Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   Other things held constant,if investors suddenly become convinced that there will be deflation in the economy,then the required returns on all stocks should increase.
B)   If a company's beta were cut in half,then its required rate of return would also be halved.
C)   If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount,then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase.
D)   If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount,then the required rate of return on an average stock will remain unchanged,but required returns on stocks with betas less than 1.0 will rise.
E)   If a company's beta doubles,then its required rate of return will also double.F) None of the above
G) A) and E)

Question 2

Brodkey Shoes has a beta of 1.30,the T-bill rate is 3.00%,and the T-bond rate is 6.5%.The annual return on the stock market during the past 3 years was 15.00%,but investors expect the annual future stock market return to be 13.00%.Based on the SML,what is the firm's required return?

Accepted Answer

A)   13.51%
B)   13.86%
C)   14.21%
D)   14.58%
E)   14.95%F) A) and E)
G) A) and B)

Question 3

Portfolio P has equal amounts invested in each of the three stocks,A,B,and C.Stock A has a beta of 0.8,Stock B has a beta of 1.0,and Stock C has a beta of 1.2.Each of the stocks has a standard deviation of 25%.The returns on the three stocks are independent of one another (i.e. ,the correlation coefficients all equal zero) .Assume that there is an increase in the market risk premium,but the risk-free rate remains unchanged.Which of the following statements is CORRECT?

Accepted Answer

A)   The required return on Stock A will increase by less than the increase in the market risk premium,while the required return on Stock C will increase by more than the increase in the market risk premium.
B)   The required return on the average stock will remain unchanged,but the returns of riskier stocks (such as Stock 
C)  will increase while the returns of safer stocks (such as Stock 
A)  will decrease.
C)   The required returns on all three stocks will increase by the amount of the increase in the market risk premium.
D)   The required return on the average stock will remain unchanged,but the returns on riskier stocks (such as Stock 
C)  will decrease while the returns on safer stocks (such as Stock 
A)  will increase.
E)   The required return of all stocks will remain unchanged since there was no change in their betas.F) C) and D)
G) B) and E)

Question 4

If a stock's market price exceeds its intrinsic value as seen by the marginal investor,then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Accepted Answer

A) True 
 B)False

Question 5

The slope of the SML is determined by the value of beta.

Accepted Answer

A) True 
 B)False

Question 6

Stock A's stock has a beta of 1.30,and its required return is 12.00%.Stock B's beta is 0.80.If the risk-free rate is 4.75%,what is the required rate of return on B's stock? (Hint: First find the market risk premium. )

Accepted Answer

A)   8.76%
B)   8.98%
C)   9.21%
D)   9.44%
E)   9.68%F) B) and C)
G) D) and E)

Question 7

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 thus reduce the riskiness of their portfolios.

Accepted Answer

A) True 
 B)False

Question 8

Assume that investors have recently become more risk averse,so the market risk premium has increased.Also,assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur?

Accepted Answer

A)   The required rate of return will decline for stocks whose betas are less than 1.0.
B)   The required rate of return on the market,rM,will not change as a result of these changes.
C)   The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk
D)   The required rate of return on a riskless bond will decline.
E)   The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.F) A) and E)
G) A) and D)

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   The CAPM has been thoroughly tested,and the theory has been confirmed beyond any reasonable doubt.
B)   If two "normal" or "typical" stocks were combined to form a 2-stock portfolio,the portfolio's expected return would be a weighted average of the stocks' expected returns,but the portfolio's standard deviation would probably be greater than the average of the stocks' standard deviations.
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 returns on a riskless asset and on an average stock,other things held constant.
E)   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.F) A) and C)
G) D) and E)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   Diversifiable risk can be reduced by forming a large portfolio,but normally even highly-diversified portfolios are subject to market (or systematic) risk.
B)   A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0.
C)   A large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8.
D)   If you add enough randomly selected stocks to a portfolio,you can completely eliminate all of the market risk from the portfolio.
E)   A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks,regardless of how the stocks in the smaller portfolio are selected.F) A) and B)
G) A) and C)

Question 11

How would the Security Market Line be affected,other things held constant,if the expected inflation rate decreases and investors also become more risk averse?

Accepted Answer

A)   The x-axis intercept would decline,and the slope would increase.
B)   The y-axis intercept would increase,and the slope would decline.
C)   The SML would be affected only if betas changed.
D)   Both the y-axis intercept and the slope would increase,leading to higher required returns.
E)   The y-axis intercept would decline,and the slope would increase.F) A) and B)
G) None of the above

Question 12

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 13

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Accepted Answer

A)   If a stock's beta doubled,its required return under the CAPM would also double.
B)   If a stock's beta doubled,its required return under the CAPM would more than double.
C)   If a stock's beta were 1.0,its required return under the CAPM would be 5%.
D)   If a stock's beta were less than 1.0,its required return under the CAPM would be less than 5%.
E)   If a stock has a negative beta,its required return under the CAPM would be less than 5%.F) A) and E)
G) C) and D)

Question 14

If investors become less averse to risk,the slope of the Security Market Line (SML)will increase.

Accepted Answer

A) True 
 B)False

Question 15

Stocks A and B are quite similar: Each has an expected return of 12%,a beta of 1.2,and a standard deviation of 25%.The returns on the two stocks have a correlation of 0.6.Portfolio P has 50% in Stock A and 50% in Stock B.Which of the following statements is CORRECT?

