Exam 7: Risk, Return, and the Capital Asset Pricing Model

The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is 0.6. Portfolio P is a portfolio with 50% invested in Stock A and 50% invested in B. Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements is correct?

Which of the following statements is correct?

Your firm's analyst believes that economic conditions during the next year will be either strong, normal, or weak, and she thinks that Crary Inc.'s returns will have the probability distribution shown below. What's the standard deviation of Crary's returns as estimated by your analyst? (Hint: Use the formula for the standard deviation of a population, not a sample.)

The real risk-free rate is 2%, the expected inflation rate is 3.00%, the market risk premium is 4.70%, and Kohers Enterprises has a beta of 1.10. What is the required rate of return on Kohers' stock?

A 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 actually reduce the riskiness of a portfolio.

Bad 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.

The risk-free rate is 6% and the market risk premium is 5%. Your $1 million 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)8. Which of the following statements is correct?

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

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. Fifty percent of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM - rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

Diversifiable risk is the only risk that affects the required rate of return because non-diversifiable risk can be eliminated.

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements MUST be true, assuming the CAPM is correct.

Diversifiable risk plays an important factor pricing role in the arbitrage pricing theory.

What happens to portfolios that cannot be dominated?

Which of the following statements is correct?

Keith Johnson has $100,000 invested in a two-stock portfolio. Thirty thousand dollars is invested in Potts Manufacturing and the remainder is invested in Stohs Corporation. Potts' beta is 1.60 and Stohs' beta is 0.60. What is the portfolio's beta?

Assume that you are the portfolio manager of the Coastal Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 14.00% and the risk-free rate is 6.00%. What rate of return should investors expect (and require) on this fund?

Which of the following statements is correct?