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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.

A) True
B) False

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Fiske Roofing Supplies' stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%.What is the required rate of return on the market? (Hint: First find the market risk premium.)


A) 10.36%
B) 10.62%
C) 10.88%
D) 11.15%
E) 11.43%

F) B) and D)
G) C) and E)

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Barker Corp.has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%.What is Barker's required rate of return?


A) 9.43%
B) 9.67%
C) 9.92%
D) 10.17%
E) 10.42%

F) B) and E)
G) All of the above

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Donald Gilmore has $100, 000 invested in a 2-stock portfolio.$35, 000 is invested in Stock X and the remainder is invested in Stock Y.X's beta is 1.50 and Y's beta is 0.70.What is the portfolio's beta?


A) 0.65
B) 0.72
C) 0.80
D) 0.89
E) 0.98

F) A) and B)
G) A) and C)

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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?


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) A) and B)
G) D) and E)

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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.

A) True
B) False

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Someone who is risk averse has a general dislike for risk and a preference for certainty.If risk aversion exists in the market, then investors in general are willing to accept somewhat lower returns on less risky securities.Different investors have different degrees of risk aversion, and the end result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return)than investors who have more tolerance for risk.

A) True
B) False

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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?


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) C) and E)
G) A) and B)

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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.

A) True
B) False

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In a portfolio of three randomly selected stocks, which of the following could NOT be true; i.e., which statement is false?


A) The standard deviation of the portfolio is greater than the standard deviation of one or two of the stocks.
B) The beta of the portfolio is lower than the lowest of the three betas.
C) The beta of the portfolio is equal to one of the three stock's betas.
D) The beta of the portfolio is equal to 1.
E) The standard deviation of the portfolio is less than the standard deviation of each of the stocks if they were held in isolation.

F) All of the above
G) C) and E)

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DHF Company has a beta of 1.5 and is currently in equilibrium.The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%.Now the required return on an average stock increases by 30.0% (not percentage points) .Neither betas nor the risk-free rate change.What would DHF's new required return be?


A) 14.89%
B) 15.68%
C) 16.50%
D) 17.33%
E) 18.19%

F) A) and E)
G) C) and E)

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Dixon Food's stock has a beta of 1.4, while Clark Café's stock has a beta of 0.7.Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM - rRF) , equals 4%.Which of the following statements is CORRECT?


A) If the market risk premium increases but the risk-free rate remains unchanged, Dixon's required return will increase because it has a beta greater than 1.0 but Clark's required return will decline because it has a beta less than 1.0.
B) Since Dixon's beta is twice that of Clark's, its required rate of return will also be twice that of Clark's.
C) If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.
D) If the market risk premium decreases but the risk-free rate remains unchanged, Dixon's required return will decrease because it has a beta greater than 1.0 and Clark's will also decrease, but by more than Dixon's because it has a beta less than 1.0.
E) If the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for Dixon since it has a higher beta.

F) None of the above
G) A) and E)

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Stock X has a beta of 0.6, while Stock Y has a beta of 1.4.Which of the following statements is CORRECT?


A) Stock Y must have a higher expected return and a higher standard deviation than Stock X.
B) If expected inflation increases but the market risk premium is unchanged, then the required return on both stocks will fall by the same amount.
C) If the market risk premium declines but expected inflation is unchanged, the required return on both stocks will decrease, but the decrease will be greater for Stock Y.
D) If expected inflation declines but the market risk premium is unchanged, then the required return on both stocks will decrease but the decrease will be greater for Stock Y.
E) A portfolio consisting of $50, 000 invested in Stock X and $50, 000 invested in Stock Y will have a required return that exceeds that of the overall market.

F) B) and C)
G) A) and E)

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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.)


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

F) All of the above
G) A) and D)

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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?


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 C)
G) B) and D)

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Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%.Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%.Portfolio AB has $300, 000 invested in Stock A and $100, 000 invested in Stock B.The correlation between the two stocks' returns is zero (that is, rA, B = 0) .Which of the following statements is CORRECT?


A) The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued.
B) The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued.
C) Portfolio AB's expected return is 11.0%.
D) Portfolio AB's beta is less than 1.2.
E) Portfolio AB's standard deviation is 17.5%.

F) All of the above
G) A) and E)

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According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation.Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

A) True
B) False

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Which of the following statements is CORRECT?


A) Portfolio diversification reduces the variability of returns on an individual stock.
B) Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events.
C) The SML relates a stock's required return to its market risk.The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs.
D) A stock with a beta of -1.0 has zero market risk if held in a 1-stock portfolio.
E) When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.

F) B) and D)
G) C) and D)

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Company A has a beta of 0.70, while Company B's beta is 1.20.The required return on the stock market is 11.00%, and the risk-free rate is 4.25%.What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)


A) 2.75%
B) 2.89%
C) 3.05%
D) 3.21%
E) 3.38%

F) B) and D)
G) A) and D)

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Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium.If the risk-free rate is 5.00%, what is the market risk premium?


A) 5.80%
B) 5.95%
C) 6.09%
D) 6.25%
E) 6.40%

F) All of the above
G) A) and D)

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