Question 1

You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.12. You have decided to sell a lead mining stock (b = 1.00)  at $5,000 net and use the proceeds to buy a like amount of a steel company stock (b = 2.00) . What is the new beta of the portfolio?

Accepted Answer

A)   1.1139
B)   1.1700
C)   1.2311
D)   1.2927
E)   1.3573F) B) and E)
G) All of the above

Question 2

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns, and the factors are specified to be (1) market returns, (2) dividend yields, and (3) changes in inflation.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is NOT a potential problem with beta and its estimation?

Accepted Answer

A)   Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.
B)   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 than the "true" or "expected future" beta.
C)   The beta of an "average stock," or "the market," can change over time, sometimes drastically.
D)   Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
E)   All of the statements above are potentially serious problems.F) C) and D)
G) B) and D)

Question 4

A stock with a beta equal to -1.0 has zero systematic (or market) risk.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Exam 3: Risk and Return: Part II

Correct Answer
verified

Which of the following is NOT a potential problem with beta and its estimation?

Correct Answer
verified

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns, and the factors are specified to be (1) market returns, (2) dividend yields, and (3) changes in inflation.

Correct Answer
verified

A stock with a beta equal to -1.0 has zero systematic (or market) risk.

Correct Answer
verified

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

Correct Answer
verified

Exam 3: Risk and Return: Part II

Correct AnswerverifiedShow Answer

Which of the following is NOT a potential problem with beta and its estimation?

Correct AnswerverifiedShow Answer

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns, and the factors are specified to be (1) market returns, (2) dividend yields, and (3) changes in inflation.

Correct AnswerverifiedShow Answer

A stock with a beta equal to -1.0 has zero systematic (or market) risk.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified