Question 1

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?

Accepted Answer

A)   9.43%
B)   9.67%
C)   9.92%
D)   10.17%E) A) and C)
F) B) and C)

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and actually reduce the riskiness of a portfolio.

Accepted Answer

A) True 
 B)False

Question 4

Diversifiable risk is the only risk that affects the required rate of return because non-diversifiable risk can be eliminated.

Accepted Answer

A) True 
 B)False

Question 5

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements MUST be true, assuming the CAPM is correct.

Accepted Answer

A)   Stock A would be a more desirable addition to a portfolio than Stock B.
B)   In equilibrium, the expected return on Stock B will be greater than that on Stock A.
C)   Stock B would be a more desirable addition to a portfolio than Stock A.
D)   In equilibrium, the expected return on Stock A will be greater than that on Stock B.E) All of the above
F) None of the above

Question 6

What happens to portfolios that cannot be dominated?

Accepted Answer

A)   They lie on the efficient frontier.
B)   They are minimum risk portfolios.
C)   They have low correlations.
D)   They have maximum expected returns.E) None of the above
F) A) and B)

Question 7

Which of the following statements is correct?

Accepted Answer

A)   If the risk-free rate rises, then the market risk premium will also rise.
B)   If a company's beta is halved, then its required return will also be halved.
C)   If a company's beta doubles, then its required return will also double.
D)   The slope of the security market line is equal to the market risk premium, (rM - rRF) .E) None of the above
F) All of the above D

Question 8

Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is 0.6. Portfolio P is a portfolio with 50% invested in Stock A and 50% invested in B. Which of the following statements is correct?

Accepted Answer

A)   Portfolio P has a standard deviation of 25% and a beta of 1.0.
B)   Based on the information we are given, and assuming those are the views of the marginal investor, it is apparent that the two stocks are in equilibrium.
C)   Portfolio P has more market risk than Stock A but less market risk than Stock B.
D)   Stock A should have a higher expected return than Stock B as viewed by the marginal investor.E) B) and C)
F) A) and C) C

Question 9

Which of the following statements is correct?

Accepted Answer

A)   A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.
B)   A portfolio that consists of 40 stocks that are not highly correlated with the market will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.
C)   A two-stock portfolio will always have a lower beta than a one-stock portfolio.
D)   If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.E) All of the above
F) C) and D)

Question 10

Assume that you are the portfolio manager of the Coastal Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 14.00% and the risk-free rate is 6.00%. What rate of return should investors expect (and require)  on this fund?

Accepted Answer

A)   13.44%
B)   13.79%
C)   14.14%
D)   14.49%E) All of the above
F) A) and C)

Question 11

The risk-free rate is 6% and the market risk premium is 5%. Your $1 million 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) 8. Which of the following statements is correct?

Accepted Answer

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

Question 12

The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

Accepted Answer

A) True 
 B)False  True

Question 13

Keith Johnson has $100,000 invested in a two-stock portfolio. Thirty thousand dollars is invested in Potts Manufacturing and the remainder is invested in Stohs Corporation. Potts' beta is 1.60 and Stohs' beta is 0.60. What is the portfolio's beta?

Accepted Answer

A)   0.66
B)   0.74
C)   0.82
D)   0.90E) A) and B)
F) A) and D)

Question 14

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is correct?

Accepted Answer

A)   If a stock has a beta equal to 1.0, its required rate of return will be unaffected by changes in the market risk premium.
B)   A stock with a negative beta must in theory have a negative required rate of return.
C)   If a stock's beta doubles, its required rate of return must also double.
D)   If a stock's returns are negatively correlated with returns on most other stocks, the stock's beta will be negative.E) C) and D)
F) B) and D)

Question 16

Which of the following statements is correct?

Accepted Answer

A)   A graph of the SML as applied to individual stocks would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
B)   The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt.
C)   If investors become more risk averse, then (1)  the slope of the SML would increase and (2)  the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.
D)   An increase in expected inflation, combined with a constant REAL risk-free rate and a constant market risk premium, would lead to identical increases in the required return on a riskless asset and on an average stock, other things held constant.E) All of the above
F) A) and D)

Question 17

Which of the following statements is correct?

