Question 1

How would the Security Market Line be affected,other things held constant,if the expected inflation rate decreases and investors also become more risk averse?

Accepted Answer

A) The x-axis intercept would decline, and the slope would increase. 
B) The y-axis intercept would increase, and the slope would decline. 
C) The SML would be affected only if betas changed. 
D) Both the y-axis intercept and the slope would increase, leading to higher required returns. 
E) The y-axis intercept would decline, and the slope would increase. 
A) The x-axis intercept would decline, and the slope would increase. 
B) The y-axis intercept would increase, and the slope would decline. 
C) The SML would be affected only if betas changed. 
D) Both the y-axis intercept and the slope would increase, leading to higher required returns. 
E) The y-axis intercept would decline, and the slope would increase. E

Question 2

Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.Your portfolio consists of 50% A and 50% B.Which of the following statements is CORRECT?

Accepted Answer

A) The portfolio's expected return is 15%. 
B) The portfolio's standard deviation is greater than 20%. 
C) The portfolio's beta is greater than 1.2. 
D) The portfolio's standard deviation is 20%. 
E) The portfolio's beta is less than 1.2. 
A) The portfolio's expected return is 15%. 
B) The portfolio's standard deviation is greater than 20%. 
C) The portfolio's beta is greater than 1.2. 
D) The portfolio's standard deviation is 20%. 
E) The portfolio's beta is less than 1.2. A

Question 3

The $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.)

Accepted Answer

A) 8.83% 
B) 9.05% 
C) 9.27% 
D) 9.51% 
E) 9.74% 
A) 8.83% 
B) 9.05% 
C) 9.27% 
D) 9.51% 
E) 9.74% A

Question 4

If a stock's market price exceeds its intrinsic value as seen by the marginal investor,then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Accepted Answer

A) True 
 B)False

Question 5

If 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.

Accepted Answer

A) True 
 B)False

Question 6

Portfolio A has but one stock,while Portfolio B consists of all stocks that trade in the market,each held in proportion to its market value.Because of its diversification,Portfolio B will by definition be riskless.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

The slope of the SML is determined by the value of beta.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following are the factors for the Fama-French model?

Accepted Answer

A) The excess market return, a debt factor, and a book-to-market factor. 
B) The excess market return, a size factor, and a debt. 
C) A debt factor, a size factor, and a book-to-market factor. 
D) The excess market return, an industrial production factor, and a book-to-market factor. 
E) The excess market return, a size factor, and a book-to-market factor. 
A) The excess market return, a debt factor, and a book-to-market factor. 
B) The excess market return, a size factor, and a debt. 
C) A debt factor, a size factor, and a book-to-market factor. 
D) The excess market return, an industrial production factor, and a book-to-market factor. 
E) The excess market return, a size factor, and a book-to-market factor.

Question 10

If investors are risk averse and hold only one stock,we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10.However,if stocks are held in portfolios,it is possible that the required return could be higher on the stock with the low standard deviation.

Accepted Answer

A) True 
 B)False

Question 11

Your friend is considering adding one additional stock to a 3-stock portfolio,to form a 4-stock portfolio.She is highly risk averse and has asked for your advice.The three stocks currently held all have b = 1.0,and they are perfectly positively correlated with the market.Potential new Stocks A and B both have expected returns of 15%,are in equilibrium,and are equally correlated with the market,with r = 0.75.However,Stock A's standard deviation of returns is 12% versus 8% for Stock B.Which stock should this investor add to his or her portfolio,or does the choice not matter?

Accepted Answer

A) Stock A. 
B) Stock B. 
C) Neither A nor B, as neither has a return sufficient to compensate for risk. 
D) Add A, since its beta must be lower. 
E) Either A or B, i.e., the investor should be indifferent between the two. 
A) Stock A. 
B) Stock B. 
C) Neither A nor B, as neither has a return sufficient to compensate for risk. 
D) Add A, since its beta must be lower. 
E) Either A or B, i.e., the investor should be indifferent between the two.

Question 12

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

Accepted Answer

A) The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation. 
B) The beta of the portfolio is less than the average of the betas of the individual stocks. 
C) The beta of the portfolio is equal to the average of the betas of the individual stocks. 
D) The beta of the portfolio is larger than the average of the betas of the individual stocks. 
E) The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation. 
A) The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation. 
B) The beta of the portfolio is less than the average of the betas of the individual stocks. 
C) The beta of the portfolio is equal to the average of the betas of the individual stocks. 
D) The beta of the portfolio is larger than the average of the betas of the individual stocks. 
E) The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.

Question 13

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

Accepted Answer

A) True 
 B)False

Question 14

The 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.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A) A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable. 
B) If a stock has a negative beta, its expected return must be negative. 
C) A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5. 
D) According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns. 
E) If the returns on two stocks are perfectly positively correlated and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks. 
A) A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable. 
B) If a stock has a negative beta, its expected return must be negative. 
C) A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5. 
D) According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns. 
E) If the returns on two stocks are perfectly positively correlated and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A) If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio. 
B) The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future. 
C) The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks. 
D) It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, rRF. 
E) The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks. 
A) If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio. 
B) The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future. 
C) The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks. 
D) It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, rRF. 
E) The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

Martin Ortner holds a $200,000 portfolio consisting of the following stocks: $$\begin{array} { c r r } 
\text { Stock } & \text { Investment } & \text { Beta } \
\hline \text { A } & \$ 50,000 & 0.95 \
\text { B } & 50,000 & 0.80 \
\text { C }& 50,000 & 1.00 \
\text { D } & 50,000 & 1.20 \
\text { Total } & \underline{\$ 200,000} &
\end{array}$$ What is the portfolio's beta?

Accepted Answer

A) 0.938 
B) 0.988 
C) 1.037 
D) 1.089 
E) 1.143 
A) 0.938 
B) 0.988 
C) 1.037 
D) 1.089 
E) 1.143

Question 19

Even 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.

Accepted Answer

A) True 
 B)False

Question 20

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.

Accepted Answer

A) 10.29% 
B) 10.83% 
C) 11.40% 
D) 12.00% 
E) 12.60% 
A) 10.29% 
B) 10.83% 
C) 11.40% 
D) 12.00% 
E) 12.60%

Exam 2: Risk and Return: Part I

How would the Security Market Line be affected,other things held constant,if the expected inflation rate decreases and investors also become more risk averse?

Stocks A and B each have an expected return of 15%,a standard deviation of 20%,and a beta of 1.2.The returns on the two stocks have a correlation coefficient of +0.6.Your portfolio consists of 50% A and 50% B.Which of the following statements is CORRECT?

If a stock's market price exceeds its intrinsic value as seen by the marginal investor,then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

If 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.

Portfolio A has but one stock,while Portfolio B consists of all stocks that trade in the market,each held in proportion to its market value.Because of its diversification,Portfolio B will by definition be riskless.

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

The slope of the SML is determined by the value of beta.

Which of the following are the factors for the Fama-French model?

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

Any change in its beta is likely to affect the required rate of return on a stock,which implies that a change in beta will likely have an impact on the stock's price,other things held constant.

The 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.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

Martin Ortner holds a $200,000 portfolio consisting of the following stocks: Stock Investment Beta A \ 50,000 0.95 B 50,000 0.80 C 50,000 1.00 D 50,000 1.20 Total What is the portfolio's beta?

Even 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.

An Overview of Financial Management and the Financial Environment

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

Filters