.docx#_edn1" title="">[i]. Currently, the risk-free rate is 6 percent
and the market risk premium is 5 percent.
On the basis of this information, which of the following statements is
most correct?

a. If a stock has a negative beta,
its required return must also be negative.

b. If a stock’s beta doubles, its required return
must also double.

c. An index fund with beta = 1.0 has a required
return of 11 percent.

d. Statements a and c are correct.

e. Statements b and c are correct.

** **

.docx#_edn2" title="">[ii]. Which of the following statements is __incorrect__?

a. The slope of the security market line is
measured by beta.

b. Two securities with the same stand-alone risk
can have different betas.

c. Company-specific risk can be diversified away.

d. The market risk premium is affected by
attitudes about risk.

e. Higher beta stocks have a higher required return.

.docx#_edn3" title="">[iii]. Which of the following statements is most
correct?

a. The slope of the security market line is beta.

b. The slope of the security market line is the
market risk premium, (k_{M} – k_{RF}).

c. If you double a company’s beta its required
return more than doubles.

d. Statements a and c are correct.

e. Statements b and c are correct.

.docx#_edn4" title="">[iv]. Stock A has a beta of 1.2 and a standard
deviation of 20 percent. Stock B has a
beta of 0.8 and a standard deviation of 25 percent. Portfolio P is a $200,000 portfolio
consisting of $100,000 invested in Stock A and $100,000 invested in Stock
B. Which of the following statements is most
correct? (Assume that the required
return is determined by the Security Market Line.)

a. Stock B has a higher required rate of return
than Stock A.

b. Portfolio P has a standard deviation of 22.5
percent.

c. Portfolio P has a beta equal to 1.0.

d. Statements a and b are correct.

e. Statements a and c are correct.

** **

.docx#_edn5" title="">[v]. Nile Foods’ stock has a beta
of 1.4 and Elbe Eateries’ stock has a beta of 0.7. Assume that the risk-free rate, k_{RF},
is 5.5 percent and the market risk premium, (k_{M} – k_{RF}),
equals 4 percent. Which of the following
statements is most correct?

a. Since Nile’s beta is twice that of Elbe’s,
its required rate of return will also be twice that of Elbe’s.

b. 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 Nile
since it has a higher beta.

c. If the
market risk premium increases but the risk-free rate remains unchanged, Nile’s
required return will increase (since it has a beta greater than 1.0) but Elbe’s
will decline (since it has a beta less than 1.0).

d. All of the statements above are
correct.

e. None of the statements above is
correct.

** **

.docx#_edn6" title="">[vi]. Stock X has a beta of 0.6,
while Stock Y has a beta of 1.4. Which
of the following statements is most correct?

a. Stock Y must
have a higher expected return and a higher standard deviation than Stock X.

b. 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.

c. If the market risk premium
decreases (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 increases
(but the market risk premium is unchanged), the required return on both stocks
will decrease by the same amount.

e. If
expected inflation decreases (but the market risk premium is unchanged), the
required return on both stocks will decrease but the decrease will be greater for
Stock Y.

** **

.docx#_edn7" title="">[vii]. Stock A has a beta of 0.8 and
Stock B has a beta of 1.2. 50 percent of
Portfolio P is invested in Stock A and 50 percent is invested in Stock B. If
the market risk premium (k_{M} – k_{RF}) were to increase but
the risk-free rate (k_{RF}) remained constant, which of the following
would occur?

a. The required return will
decrease by the same amount for both Stock A and Stock B.

b. The required return will
increase for both stocks but the increase will be greater for Stock B than for
Stock A.

c. The
required return will increase for Stock A but will decrease for Stock B.

d. The required return will
increase for Stock B but will decrease for Stock A.

e. The required return on Portfolio
P will remain unchanged.

** **

.docx#_edn8" title="">[viii]. Stock A has a beta of 0.7, whereas Stock B has
a beta of 1.3. Portfolio P has 50
percent invested in both Stocks A and B.
Which of the following would occur if the market risk premium increased
by

1 percentage point? (Assume that the
risk-free rate remains constant.)

a. The required return for Stock A would fall but
the required return for Stock B would increase.

b. The required return for Portfolio P would
remain unchanged.

c. The
required return for both stocks would increase by 1 percentage point.

d. The required return for Stock A would increase
by more than

1 percentage point, while the return for Stock B would increase by less than 1
percentage point.

e. The required return for Portfolio P would
increase by 1 percentage point.

.docx#_edn9" title="">[ix]. Assume that the risk-free rate remains
constant, but that the market risk premium declines. Which of the following is likely to occur?

a. The required return on a stock with a beta =
1.0 will remain the same.

b. The required return on a stock with a beta <
1.0 will decline.

c. The required return on a stock with a beta >
1.0 will increase.

d. Statements b and c are correct.

e. All of the statements above are
correct.

