Exam 2: Risk and Return: Part I

two stocks in your portfolio, X and Y, have independent returns, so the correlation between them, rXY is zero Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%Which of the following statements best describes the characteristics of your 2-stock portfolio?

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

stock with a beta equal to -1.0 has zero systematic (or market) risk.

"Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

Hazel Morrison, 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% Hazel 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?

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

Calculate the required rate of return for Everest Expeditions Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the firm has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.

Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRFMeanwhile, investors are afraid of a recession, so the market risk premium, (rM - rRF), has increased Under these conditions, with other things held constant, which of the following statements is most correct?

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

slope of the SML is determined by investors' aversion to risk The greater the average investor's risk aversion, the steeper the SML.

Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2 Portfolio P has 1/3 of its value invested in each stock Each stock has a standard deviation of 25%, and their returns are independent of one another, i.e., the correlation coefficients between each pair of stocks is zero Assuming the market is in equilibrium, which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.

Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks The portfolio's beta is 1.25 Now suppose Stan decided to sell one of his stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35 What would the portfolio's new beta be?

managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

have a portfolio P that consists of 50% Stock X and 50% Stock YStock X has a beta of 0.7 and Stock Y has a beta of 1.3 The standard deviation of each stock's returns is 20% The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zeroGiven this information, which of the following statements is CORRECT?

Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3 Portfolio P has 50% invested in both A and B Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?