Chapter 6 The Meaning and Measurement of Risk and Return

7) Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

8) The capital asset pricing model

A) provides a risk-return trade off in which risk is measured in terms of the market volatility.

B) provides a risk-return trade off in which risk is measured in terms of beta.

C) measures risk as the coefficient of variation between security and market rates of return.

D) depicts the total risk of a security.

9) A typical measure for the risk-free rate of return is the

A) U.S. Treasury Bill rate.

B) prime lending rate.

C) money market rate.

D) short-term AAA-rated bond rate.

10) If the Beta for stock A equals zero, then

A) stock A's required return is equal to the required return on the market portfolio.

B) stock A's required return is equal to the risk-free rate of return.

C) stock A has a guaranteed return.

D) stock A's required return is greater than the required return on the market portfolio.

11) The risk-free rate of interest is 4% and the market risk premium is 9%. Howard Corporation has a beta of 2.0, and last year generated a return of 16% with a standard deviation of returns of 27%. The required return on Howard Corporation stock is

A) 36%.

B) 34%.

C) 26%.

D) 22%.

12) Stock A has a beta of 1.2 and a standard deviation of returns of 18%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the market risk premium increases, then

A) the required return on stock B will increase more than the required return on stock A.

B) the required returns on stocks A and B will both increase by the same amount.

C) the required returns on stocks A and B will remain the same.

D) the required return on stock A will increase more than the required return on stock B.

13) Stock A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the risk-free rate of return increases and the market risk premium remains constant, then

A) the required return on stock B will increase more than the required return on stock A.

B) the required returns on stocks A and B will both increase by the same amount.

C) the required returns on stocks A and B will not change.

D) the required return on stock A will increase more than the required return on stock B.

14) An investor currently holds the following portfolio:

Amount

Invested

4,000 shares of Stock H $8,000 Beta = 1.3

7,500 shares of Stock I $24,000 Beta = 1.8

12,500 shares of Stock J $48,000 Beta = 2.2

The beta for the portfolio is

A) 1.99.

B) 1.77.

C) 1.45.

D) 1.27.

15) An investor currently holds the following portfolio:

Amount

Invested

8,000 shares of Stock A $16,000 Beta = 1.3

15,000 shares of Stock B $48,000 Beta = 1.8

25,000 shares of Stock C $96,000 Beta = 2.2

If the risk-free rate of return is 2% and the market risk premium is 7%, then the required return on the portfolio is

A) 14.91%.

B) 15.93%.

C) 21.91%.

D) 23.93%.

16) Wendy purchased 800 shares of Robotics Stock at $3 per share on 1/1/09. Wendy sold the shares on 12/31/09 for $3.45. Genetics stock has a beta of 1.3, the risk-free rate of return is 3%, and the market risk premium is 8%. The required return on Genetics Stock is

A) 13.4%.

B) 16.5%.

C) 17.6%.

D) 21.1%.