Finance 534 week 5 quiz 4

Assume that in recent years both expected inflation and the market risk premium (rM
? rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?

Answer

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

Which of the following statements is
CORRECT?

A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

During the coming year, the market risk premium (rM ? rRF), is expected to fall, while the risk-free rate, rRF, is expected to remain the same. Given this forecast, which of the following statements is CORRECT?

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.

Bob has a $50,000 stock portfolio with a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%. Becky also has a $50,000 portfolio, but it has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%. The correlation coefficient, r, between Bob's and Becky's portfolios is zero. If Bob and Becky marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)

For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

Which of the following statements is CORRECT?

You have the following data on three stocks:

Stock Standard Deviation Beta
A 20% 0.59
B 10% 0.61
C 12% 1.29

If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

Answer

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. Portfolio P has equal amounts invested in each of the three stocks. 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?

Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Answer

Which of the following statements is CORRECT?

If in the opinion of a given investor a stock’s expected return exceeds
its required return, this suggests that the investor thinks

Answer

The preemptive right is important to shareholders
because it

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

X Y
Price $25 $25
Expected dividend yield 5% 3%
Required return 12% 10%

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

The required returns of Stocks X and Y are rX = 10% and rY
= 12%. Which of the following statements is CORRECT?

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A B
Price $25 $40
Expected growth 7% 9%
Expected return 10% 12%

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of
the following statements is CORRECT?

X Y
Price $30 $30
Expected growth (constant) 6% 4%
Required return 12% 10%

Answer

Which of the following statements is CORRECT?

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

Answer

Stocks A and B have the following data. Assuming
the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A B
Required return 10% 12%
Market price $25 $40
Expected growth 7% 9%

An increase in a firm’s expected growth rate would cause its required rate of return to

If markets are in equilibrium, which of the following conditions will exist?

Answer

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Answer

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Which of the following statements is CORRECT, assuming stocks are in equilibrium?