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?
(Points : 2) 1.1139
1.1700
1.2311
1.2927
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Question
2. 2.Calculate the
required rate of return for Mercury, Inc., assuming that (1) investors
expect a 4.0% rate of inflation in the future, (2) the real risk-free rate
is 3.0%, (3) the market risk premium is 5.0%, (4) Mercury has a beta of
1.00, and (5) its realized rate of return has averaged 15.0% over the last
5 years.
(Points
: 2)
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10.29%
10.83%
11.40%
12.00%
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Question
3. 3.In a portfolio of three different stocks, which of
the following could NOT be true? (Points : 2)
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The riskiness of the portfolio is
less than the riskiness of each of the stocks if they were held in isolation.
The riskiness of the portfolio is greater
than the riskiness of one or two of the stocks.
The beta of the portfolio is less than the betas of
each of the individual stocks.
The beta of the portfolio is greater than
the beta of one or two of the individual stocks’ betas.
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Question
4. 4.We will almost always find that the beta of a
diversified portfolio is less stable over time than the beta of a single
security. (Points : 2)
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True
False
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Question
5. 5.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.) (Points : 2)
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When held in isolation, Stock A
has greater risk than Stock B.
Stock B must be a more desirable addition
to a portfolio than Stock A.
Stock A must be a more desirable addition
to a portfolio than Stock B.
The expected return on Stock A should be greater than that
on Stock B.
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Question
6. 6.Which of the following statements is CORRECT?
(Points : 2)
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“Characteristic line” is another name for the Security
Market Line.
The characteristic line is the regression
line that results from plotting the returns on a particular stock versus the
returns on a stock from a different industry.
The slope of the characteristic line is
the stock’s standard deviation.
The distance of the plot points from the
characteristic line is a measure of the stock’s diversifiable risk.
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Question
7. 7.Which of the following is NOT a potential problem
with beta and its estimation? (Points : 2)
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Sometimes a security or project
does not have a past history which can be used as a basis for calculating
beta.
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.
The beta of “the market,” can change over time,
sometimes drastically.
Sometimes the past data used to calculate
beta do not reflect the likely risk of the firm for the future because
conditions have changed.
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Question
8. 8.If the returns of two firms are negatively
correlated, then one of them must have a negative beta. (Points : 2)
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True
False
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Question
9. 9.It is possible for a firm to have a positive beta,
even if the correlation between its returns and those of another firm are
negative. (Points : 2)
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True
False
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Question 10. 10.Which is the best measure of risk
for an asset held in isolation, and which is the best measure for an asset
held in a diversified portfolio? (Points : 2)
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Variance; correlation coefficient.
Standard deviation; correlation
coefficient.
Beta; variance.
Coefficient of variation; beta.
Solution: kaplan gb550 quiz 4