Accepted Answer

A)   Portfolio P has a standard deviation that is greater than 25%.
B)   Portfolio P has an expected return that is less than 12%.
C)   Portfolio P has a standard deviation that is less than 25%.
D)   Portfolio P has a beta that is less than 1.2.
E)   Portfolio P has a beta that is greater than 1.2.F) D) and E)
G) A) and C)

Question 16

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Accepted Answer

A) True 
 B)False

Question 17

Suppose that Federal Reserve actions have caused an increase in the risk-free rate,rRF.Meanwhile,investors are afraid of a recession,so the market risk premium, (rM − rRF) ,has increased.Under these conditions,with other things held constant,which of the following statements is most correct?

Accepted Answer

A)   The required return on all stocks would increase,but the increase would be greatest for stocks with betas of less than 1.0.
B)   Stocks' required returns would change,but so would expected returns,and the result would be no change in stocks' prices.
C)   The prices of all stocks would decline,but the decline would be greatest for high-beta stocks.
D)   The prices of all stocks would increase,but the increase would be greatest for high-beta stocks.
E)   The required return on all stocks would increase by the same amount.F) A) and C)
G) None of the above

Question 18

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
2010
21) 00%
2009
−12) 50%
2008
25) 00%

Accepted Answer

A)   20.08%
B)   20.59%
C)   21.11%
D)   21.64%
E)   22.18%F) C) and D)
G) A) and E)

Question 19

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 20

If a stock's expected return as seen by the marginal investor exceeds this investor's required return,then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Accepted Answer

A) True 
 B)False

Exam 6: Risk and Return

Which of the following statements is CORRECT?

Correct Answer
verified

If a stock's market price exceeds its intrinsic value as seen by the marginal investor,then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Suppose that Federal Reserve actions have caused an increase in the risk-free rate,r_RF.Meanwhile,investors are afraid of a recession,so the market risk premium, (r_M − r_RF) ,has increased.Under these conditions,with other things held constant,which of the following statements is most correct?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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 2010 21) 00% 2009 −12) 50% 2008 25) 00%

Correct Answer
verified

If a stock's expected return as seen by the marginal investor exceeds this investor's required return,then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Correct Answer
verified

How would the Security Market Line be affected,other things held constant,if the expected inflation rate decreases and investors also become more risk averse?

Correct Answer
verified

The slope of the SML is determined by the value of beta.

Correct Answer
verified

Brodkey Shoes has a beta of 1.30,the T-bill rate is 3.00%,and the T-bond rate is 6.5%.The annual return on the stock market during the past 3 years was 15.00%,but investors expect the annual future stock market return to be 13.00%.Based on the SML,what is the firm's required return?

Correct Answer
verified

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Correct Answer
verified

Stock A's stock has a beta of 1.30,and its required return is 12.00%.Stock B's beta is 0.80.If the risk-free rate is 4.75%,what is the required rate of return on B's stock? (Hint: First find the market risk premium. )

Correct Answer
verified

Assume that investors have recently become more risk averse,so the market risk premium has increased.Also,assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur?

Correct Answer
verified

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
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 thus reduce the riskiness of their portfolios.

Correct Answer
verified

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Correct Answer
verified

If investors become less averse to risk,the slope of the Security Market Line (SML)will increase.

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

Stocks A and B are quite similar: Each has an expected return of 12%,a beta of 1.2,and a standard deviation of 25%.The returns on the two stocks have a correlation of 0.6.Portfolio P has 50% in Stock A and 50% in Stock B.Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Exam 6: Risk and Return

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If a stock's market price exceeds its intrinsic value as seen by the marginal investor,then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Suppose that Federal Reserve actions have caused an increase in the risk-free rate,rRF.Meanwhile,investors are afraid of a recession,so the market risk premium, (rM − rRF) ,has increased.Under these conditions,with other things held constant,which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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 2010 21) 00% 2009 −12) 50% 2008 25) 00%

Correct AnswerverifiedShow Answer

If a stock's expected return as seen by the marginal investor exceeds this investor's required return,then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

Correct AnswerverifiedShow Answer

How would the Security Market Line be affected,other things held constant,if the expected inflation rate decreases and investors also become more risk averse?

Correct AnswerverifiedShow Answer

The slope of the SML is determined by the value of beta.

Correct AnswerverifiedShow Answer

Brodkey Shoes has a beta of 1.30,the T-bill rate is 3.00%,and the T-bond rate is 6.5%.The annual return on the stock market during the past 3 years was 15.00%,but investors expect the annual future stock market return to be 13.00%.Based on the SML,what is the firm's required return?

Correct AnswerverifiedShow Answer

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Correct AnswerverifiedShow Answer

Stock A's stock has a beta of 1.30,and its required return is 12.00%.Stock B's beta is 0.80.If the risk-free rate is 4.75%,what is the required rate of return on B's stock? (Hint: First find the market risk premium. )

Correct AnswerverifiedShow Answer

Assume that investors have recently become more risk averse,so the market risk premium has increased.Also,assume that the risk-free rate and expected inflation have not changed.Which of the following is most likely to occur?

Correct AnswerverifiedShow Answer

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

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 thus reduce the riskiness of their portfolios.

Correct AnswerverifiedShow Answer

Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If investors become less averse to risk,the slope of the Security Market Line (SML)will increase.

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

Stocks A and B are quite similar: Each has an expected return of 12%,a beta of 1.2,and a standard deviation of 25%.The returns on the two stocks have a correlation of 0.6.Portfolio P has 50% in Stock A and 50% in Stock B.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Suppose that Federal Reserve actions have caused an increase in the risk-free rate,r_RF.Meanwhile,investors are afraid of a recession,so the market risk premium, (r_M − r_RF) ,has increased.Under these conditions,with other things held constant,which of the following statements is most correct?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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