A) Jane's portfolio will have less diversifiable risk and also less market risk than Dick's portfolio.
B) The required return on Jane's portfolio will be lower than that on Dick's portfolio because Jane's portfolio will have less total risk.
C) Dick's portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Jane's portfolio, but the required (and expected) returns will be the same on both portfolios.
D) If the two portfolios have the same beta, their required returns will be the same, but Jane's portfolio will have less market risk than Dick's.
E) The expected return on Jane's portfolio must be lower than the expected return on Dick's portfolio because Jane is more diversified.
G) A) and C)
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A) The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A.
B) The required return would decrease by the same amount for both Stock A and Stock B.
C) The required return would increase for Stock A but decrease for Stock B.
D) The required return on Portfolio P would remain unchanged.
E) The required return would increase for Stock B but decrease for Stock A.
G) B) and E)
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B) False
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A) Beta is measured by the slope of the security market line.
B) If the risk-free rate rises, then the market risk premium must also rise.
C) If a company's beta is halved, then its required return will also be halved.
D) If a company's beta doubles, then its required return will also double.
E) The slope of the security market line is equal to the market risk premium, (rM − rRF) .
G) A) and C)
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B) False
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A) The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas.
B) The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas.
C) The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0.
D) Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.
E) The required returns on all stocks have fallen by the same amount.
G) B) and D)
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B) False
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B) False
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B) False
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A) The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.
B) 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.
C) 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.
D) The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.
E) 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.
G) A) and C)
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A) If a stock has a beta of to 1.0, its required rate of return will be unaffected by changes in the market risk premium.
B) The slope of the Security Market Line is beta.
C) Any stock with a negative beta must in theory have a negative required rate of return, provided rRF is positive.
D) If a stock's beta doubles, its required rate of return must also double.
E) If a stock's returns are negatively correlated with returns on most other stocks, the stock's beta will be negative.
G) C) and D)
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A) systematic risk factors that can be diversified away.
B) company-specific risk factors that can be diversified away.
C) among the factors that are responsible for market risk.
D) risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.
E) irrelevant except to governmental authorities like the Federal Reserve.
G) A) and B)
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