Exam 3: Risk and Return-Part II

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 low standard deviation stock.

You hold a portfolio consisting of a $5,000 investment in each of 20 different stocks. The portfolio beta is equal to 1.12. You have decided to sell a coal mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a mineral rights company stock (b = 2.00). What is the new beta of the portfolio?

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

The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by managerial actions.

In a portfolio of three different stocks, which of the following could NOT be true?

Assume that the market is in equilibrium and that stock betas can be estimated with historical data. The returns on the market, the returns on United Fund (UF), the risk-free rate, and the required return on the United Fund are shown below. Based on this information, what is the required return on the market, rM? 2011 -9\% -14\% 2012 11\% 16\% 2013 15\% 22\% 2014 5\% 7\% 2015 -1\% -2\% $\mathrm { rgF: } : 7 \mathrm { cde } \%$ rUrited $15.00 \%$

Which of the following statements is CORRECT?

You have the following data on three stocks: Stock Standard Deviation Beta 0.15 0.79 0.25 0.61 0.20 130 As a risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

For markets to be in equilibrium (that is, for there to be no strong pressure for prices to depart from their current levels),

In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.

The CAPM is a multi-period model which takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative.

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns, and the factors are specified to be (1) market returns, (2) dividend yields, and (3) changes in inflation.

Consider the information below for Postman Builders Inc. Suppose that the expected inflation rate and thus the inflation premium increase by 2.0 percentage points, and Postman acquires risky assets that increase its beta by the indicated percentage. What is the firm's new required rate of return? beta: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad 1.50$ Recquired return $\left( r _ { 5 } \right)$ $\quad$ $\quad$$\quad10.20 \%$ RPM: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad6.00 \%$ Percentage increase in beta: $\quad 20 \%$

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

A stock you are holding has a beta of 2.0 and the stock is currently in equilibrium. The required rate of return on the stock is 15% versus a required return on an average stock of 10%. Now the required return on an average stock increases by 30.0% (not percentage points). The risk-free rate is unchanged. By what percentage (not percentage points) would the required return on your stock increase as a result of this event?

Stock A has an expected return rA = 10% and σA = 10%. Stock B has rB = 14% and σB = 15%. rAB = 0. The rate of return on riskless assets is 6%. a. Construct a graph that shows the feasible and efficient sets, giving consideration to the existence of the riskless asset. b. Explain what would happen to the CML if the two stocks had (a) a positive correlation coefficient or (b) a negative correlation coefficient. c. Suppose these were the only three securities (A, B, and riskless) in the economy, and everyone's indifference curves were such that they were tangent to the CML to the right of the point where the CML was tangent to the efficient set of risky assets. Would this represent a stable equilibriumσ If not, how would an equilibrium be produced?

You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B? Years Market Stock A Stock B 1 0.03 0.16 0.05 2 0.03 0.20 0.05 3 0.03 0.18 0.05 4 0.03 0.25 0.05 5 0.03 0.14 0.05

Calculate the required rate of return for the Wagner Assets Management Group, which holds 4 stocks. The market's required rate of return is 15.0%, the risk-free rate is 7.0%, and the Fund's assets are as follows: Stack Investment Beta A \2 00,000 1.50 B 300,000 -0.50 C 500,000 1.25 D 1,000,000 0.75

Which of the following statements is CORRECT?