.docx#_edn10" title="">[x]. Which of the following statements is most
correct?

a. The slope of the security market line is beta.

b. A stock with a negative beta must have a
negative required rate of return.

c. If a stock’s beta doubles its required rate of
return must double.

d. If a stock has a beta equal to 1.0, its
required rate of return will be unaffected by changes in the market risk
premium.

e. None of the statements above is correct.

** **

.docx#_edn11" title="">[xi]. Which of the following statements is most
correct?

a. Portfolio diversification reduces the
variability of the returns on the individual stocks held in the portfolio.

b. If an investor buys enough stocks, he or she
can, through diversification, eliminate virtually all of the nonmarket (or
company-specific) risk inherent in owning stocks. Indeed, if the portfolio contained all
publicly traded stocks, it would be riskless.

c. The required return on a firm’s common stock is
determined by its systematic (or market) risk.
If the systematic risk is known, and if that risk is expected to remain
constant, then no other information is required to specify the firm’s required
return.

d. A security’s beta measures its nondiversifiable
(systematic, or market) risk relative to that of an average stock.

e. A stock’s beta is less relevant as a measure of
risk to an investor with a well-diversified portfolio than to an investor who
holds only that one stock.

##

.docx#_edn12" title="">[xii]. Consider the following
information for three stocks, Stock A, Stock B, and Stock C. The returns on each of the three stocks are
positively correlated, but they are not perfectly correlated. (That is, all of the correlation coefficients
are between 0 and 1.)

Expected Standard

__ Stock__ __Return__ __Deviation__ __Beta__

Stock A 10% 20% 1.0

Stock B 10 20 1.0

Stock C 12 20 1.4

Portfolio
P has half of its funds invested in Stock A and half invested in Stock B. Portfolio Q has one third of its funds
invested in each of the three stocks.
The risk-free rate is 5 percent, and the market is in equilibrium. (That is, required returns equal expected
returns.) Which of the following
statements is most correct?

a. Portfolio P has a standard deviation of 20 percent.

b. Portfolio P’s coefficient of variation is greater than 2.0.

c. Portfolio Q’s expected return is 10.67 percent.

d. Portfolio Q has a standard deviation of 20 percent.

e. Portfolio P’s required return is greater than the required return on
Stock A.

*Medium:*

** **

.docx#_edn13" title="">[xiii]. You have developed the following data on three
stocks:

__StockStandard
DeviationBeta__

A 0.15 0.79

B 0.25 0.61

C 0.20 1.29

If you are a risk
minimizer, you should 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.

a. A; A

b. A; B

c. B; A

d. C; A

e. C; B

.docx#_edn14" title="">[xiv]. Assume that investors become increasingly
risk averse, so that the market risk premium increases. Also, assume that the risk-free rate and
expected inflation remain the same. Which
of the following is most likely to occur?

a. The required rate of return will decline for
stocks that have betas less than 1.0.

b. The required rate of return on the market, k_{M},
will remain the same.

c. The required rate of return for each stock in
the market will increase by an amount equal to the increase in the market risk
premium.

d. Statements a and b are correct.

e. None of the statements above is correct.

##

.docx#_edn15" title="">[xv]. In a portfolio of three different stocks,
which of the following could __not__ be true?

a. The riskiness of the portfolio is less than the
riskiness of each of the stocks if each were held in isolation.

b. The riskiness of the portfolio is greater than
the riskiness of one or two of the stocks.

c. The beta of the portfolio is less than the beta
of each of the individual stocks.

d. The beta of the portfolio is greater than the beta of one or two of
the individual stocks’ betas.

e. None of the above (that is, they all could be
true, but not necessarily at the same time).

.docx#_edn16" title="">[xvi]. Stock A has an expected return of 10 percent
and a standard deviation of 20 percent.
Stock B has an expected return of 12 percent and a standard deviation of
30 percent. The risk-free rate is 5
percent and the market risk premium, k_{M} - k_{RF}, is 6
percent. Assume that the market is in
equilibrium. Portfolio P has 50 percent
invested in Stock A and 50 percent invested in Stock B. The returns of Stock A and Stock B are
independent of one another. (That is,
their correlation coefficient equals zero.)
Which of the following statements is most correct?

a. Portfolio
P’s expected return is 11 percent.

b. Portfolio
P’s standard deviation is less than 25 percent.

c. Stock
B’s beta is 1.25.

d. Statements
a and b are correct.

e. All of
the statements above are correct.

.docx#_edn17" title="">[xvii]. Stock A has a beta of 1.2 and a
standard deviation of 25 percent. Stock
B has
a beta of 1.4 and a standard deviation of 20 percent. Portfolio P was created
by investing in a combination of Stocks A and B. Portfolio P has a beta of 1.25 and a standard
deviation of 18 percent. Which of the
following statements is most correct?

a. Portfolio
P has the same amount of money invested in each of the two stocks.

b. The
returns of the two stocks are perfectly positively correlated (r = 1.0).

c. Stock
A has more market risk than Stock B but less stand-alone risk.

d. Portfolio P’s required return is greater than Stock A’s required
return.

e. Stock
A has more market risk than Portfolio P.