Accepted Answer

A)   A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock.
B)   If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless.
C)   Portfolio diversification reduces the variability of returns (as measured by the standard deviation)  of each individual stock held in a portfolio.
D)   A security's beta measures its nondiversifiable, or market, risk relative to that of an average stock.E) A) and C)
F) All of the above

Question 18

Your firm's analyst believes that economic conditions during the next year will be either strong, normal, or weak, and she thinks that Crary Inc.'s returns will have the probability distribution shown below. What's the standard deviation of Crary's returns as estimated by your analyst? (Hint: Use the formula for the standard deviation of a population, not a sample.)

Accepted Answer

A)   17.77%
B)   18.71%
C)   19.65%
D)   20.63%E) All of the above
F) None of the above

Question 19

Diversifiable risk plays an important factor pricing role in the arbitrage pricing theory.

Accepted Answer

A) True 
 B)False

Question 20

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. Fifty percent of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM - rRF)  were to increase but the risk-free rate (rRF)  remained constant, which of the following would occur?

Accepted Answer

A)   The required return will increase for both stocks but the increase will be greater for Stock B than for Stock A.
B)   The required return will decrease by the same amount for both Stock A and Stock B.
C)   The required return will increase for Stock A but will decrease for Stock B.
D)   The required return on Portfolio P will remain unchanged.E) A) and B)
F) All of the above

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

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?

Correct Answer
verified

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

Correct Answer
verified

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and actually reduce the riskiness of a portfolio.

Correct Answer
verified

Diversifiable risk is the only risk that affects the required rate of return because non-diversifiable risk can be eliminated.

Correct Answer
verified

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements MUST be true, assuming the CAPM is correct.

Correct Answer
verified

What happens to portfolios that cannot be dominated?

Correct Answer
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Which of the following statements is correct?

Correct Answer
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D

Correct Answer
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C

Which of the following statements is correct?

Correct Answer
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Assume that you are the portfolio manager of the Coastal Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 14.00% and the risk-free rate is 6.00%. What rate of return should investors expect (and require) on this fund?

Correct Answer
verified

The risk-free rate is 6% and the market risk premium is 5%. Your $1 million 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) 8. Which of the following statements is correct?

Correct Answer
verified

The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

Correct Answer
verified
True

Keith Johnson has $100,000 invested in a two-stock portfolio. Thirty thousand dollars is invested in Potts Manufacturing and the remainder is invested in Stohs Corporation. Potts' beta is 1.60 and Stohs' beta is 0.60. What is the portfolio's beta?

Correct Answer
verified

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Correct Answer
verified

Diversifiable risk plays an important factor pricing role in the arbitrage pricing theory.

Correct Answer
verified

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. Fifty percent of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM - rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

Correct Answer
verified

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

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and actually reduce the riskiness of a portfolio.

Correct AnswerverifiedShow Answer

Diversifiable risk is the only risk that affects the required rate of return because non-diversifiable risk can be eliminated.

Correct AnswerverifiedShow Answer

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements MUST be true, assuming the CAPM is correct.

Correct AnswerverifiedShow Answer

What happens to portfolios that cannot be dominated?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedD

Correct AnswerverifiedC

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Assume that you are the portfolio manager of the Coastal Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 14.00% and the risk-free rate is 6.00%. What rate of return should investors expect (and require) on this fund?

Correct AnswerverifiedShow Answer

The risk-free rate is 6% and the market risk premium is 5%. Your $1 million 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) 8. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.

Correct AnswerverifiedTrue

Keith Johnson has $100,000 invested in a two-stock portfolio. Thirty thousand dollars is invested in Potts Manufacturing and the remainder is invested in Stohs Corporation. Potts' beta is 1.60 and Stohs' beta is 0.60. What is the portfolio's beta?

Correct AnswerverifiedShow Answer

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Diversifiable risk plays an important factor pricing role in the arbitrage pricing theory.

Correct AnswerverifiedShow Answer

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. Fifty percent of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM - rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

Correct AnswerverifiedShow Answer

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D

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C

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True

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