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)  Stock Y must have a higher expected return and a higher standard deviation than Stock X. 
B)  If expected inflation increases but the market risk premium is unchanged, then the required return on both stocks will fall by the same amount. 
C)  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. 
D)  If expected inflation declines but the market risk premium is unchanged, then the required return on both stocks will decrease but the decrease will be greater for Stock Y. 
E)  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. 
A)  Stock Y must have a higher expected return and a higher standard deviation than Stock X. 
B)  If expected inflation increases but the market risk premium is unchanged, then the required return on both stocks will fall by the same amount. 
C)  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. 
D)  If expected inflation declines but the market risk premium is unchanged, then the required return on both stocks will decrease but the decrease will be greater for Stock Y. 
E)  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.

Question 2

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, its standard deviation.

Accepted Answer

A) True 
 B)False

Question 3

portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A)  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. 
B)  If both expected inflation and the market risk premium (rM − rRF) increase, the required returns of both stocks will increase by the same amount. 
C)  Since the market is in equilibrium, the required returns of the two stocks should be the same. 
D)  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. 
E)  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. 
A)  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. 
B)  If both expected inflation and the market risk premium (rM − rRF) increase, the required returns of both stocks will increase by the same amount. 
C)  Since the market is in equilibrium, the required returns of the two stocks should be the same. 
D)  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. 
E)  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.

Question 5

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 6

Which of the following statements is CORRECT?

Accepted Answer

A)  A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations. 
B)  A two-stock portfolio will always have a lower beta than a one-stock portfolio. 
C)  If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio. 
D)  A stock with an above-average standard deviation must also have an above-average beta. 
E)  A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio. 
A)  A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations. 
B)  A two-stock portfolio will always have a lower beta than a one-stock portfolio. 
C)  If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio. 
D)  A stock with an above-average standard deviation must also have an above-average beta. 
E)  A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

Question 7

Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock BStock A has a beta of 1.2 and a standard deviation of 20% Stock B has a beta of 0.8 and a standard deviation of 25% Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)

Accepted Answer

A)  Stock B has a higher required rate of return than Stock A. 
B)  Portfolio P has a standard deviation of 22.5%. 
C)  More information is needed to determine the portfolio's beta. 
D)  Portfolio P has a beta of 1.0. 
E)  Stock A's returns are less highly correlated with the returns on most other stocks than are B's returns. 
A)  Stock B has a higher required rate of return than Stock A. 
B)  Portfolio P has a standard deviation of 22.5%. 
C)  More information is needed to determine the portfolio's beta. 
D)  Portfolio P has a beta of 1.0. 
E)  Stock A's returns are less highly correlated with the returns on most other stocks than are B's returns.

Question 8

Stocks A and B are quite similar: Each has an expected return of 12%, a beta of 1.2, and a standard deviation of 25% The returns on the two stocks have a correlation of 0.6 Portfolio P has 50% in Stock A and 50% in Stock B Which of the following statements is CORRECT?

Accepted Answer

A)  Portfolio P has a standard deviation that is greater than 25%. 
B)  Portfolio P has an expected return that is less than 12%. 
C)  Portfolio P has a standard deviation that is less than 25%. 
D)  Portfolio P has a beta that is less than 1.2. 
E)  Portfolio P has a beta that is greater than 1.2. 
A)  Portfolio P has a standard deviation that is greater than 25%. 
B)  Portfolio P has an expected return that is less than 12%. 
C)  Portfolio P has a standard deviation that is less than 25%. 
D)  Portfolio P has a beta that is less than 1.2. 
E)  Portfolio P has a beta that is greater than 1.2.

Question 9

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 10

Portfolio P has equal amounts invested in each of the three stocks, A, B, and CStock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2 Each of the stocks has a standard deviation of 25% The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero) Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged Which of the following statements is CORRECT?

Accepted Answer

A)  The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium. 
B)  The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock 
C)  will increase while the returns of safer stocks (such as Stock 
A)  will decrease. 
C)  The required returns on all three stocks will increase by the amount of the increase in the market risk premium. 
D)  The required return on the average stock will remain unchanged, but the returns on riskier stocks (such as Stock 
C)  will decrease while the returns on safer stocks (such as Stock 
A)  will increase. 
E)  The required return of all stocks will remain unchanged since there was no change in their betas. 
A)  The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium. 
B)  The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock 
C)  will increase while the returns of safer stocks (such as Stock 
A)  will decrease. 
C)  The required returns on all three stocks will increase by the amount of the increase in the market risk premium. 
D)  The required return on the average stock will remain unchanged, but the returns on riskier stocks (such as Stock 
C)  will decrease while the returns on safer stocks (such as Stock 
A)  will increase. 
E)  The required return of all stocks will remain unchanged since there was no change in their betas.

