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

A mutual fund manager has a $20 million portfolio with a beta of 1.00. The risk-free rate is 4.25%, and the market risk premium is 6.00%. The manager expects to receive an additional $25.50 million, which she plans to invest in additional stocks. After investing the additional funds, she wants the fund's required and expected return to be 13.00%. What must the average beta of the new stocks be to achieve the target required rate of return?

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, or the risk-free rate.

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM?

Assume that the risk-free rate is 5%. Which statement about a stock's beta is correct?

Rosenberg Inc. is considering a capital budgeting project that has an expected return of 20% and a standard deviation of 25%. What is the project's coefficient of variation?

Any change in 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.

Which type of correlation will a completely diversified portfolio have with the market portfolio?

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?

Which of the following statements is correct?

Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is correct?

The slope of the SML is determined by investors' aversion to risk. The greater the marginal investor's risk aversion, the steeper the SML.

Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting two-asset portfolio will have less risk than either security held alone.

A payoff matrix shows the set of possible rates of return on an investment, along with their probabilities of occurrence, and the investment's expected rate of return is found by multiplying each outcome or "state" by its probability.

Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%. The returns of the two stocks are independent, so the correlation coefficient between them, r_XY, is zero. Which statement best describes the characteristics of your two-stock portfolio?

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

Assume that two investors each hold a portfolio, and that portfolio is their only asset. Investor A's portfolio has a beta of minus 2.0, while Investor B's portfolio has a beta of plus 2.0. Assuming that the unsystematic risks of the stocks in the two portfolios are the same, then the two investors face the same amount of risk. However, the holders of either portfolio could lower their risks, and by exactly the same amount, by adding some "normal" stocks with beta = 1.0.

Efficient portfolio has the best risk and expected return combination for any given level of risk or return.

Which of the following statements is correct?

Which of the following statements is correct?

Companies should under no conditions take actions that increase their risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.