Exam 5: Modern Portfolio Concepts

The Capital Asset Pricing Model (CAPM) includes which of the following in its base assumptions? I. Investors buying positive beta stocks should earn a minimum return equal to the risk-free rate. II. Investors in the market should earn a return greater than the return on the overall market. III. Investors should be rewarded for the amount of risk they assume. IV. Investors should earn a return located above the Security Market Line.

In severe market downturns different asset classes become less correlated.

If the actual rate of return on an investment portfolio is constant from year to year, the standard deviation of that portfolio is zero.

Portfolios falling to the right of the efficient frontier

Investing in emerging markets is an effective means of diversifying a U.S. portfolio.

MacroN Company has a beta of 1.75. By what percent will the required rate of return on the stock of MacroN Company increase if the expected market rate of return rises by 4%?

The risk-free rate of return is 3% while the market rate of return is 12%. Delta Company has a historical beta of .85. Today, the beta for Delta Company was adjusted to reflect internal changes in the structure of the company. The new beta is 1.15. What is the amount of the change in the expected rate of return for Delta Company based on this revision to beta?

The market rate of return increased by 8% while the rate of return on XYZ stock increased by 4%. The beta of XYZ stock is

Modern portfolio theory seeks to minimize risk and maximize return by combining highly correlated assets.

Stock of Gould and Silber Inc. has a beta of -1. If the market declines by 10%, Gould and Silber would be expected to

A negative beta means that on average a stock moves in the opposite direction of the market.

In the real world, most of the assets available to investors

Studies have shown that about half of all stocks listed on the major exchanges are negatively correlated.

If the expected rate of return on AZNG is 12.72, its beta is 1.09 and the market risk premium is 8%, what is the risk-free rate?

Which of the following will always lower the beta of a portfolio that currently stands at 1.0? I. Diversify among different types of securities and across industry and geographic lines. II. Add investments with low betas to the portfolio. III. Hold more cash or Treasury Bills in the portfolio. IV. Reduce the percentage of the portfolio invested in high beta securities.

Investors are rewarded for assuming

Two assets have a coefficient of correlation of -.4. Asset A has a standard deviation of 20% and asset B has a standard deviation of 40%. Relative to holding a portfolio consisting of 100% of Asset B, what happens to risk if you combine these assets into a 50-50 weighted portfolio?

Explain what beta measures and how investors can use beta.

Which of the following statements concerning beta are correct? I. Stock with high standard deviations of returns will always have high betas. II. The higher the beta, the higher the expected return. III. A beta can be positive, negative, or equal to zero. IV. A beta of 0.35 indicates a lower rate of risk than a beta of 0.50.

Both modern portfolio theory and traditional portfolio management result in diversified portfolios, but they take different approaches to diversification.