##

.docx#_edn18" title="">[xviii]. Which of the following statements is most
correct?

a. Market participants are able to eliminate
virtually all market risk if they hold a large diversified portfolio of stocks.

b. Market participants are able to eliminate
virtually all company-specific risk if they hold a large diversified portfolio
of stocks.

c. It is possible to have a situation where the market risk of a single
stock is less than that of a well diversified portfolio.

d. Statements a and c are correct.

e. Statements b and c are correct.

** **

.docx#_edn19" title="">[xix]. Stock A has a beta = 0.8, while Stock B has a
beta = 1.6. Which of the following
statements is most correct?

a. Stock B’s required return is double that of
Stock A’s.

b. An equally weighted portfolio of Stock A and
Stock B will have a beta less than 1.2.

c. If market participants become more risk averse,
the required return on Stock B will increase more than the required return for Stock
A.

d. All of the statements above are correct.

e. Statements a and c are correct.

##

.docx#_edn20" title="">[xx]. Which of the following statements is most
correct?

a. If you add enough randomly selected stocks to a
portfolio, you can completely eliminate all the __market__ risk from the
portfolio.

b. If you formed a portfolio that included a large
number of low-beta stocks (stocks with betas less than 1.0 but greater than
-1.0), the portfolio would itself have a beta coefficient that is equal to the
weighted average beta of the stocks in the portfolio, so the portfolio would
have a relatively low degree of risk.

c. If you were restricted to investing in publicly
traded common stocks, yet you wanted to minimize the riskiness of your
portfolio as measured by its beta, then according to the CAPM theory you should
invest some of your money in each stock in the market. That is, if there were 10,000 traded stocks
in the world, the least risky portfolio would include some shares in each of
them.

d. Diversifiable risk can be eliminated by forming
a large portfolio, but normally even highly-diversified portfolios are subject
to market risk.

e. Statements b and d are correct.

##

.docx#_edn21" title="">[xxi]. Inflation, recession, and high interest rates
are economic events that are characterized as

a. Company-specific risk that can be diversified
away.

b. Market risk.

c. Systematic risk that can be diversified away.

d. Diversifiable risk.

e. Unsystematic risk that can be diversified away.

##

.docx#_edn22" title="">[xxii]. Which of the following statements is most
correct?

a. The beta coefficient of a stock is normally
found by running a regression of past returns on the stock against past returns
on a stock market index. One could also
construct a scatter diagram of returns on the stock versus those on the market,
estimate the slope of the line of best fit, and use it as beta.

b. It is theoretically possible for a stock to
have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in
theory, its required rate of return would be equal to the risk-free
(default-free) rate of return, k_{RF}.

c. If you found a stock with a zero beta and held it as the only stock
in your portfolio, you would by definition have a riskless portfolio. Your
1-stock portfolio would be even less risky if the stock had a negative beta.

d. The beta of a portfolio of stocks is always
larger than the betas of any of the individual stocks.

e. All of the statements above are correct.

** **

.docx#_edn23" title="">[xxiii]. You have developed data that give (1) the
average annual returns on the market for the past five years, and (2) similar
information on Stocks A and B. If these
data are as follows, which of the possible answers best describes the
historical betas for A and B?

__YearsMarketStock
AStock B__

1 0.03 0.16 0.05

2 -0.05 0.20 0.05

3 0.01 0.18 0.05

4 -0.10 0.25 0.05

5 0.06 0.14 0.05

a. b_{A}> 0; b_{B} = 1

b. b_{A}> +1; b_{B} = 0

c. b_{A} = 0; b_{B} = -1

d. b_{A}< 0; b_{B} = 0

e. b_{A}< -1; b_{B} = 1

** **

.docx#_edn24" title="">[xxiv]. Which of
the following statements is most correct?

a. Suppose the returns on two
stocks are negatively correlated. One
has a beta of 1.2 as determined in a regression analysis, while the other has a
beta of -0.6. The returns on the stock
with the negative beta will be negatively correlated with returns on most other
stocks in the market.

b. Suppose you are managing a stock
portfolio, and you have information that leads you to believe the stock market
is likely to be very strong in the immediate future. That is, you are confident the market is
about to rise sharply. You should sell
your high-beta stocks and buy low-beta stocks in order to take advantage of the
expected market move.

c. Collections Inc. is in the business of
collecting past-due accounts for other companies; that is, it is a collection
agency. Collections’ revenues, profits,
and stock price tend to rise during recessions. This suggests that Collections
Inc.’s beta should be quite high, say 2.0, because it does so much better than
most other companies when the economy is weak.

d. Statements a and b are correct.

e. Statements a and c are correct.

.docx#_edn25" title="">[xxv]. Which of
the following is __not__ a difficulty concerning beta and its estimation?

a. Sometimes a security or project
does not have a past history that can be used as a basis for calculating beta.

b. 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.

c. The beta of an “average stock,”
or “the market,” can change over time, sometimes drastically.

d. 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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