Exam 2: Risk and Return: Part I

adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.

Which of the following statements is CORRECT?

portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

Stocks A, B, and C are similar in some respects: Each has 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?

Which of the following statements is CORRECT?

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?

stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

Assume that the risk-free rate remains constant, but the market risk premium declines Which of the following is most likely to occur?

stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

investors become less averse to risk, the slope of the Security Market Line (SML) will increase.

Which of the following statements is CORRECT?

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.

Fiske Roofing Supplies' stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30% What is the required rate of return on the market? (Hint: First find the market risk premium.)

$10.00 million mutual fund Henry manages has a beta of 1.05 and a 9.50% required return The risk-free rate is 4.20% Henry now receives another $5.00 million, which he invests 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.)

Gardner Electric has a beta of 0.88 and an expected dividend growth rate of 4.00% per year The T-bill rate is 4.00%, and the T-bond rate is 5.25% The annual return on the stock market during the past 4 years was 10.25% Investors expect the average annual future return on the market to be 12.50% Using the SML, what is the firm's required rate of return?

Charlie and Lucinda each have $50,000 invested in stock portfoliosCharlie's has a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25% Lucinda's 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 Charlie's and Lucinda's portfolios is zero If Charlie and Lucinda marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?

Stock A's beta is 1.7 and Stock B's beta is 0.7 Which of the following statements must be true, assuming the CAPM is correct.

CAPM is built on historic conditions, although in most cases we use expected future data in applying it Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility This is one of the strengths of the CAPM.

Knobel holds a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20 He is in the process of buying 1,000 shares of Syngine Corp at $10 a share and adding it to his portfolio Syngine has an expected return of 13.0% and a beta of 1.50 The total value of Ivan's current portfolio is $90,000 What will the expected return and beta on the portfolio be after the purchase of the Syngine stock?

Stock A has a beta = 0.8, while Stock B has a beta = 1.6 Which of the following statements is CORRECT?