Question 1

Which of the following is/are true?

Accepted Answer

A)  Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks. 
B)  Two points on the Characteristic Line are the T-bill and the market portfolio. 
C)  The greater the total risk of an asset, the greater the expected return. 
D)  All securities have a beta between 0 and 1.

Question 2

The expected return for the market portfolio is 13%,the expected return on U.S.Treasury bills is 2%,and the expected return on AAA-rated short-term corporate bonds is 7%.Calculate the required return for a stock with a beta equal to 1.5.

Accepted Answer

The answer of The expected return for the market portfolio...

Question 3

If you hold a portfolio made up of the following stocks:

What is the beta of the portfolio?

Accepted Answer

A)  1.33 
B)  1.24 
C)  1.15 
D)  1.00

Question 4

Stock A has a beta of 1.2 and a standard deviation of returns of 18%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the market risk premium increases,then

Accepted Answer

A)  the required return on stock B will increase more than the required return on stock A. 
B)  the required returns on stocks A and B will both increase by the same amount. 
C)  the required returns on stocks A and B will remain the same. 
D)  the required return on stock A will increase more than the required return on stock B.

Question 5

The T-bill return is used in the CAPM model as the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 6

Wildings,Inc.common stock has a beta of 1.2.If the expected risk free return is 4% and the expected market risk premium is 9%,what is the expected return on Wildings' stock?

Accepted Answer

A)  10.0% 
B)  12.0% 
C)  13.8% 
D)  14.8%

Question 7

You are considering the three securities listed below.
  
a.Calculate the expected return for each security.
b.Calculate the standard deviation of returns for each security.
c.Compare Stock A with Stocks B and C.Is Stock A preferred over the others?

Accepted Answer

The answer of You are considering the three securities listed...

Question 8

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

Accepted Answer

A) True 
 B)False

Question 9

A security with a beta of one has a required rate of return equal to the overall market rate of return.

Accepted Answer

A) True 
 B)False

Question 10

A stock with a beta of 1 has systematic or market risk equal to the "typical" stock in the marketplace.

Accepted Answer

A) True 
 B)False

Question 11

Stock A has the following returns for various states of the economy:

Stock A's expected return is

Accepted Answer

A)  5.4%. 
B)  7.2%. 
C)  8.2%. 
D)  9.6%

Question 12

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

Accepted Answer

A) True 
 B)False

Question 13

Rogue Recreation,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 5%,while Lake Tours,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 15%.Which of the following is true?

Accepted Answer

A)  Lake Tours' investors are not being adequately compensated for relevant risk. 
B)  Rogue Rec is likely to experience returns larger than those of Lake Tours. 
C)  Lake Tours is more likely to have negative returns than Rogue Rec. 
D)  Rational investors will prefer Lake Tours, Inc. over Rogue Recreation, Inc.

Question 14

Because risk is measured by variability of returns,how long we hold our investments does not matter very much when it comes to reducing risk.

Accepted Answer

A) True 
 B)False

Question 15

You are given the following probability distribution for XYZ common stock's returns during the next year,which are assumed to be normally distributed.Show all work below,and complete the following:
  
a.Calculate the standard deviation of the returns,and round to the nearest one-half percent.
b.Draw a graphical representation of XYZ's normal distribution below (ye old bell-shaped curve).LABEL THE AXES OF THE GRAPH OR THE FOLLOWING RESULTS WILL BE MEANINGLESS.Using your result in part A for the standard deviation (rounded to the nearest one-half percent)explain and indicate on the graph,the probability that XYZ will return more than 13.5%,assuming a normal distribution.

Accepted Answer

The answer of You are given the following probability distribution...

Question 16

Surf and Spray Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the market risk premium is 7.5%,the risk-free rate of return is

Accepted Answer

A)  4.1%. 
B)  3.4%. 
C)  2.0%. 
D)  1.5%.

Question 17

According to the CAPM,for each unit of beta,an asset's required rate of return increases by the market's risk premium.

Accepted Answer

A) True 
 B)False

Question 18

As the required rate of return of an investment decreases,the market price of the investment decreases.

Accepted Answer

A) True 
 B)False

Question 19

Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12.Wendy sold the shares on 12/31/12 for $3.45.Genetics stock has a beta of 1.9,the risk-free rate of return is 4%,and the market risk premium is 9%.Wendy's holding period return is

Accepted Answer

A)  15.0%. 
B)  16.5%. 
C)  17.6%. 
D)  21.1%.

Question 20

Investment A has an expected return of 15% per year,while Investment B has an expected return of 12% per year.A rational investor will choose

Accepted Answer

A)  Investment A because of the higher expected return. 
B)  Investment B because a lower return means lower risk. 
C)  Investment A if A and B are of equal risk. 
D)  Investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B.

Exam 6: The Meaning and Measurement of Risk and Return

Which of the following is/are true?

The expected return for the market portfolio is 13%,the expected return on U.S.Treasury bills is 2%,and the expected return on AAA-rated short-term corporate bonds is 7%.Calculate the required return for a stock with a beta equal to 1.5.

If you hold a portfolio made up of the following stocks: What is the beta of the portfolio?

Stock A has a beta of 1.2 and a standard deviation of returns of 18%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the market risk premium increases,then

The T-bill return is used in the CAPM model as the risk-free rate.

Wildings,Inc.common stock has a beta of 1.2.If the expected risk free return is 4% and the expected market risk premium is 9%,what is the expected return on Wildings' stock?

You are considering the three securities listed below. a.Calculate the expected return for each security. b.Calculate the standard deviation of returns for each security. c.Compare Stock A with Stocks B and C.Is Stock A preferred over the others?

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

A security with a beta of one has a required rate of return equal to the overall market rate of return.

A stock with a beta of 1 has systematic or market risk equal to the "typical" stock in the marketplace.

Stock A has the following returns for various states of the economy: Stock A's expected return is

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

Rogue Recreation,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 5%,while Lake Tours,Inc.has normally distributed returns with an expected return of 15% and a standard deviation of 15%.Which of the following is true?

Because risk is measured by variability of returns,how long we hold our investments does not matter very much when it comes to reducing risk.

Surf and Spray Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the market risk premium is 7.5%,the risk-free rate of return is

According to the CAPM,for each unit of beta,an asset's required rate of return increases by the market's risk premium.

As the required rate of return of an investment decreases,the market price of the investment decreases.

Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12.Wendy sold the shares on 12/31/12 for $3.45.Genetics stock has a beta of 1.9,the risk-free rate of return is 4%,and the market risk premium is 9%.Wendy's holding period return is

Investment A has an expected return of 15% per year,while Investment B has an expected return of 12% per year.A rational investor will choose