Exam 6: The Meaning and Measurement of Risk and Return

Bankers Corp.has a very conservative beta of .7,while Biotech Corp.has a beta of 2.1.Given that the T-bill rate is 5%,and the market is expected to return 15%,what is the expected return of Bankers Corp.,Biotech Corp.,and a portfolio composed of 60% of Bankers Corp.and 40% Biotech Corp.? a.Solve this problem first by weighting the betas to calculate a portfolio beta,and then using CAPM to calculate the portfolio expected return. b.Then solve the problem again by calculating the expected return of each asset and weighting those returns to calculate the portfolio expected return. c.Why is Biotech Corp.'s expected return NOT three times that of Bankers Corp.?

The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio.

The slope of the characteristic line of a security is that security's beta.

Investment A and Investment B both have the same expected return,but Investment A is more risky than Investment B.In the technical jargon of modern portfolio theory,Investment A is said to "dominate" Investment B.

The risk-free rate of interest is 4% and the market risk premium is 9%.Howard Corporation has a beta of 2.0,and last year generated a return of 16% with a standard deviation of returns of 27%.The required return on Howard Corporation stock is

Diversifying among different kinds of assets is called asset allocation.

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the highest risk investment?

Small company stocks have historically had higher average annual returns than large company stocks,and also a higher risk premium.

Which of the following statements is MOST correct concerning diversification and risk?

The relevant variable a financial manager uses to measure returns is

A well-diversified portfolio typically has systematic risk equal to about 40% of the portfolio's total risk.

Green Company stock has a beta of 2 and a required return of 23%,while Gold Company stock has a beta of 1.0 and a required return of 14%.The standard deviation of returns for Green Company is 10% more than the standard deviation for Gold Company.The expected return on the market portfolio according to the CAPM is

How is risk defined?

Of the following different types of securities,which is typically considered most risky?

Beta is a measurement of the relationship between a security's returns and the general market's returns.

Which of the following statements is MOST correct concerning diversification and risk?

Assume that you have $165,000 invested in a stock whose beta is 1.25,$85,000 invested in a stock whose beta is 2.35,and $235,000 invested in a stock whose beta is 1.11.What is the beta of your portfolio?

In general,the required rate of return is a function of (1)the time value of money,(2)the risk of an asset,and (3)the investor's attitude toward risk.

Most stocks have betas between

Another name for an asset's expected rate of return is holding-period return.