standard deviation will be less than the simple average of the two portfolios' standard deviations,25%.
C) The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios,10.0%.
D) The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations,25%.
E) The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations,25%.

F) A) and E)
G) A) and D)

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We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.

A) True
B) False

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Which of the following statements is CORRECT?


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) C) and E)
G) D) and E)

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


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) A) and B)
G) C) and D)

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Bill Dukes has $100,000 invested in a 2-stock portfolio.$62,500 is invested in Stock X and the remainder is invested in Stock Y.X's beta is 1.50 and Y's beta is 0.70.What is the portfolio's beta? Do not round your intermediate calculations.Round the final answer to 2 decimal places.


A) 1.14
B) 0.90
C) 1.44
D) 1.20
E) 1.56

F) B) and C)
G) A) and D)

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Which of the following statements is CORRECT?


A) If a stock has a beta of to 1.0,its required rate of return will be unaffected by changes in the market risk premium.
B) The slope of the Security Market Line is beta.
C) Any stock with a negative beta must in theory have a negative required rate of return,provided rRF is positive.
D) If a stock's beta doubles,its required rate of return must also double.
E) If a stock's returns are negatively correlated with returns on most other stocks,the stock's beta will be negative.

F) B) and D)
G) C) and D)

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