Exam 2: Risk and Return: Part I

Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each The portfolio's beta is 1.12 Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80 What will the portfolio's new beta be?

Assume that investors have recently become more risk averse, so the market risk premium has increased Also, assume that the risk-free rate and expected inflation have not changed Which of the following is most likely to occur?

Diversification will normally reduce the riskiness of a portfolio of stocks.

Zacher Co.'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?

firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.

Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?

Which of the following statements is CORRECT?

Company 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 DHF's new required return be?

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8The risk-free rate is 6% and the market risk premium is 5%Which of the following statements is CORRECT?

Suppose that during the coming year, the risk free rate, rRF, is expected to remain the same, while the market risk premium (rM − rRF), is expected to fall Given this forecast, which of the following statements is CORRECT?

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

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.

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

Recession, inflation, and high interest rates are economic events that are best characterized as being

Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk.

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.

Portfolio AB was created by investing in a combination of Stocks A and BStock A has a beta of 1.2 and a standard deviation of 25% Stock B has a beta of 1.4 and a standard deviation of 20% Portfolio AB has a beta of 1.25 and a standard deviation of 18% Which of the following statements is CORRECT?

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 Your portfolio consists of 50% A and 50% B Which of the following statements is CORRECT?

Market risk refers to the tendency of a stock to move with the general stock market A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

Which of the following statements is CORRECT?