Question 11

Dixon Food's stock has a beta of 1.4, while Clark Café's 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 market risk premium increases but the risk-free rate remains unchanged, Dixon's required return will increase because it has a beta greater than 1.0 but Clark's required return will decline because it has a beta less than 1.0. 
B)  Since Dixon's beta is twice that of Clark's, its required rate of return will also be twice that of Clark's. 
C)  If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase. 
D)  If the market risk premium decreases but the risk-free rate remains unchanged, Dixon's required return will decrease because it has a beta greater than 1.0 and Clark's will also decrease, but by more than Dixon's because it has a beta less than 1.0. 
E)  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 Dixon since it has a higher beta. 
A)  If the market risk premium increases but the risk-free rate remains unchanged, Dixon's required return will increase because it has a beta greater than 1.0 but Clark's required return will decline because it has a beta less than 1.0. 
B)  Since Dixon's beta is twice that of Clark's, its required rate of return will also be twice that of Clark's. 
C)  If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase. 
D)  If the market risk premium decreases but the risk-free rate remains unchanged, Dixon's required return will decrease because it has a beta greater than 1.0 and Clark's will also decrease, but by more than Dixon's because it has a beta less than 1.0. 
E)  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 Dixon since it has a higher beta.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium If the risk-free rate is 5.00%, what is the market risk premium?

Accepted Answer

A)  5.80% 
B)  5.95% 
C)  6.09% 
D)  6.25% 
E)  6.40% 
A)  5.80% 
B)  5.95% 
C)  6.09% 
D)  6.25% 
E)  6.40%

Question 14

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

Question 15

Assume that the risk-free rate is 5% Which of the following statements is CORRECT?

Accepted Answer

A)  If a stock's beta doubled, its required return under the CAPM would also double. 
B)  If a stock's beta doubled, its required return under the CAPM would more than double. 
C)  If a stock's beta were 1.0, its required return under the CAPM would be 5%. 
D)  If a stock's beta were less than 1.0, its required return under the CAPM would be less than 5%. 
E)  If a stock has a negative beta, its required return under the CAPM would be less than 5%. 
A)  If a stock's beta doubled, its required return under the CAPM would also double. 
B)  If a stock's beta doubled, its required return under the CAPM would more than double. 
C)  If a stock's beta were 1.0, its required return under the CAPM would be 5%. 
D)  If a stock's beta were less than 1.0, its required return under the CAPM would be less than 5%. 
E)  If a stock has a negative beta, its required return under the CAPM would be less than 5%.

Question 16

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined Assume also that all stocks have positive betas Which of the following would be most likely to have occurred as a result of these changes?

Accepted Answer

A)  The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas. 
B)  The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0. 
C)  Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0. 
D)  The required returns on all stocks have fallen by the same amount. 
E)  The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas. 
A)  The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas. 
B)  The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0. 
C)  Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0. 
D)  The required returns on all stocks have fallen by the same amount. 
E)  The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas.

Question 17

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 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. 
B)  Since the overall return on the market stays constant, the required return on each individual stock will also remain constant. 
C)  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. 
D)  The required return of all stocks will fall by the amount of the decline in the market risk premium. 
E)  The required return of all stocks will increase by the amount of the increase in the risk-free rate. 
A)  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. 
B)  Since the overall return on the market stays constant, the required return on each individual stock will also remain constant. 
C)  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. 
D)  The required return of all stocks will fall by the amount of the decline in the market risk premium. 
E)  The required return of all stocks will increase by the amount of the increase in the risk-free rate.

Question 18

Stock A's stock has a beta of 1.30, and its required return is 12.00% Stock B's beta is 0.80 If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)

Accepted Answer

A)  8.76% 
B)  8.98% 
C)  9.21% 
D)  9.44% 
E)  9.68% 
A)  8.76% 
B)  8.98% 
C)  9.21% 
D)  9.44% 
E)  9.68%

Question 19

the returns of two firms are negatively correlated, then one of them must have a negative beta.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 2: Risk and Return: Part I

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

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, its standard deviation.

portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data.

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

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.

Which of the following statements is CORRECT?

Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock BStock A has a beta of 1.2 and a standard deviation of 20% Stock B has a beta of 0.8 and a standard deviation of 25% Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)

Stocks A and B are quite similar: Each has an expected return of 12%, a beta of 1.2, and a standard deviation of 25% The returns on the two stocks have a correlation of 0.6 Portfolio P has 50% in Stock A and 50% in Stock B Which of the following statements is CORRECT?

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.

Dixon Food's stock has a beta of 1.4, while Clark Café's 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?

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

Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium If the risk-free rate is 5.00%, what is the market risk premium?

Assume that the risk-free rate is 5% Which of the following statements is CORRECT?

Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined Assume also that all stocks have positive betas Which of the following would be most likely to have occurred as a result of these changes?

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?

Stock A's stock has a beta of 1.30, and its required return is 12.00% Stock B's beta is 0.80 If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)

the returns of two firms are negatively correlated, then one of them must have a negative beta.

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

Overview

Risk and Return: Part II

Bonds

Stocks

Financial Options

Financial Analysis

Forecasting

Cost of Capital

Corporate Valuation

Capital Budgeting

Cash Flows and Risk

Real Options

Cap Structure

Cap Structure II

Dividends

Ipos, Invsmt Banking

Leasing

Hybrids

Working Capital

Derivatives

Bankruptcy, Reorganization, and Liquidation

Mergers

Filters