Question 1

Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each The portfolio's beta is 1.12 Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80 What will the portfolio's new beta be?

Accepted Answer

A)  1.286 
B)  1.255 
C)  1.224 
D)  1.194 
E)  1.165

Question 2

Assume that investors have recently become more risk averse, so the market risk premium has increased Also, assume that the risk-free rate and expected inflation have not changed Which of the following is most likely to occur?

Accepted Answer

A)  The required rate of return will decline for stocks whose betas are less than 1.0. 
B)  The required rate of return on the market, rM, will not change as a result of these changes. 
C)  The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk 
D)  The required rate of return on a riskless bond will decline. 
E)  The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.

Question 3

Diversification will normally reduce the riskiness of a portfolio of stocks.

Accepted Answer

A) True 
 B)False

Question 4

Zacher Co.'s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50% What is the firm's required rate of return?

Accepted Answer

A)  11.36% 
B)  11.65% 
C)  11.95% 
D)  12.25% 
E)  12.55%

Question 5

firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?

Accepted Answer

A)  Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta. 
B)  The beta of an "average stock," or "the market," can change over time, sometimes drastically. 
C)  Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. 
D)  All of the statements above are true. 
E)  The fact that a security or project may not have a past history that can be used as the basis for calculating beta.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk. 
B)  A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0. 
C)  A large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8. 
D)  If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio. 
E)  A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected.

Question 8

Company has a beta of 1.5 and is currently in equilibrium The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00% Now the required return on an average stock increases by 30.0% (not percentage points) Neither betas nor the risk-free rate change What would DHF's new required return be?

Accepted Answer

A)  14.89% 
B)  15.68% 
C)  16.50% 
D)  17.33% 
E)  18.19%

Question 9

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8The risk-free rate is 6% and the market risk premium is 5%Which of the following statements is CORRECT?

Accepted Answer

A)  The required return on the market is 10%. 
B)  The portfolio's required return is less than 11%. 
C)  If the risk-free rate remains unchanged but the market risk premium increases by 2%, Gretta's portfolio's required return will increase by more than 2%. 
D)  If the market risk premium remains unchanged but expected inflation increases by 2%, Gretta's portfolio's required return will increase by more than 2%. 
E)  If the stock market is efficient, Gretta's portfolio's expected return should equal the expected return on the market, which is 11%.

Question 10

Suppose that during the coming year, the risk free rate, rRF, is expected to remain the same, while the market risk premium (rM − rRF), is expected to fall Given this forecast, which of the following statements is CORRECT?

Accepted Answer

A)  The required return on all stocks will remain unchanged. 
B)  The required return will fall for all stocks, but it will fall more for stocks with higher betas. 
C)  The required return for all stocks will fall by the same amount. 
D)  The required return will fall for all stocks, but it will fall less for stocks with higher betas. 
E)  The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.

Question 11

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

Accepted Answer

A)  The effect of a change in the market risk premium depends on the slope of the yield curve. 
B)  If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%. 
C)  If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0. 
D)  The effect of a change in the market risk premium depends on the level of the risk-free rate. 
E)  If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

you randomly select stocks and add them to your portfolio, which of the following statements best describes what you should expect?

Accepted Answer

A)  Adding more such stocks will increase the portfolio's expected rate of return. 
B)  Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk. 
C)  Adding more such stocks will have no effect on the portfolio's risk. 
D)  Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk. 
E)  Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.

Question 14

Recession, inflation, and high interest rates are economic events that are best characterized as being

Accepted Answer

A)  company-specific risk factors that can be diversified away. 
B)  among the factors that are responsible for market risk. 
C)  risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. 
D)  irrelevant except to governmental authorities like the Federal Reserve. 
E)  systematic risk factors that can be diversified away.

Question 15

Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk.

Accepted Answer

A) True 
 B)False

Question 16

According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

Accepted Answer

A) True 
 B)False

Question 17

Portfolio AB was created by investing in a combination of Stocks A and BStock A has a beta of 1.2 and a standard deviation of 25% Stock B has a beta of 1.4 and a standard deviation of 20% Portfolio AB has a beta of 1.25 and a standard deviation of 18% Which of the following statements is CORRECT?

Accepted Answer

A)  Stock A has more market risk than Stock B but less stand-alone risk. 
B)  Portfolio AB has more money invested in Stock A than in Stock B. 
C)  Portfolio AB has the same amount of money invested in each of the two stocks. 
D)  Portfolio AB has more money invested in Stock B than in Stock A. 
E)  Stock A has more market risk than Portfolio AB.

Question 18

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.

Question 19

Market risk refers to the tendency of a stock to move with the general stock market A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 2: Risk and Return: Part I

Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each The portfolio's beta is 1.12 Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80 What will the portfolio's new beta be?

Assume that investors have recently become more risk averse, so the market risk premium has increased Also, assume that the risk-free rate and expected inflation have not changed Which of the following is most likely to occur?

Diversification will normally reduce the riskiness of a portfolio of stocks.

Zacher Co.'s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50% What is the firm's required rate of return?

firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.

Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?

Which of the following statements is CORRECT?

Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8The risk-free rate is 6% and the market risk premium is 5%Which of the following statements is CORRECT?

Suppose that during the coming year, the risk free rate, rRF, is expected to remain the same, while the market risk premium (rM − rRF) , is expected to fall Given this forecast, which of the following statements is CORRECT?

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

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

you randomly select stocks and add them to your portfolio, which of the following statements best describes what you should expect?

Recession, inflation, and high interest rates are economic events that are best characterized as being

According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

Portfolio AB was created by investing in a combination of Stocks A and BStock A has a beta of 1.2 and a standard deviation of 25% Stock B has a beta of 1.4 and a standard deviation of 20% Portfolio AB has a beta of 1.25 and a standard deviation of 18% Which of the following statements is CORRECT?

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?

Market risk refers to the tendency of a stock to move with the general stock market A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

Which of the following statements is CORRECT?