Question 1

The $10.00 million mutual fund Henry manages has a beta of 1.05 and a 9.50% required return.The risk-free rate is 4.20%.Henry now receives another $5.00 million, which he invests in stocks with an average beta of 0.65.What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium, then find the new portfolio beta.)

Accepted Answer

A)   8.83%
B)   9.05%
C)   9.27%
D)   9.51%
E)   9.74%F) A) and E)
G) A) and B)

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Charlie and Lucinda each have $50,000 invested in stock portfolios.Charlie's has a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%.Lucinda's has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%.The correlation coefficient, r, between Charlie's and Lucinda's portfolios is zero.If Charlie and Lucinda marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?

Accepted Answer

A)   The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.
B)   The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
C)   The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations, 25%.
D)   The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations, 25%.
E)   The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.F) D) and E)
G) A) and C)

Question 4

We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following are the factors for the Fama-French model?

Accepted Answer

A)   The excess market return, a debt factor, and a book-to-market factor.
B)   The excess market return, a size factor, and a debt.
C)   A debt factor, a size factor, and a book-to-market factor.
D)   The excess market return, an industrial production factor, and a book-to-market factor.
E)   The excess market return, a size factor, and a book-to-market factor.F) All of the above
G) A) and E)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.
B)   An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky.Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk.
C)   There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML.
D)   Assume that the required rate of return on the market, rM, is given and fixed at 10%.If the yield curve were upward sloping, then the Security Market Line (SML)  would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.
E)   If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0.Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds.F) A) and E)
G) A) and D)

Question 7

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Accepted Answer

A) True 
 B)False

Question 8

Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)

Accepted Answer

A)   Stock B has a higher required rate of return than Stock A.
B)   Portfolio P has a standard deviation of 22.5%.
C)   More information is needed to determine the portfolio's beta.
D)   Portfolio P has a beta of 1.0.
E)   Stock A's returns are less highly correlated with the returns on most other stocks than are B's returns.F) C) and D)
G) A) and D)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   Suppose the returns on two stocks are negatively correlated.One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of −0.6.The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that 5-year period.
B)   Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be very strong in the immediate future.That is, you are convinced that the market is about to rise sharply.You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the expected market move.
C)   You think that investor sentiment is about to change, and investors are about to become more risk averse.This suggests that you should re-balance your portfolio to include more high-beta stocks.
D)   If the market risk premium remains constant, but the risk-free rate declines, then the required returns on low-beta stocks will rise while those on high-beta stocks will decline.
E)   Paid-in-Full Inc.is in the business of collecting past-due accounts for other companies, i.e., it is a collection agency.Paid-in-Full's revenues, profits, and stock price tend to rise during recessions.This suggests that Paid-in-Full Inc.'s beta should be quite high, say 2.0, because it does so much better than most other companies when the economy is weak.F) D) and E)
G) All of the above

Question 10

Returns for the Alcoff Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.)    Year  Return 201021.00%2009−12.50%200825.00%\begin{array}{rr}	ext { Year } & 	ext { Return } \2010 & 21.00 \% \2009 & -12.50 \% \2008 & 25.00 \%\end{array} Year 201020092008​ Return 21.00%−12.50%25.00%​

Accepted Answer

A)   20.08%
B)   20.59%
C)   21.11%
D)   21.64%
E)   22.18% F) All of the above
G) D) and E)

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

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.F) None of the above
G) C) and D)

Question 13

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

Accepted Answer

A)   The expected return of your portfolio is likely to decline.
B)   The diversifiable risk will remain the same, but the market risk will likely decline.
C)   Both the diversifiable risk and the market risk of your portfolio are likely to decline.
D)   The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.
E)   The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change.F) A) and D)
G) A) and C)

Question 14

Assume that the risk-free rate remains constant, but the market risk premium declines.Which of the following is most likely to occur?

Accepted Answer

A)   The required return on a stock with beta > 1.0 will increase.
B)   The return on "the market" will remain constant.
C)   The return on "the market" will increase.
D)   The required return on a stock with beta 
E)   The required return on a stock with beta = 1.0 will not change.F) B) and D)
G) B) and C)

Question 15

Gardner Electric has a beta of 0.88 and an expected dividend growth rate of 4.00% per year.The T-bill rate is 4.00%, and the T-bond rate is 5.25%.The annual return on the stock market during the past 4 years was 10.25%.Investors expect the average annual future return on the market to be 12.50%.Using the SML, what is the firm's required rate of return?

Accepted Answer

A)   11.34%
B)   11.63%
C)   11.92%
D)   12.22%
E)   12.52%F) None of the above
G) C) and D)

Question 16

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Accepted Answer

A)   The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.
B)   The beta of the portfolio is less than the average of the betas of the individual stocks.
C)   The beta of the portfolio is equal to the average of the betas of the individual stocks.
D)   The beta of the portfolio is larger than the average of the betas of the individual stocks.
E)   The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.F) C) and E)
G) A) and E)

Question 17

When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.

Accepted Answer

A) True 
 B)False

Question 18

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Accepted Answer

A) True 
 B)False

Question 19

One key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both the risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio.The risk of the asset held in isolation is not relevant under the CAPM.

Accepted Answer

A) True 
 B)False

Question 20

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information, which of the following statements is CORRECT?

Accepted Answer

A)   If a stock has a negative beta, its required return must also be negative.
B)   An index fund with beta = 1.0 should have a required return less than 11%.
C)   If a stock's beta doubles, its required return must also double.
D)   An index fund with beta = 1.0 should have a required return greater than 11%.
E)   An index fund with beta = 1.0 should have a required return of 11%.F) B) and E)
G) B) and C)

Exam 6: Risk and Return

We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

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

Correct Answer
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Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information, which of the following statements is CORRECT?

Correct Answer
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Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)

Correct Answer
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Assume that the risk-free rate remains constant, but the market risk premium declines.Which of the following is most likely to occur?

Correct Answer
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When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.

Correct Answer
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Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

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

Correct Answer
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An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Correct Answer
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Which of the following are the factors for the Fama-French model?

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
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Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

Correct Answer
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The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Correct Answer
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Correct Answer
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Exam 6: Risk and Return

We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Assume that the risk-free rate is 6% and the market risk premium is 5%.Given this information, which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B.Stock A has a beta of 1.2 and a standard deviation of 20%.Stock B has a beta of 0.8 and a standard deviation of 25%.Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Assume that the risk-free rate remains constant, but the market risk premium declines.Which of the following is most likely to occur?

Correct AnswerverifiedShow Answer

When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.

Correct AnswerverifiedShow Answer

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following are the factors for the Fama-French model?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

Correct AnswerverifiedShow Answer

The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

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