Question 1

You are an investor in common stock,and you currently hold a well-diversified portfolio which has an expected return of 12 percent,a beta of 1.2,and a total value of $9,000.You plan to increase your portfolio by buying 100 shares of AT&E at $10 a share.AT&E has an expected return of 20 percent with a beta of 2.0.What will be the expected return and the beta of your portfolio after you purchase the new stock?

Accepted Answer

A)   
B)   
C)   
D)   
E)

Question 2

The distributions of rates of return for Companies AA and BB are given below:
  We can conclude from the above information that any rational risk-averse investor will add Security AA to a well-diversified portfolio over Security BB.

Accepted Answer

A) True 
 B)False

Question 3

Given the following information,determine which beta coefficient for Stock A is consistent with equilibrium: rs = 11.3%;rRF = 5%;rM = 10%

Accepted Answer

A)   0.86
B)   1.26
C)   1.10
D)   0.80
E)   1.35

Question 4

Which of the following statements is correct?

Accepted Answer

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.

Question 5

Risk averse investors require ____ rates of return for investments with ____ risk.

Accepted Answer

A)   higher;lower
B)   lower;higher
C)   lower;lower
D)   higher;higher
E)   both c and d are correct

Question 6

Carlson Products,a constant growth company,has a current market (and equilibrium) stock price of $20.00.Carlson's next dividend,  ,is forecasted to be $2.00,and Carlson is growing at an annual rate of 6 percent.Carlson has a beta coefficient of 1.2,and the required rate of return on the market is 15 percent.As Carlson's financial manager,you have access to insider information concerning a switch in product lines which would not change the growth rate,but would cut Carlson's beta coefficient in half.If you buy the stock at the current market price,what is your expected percentage capital gain?

Accepted Answer

A)   23%
B)   33%
C)   43%
D)   53%
E)   There would be a capital loss.

Question 7

Which of the following statements is most correct?

Accepted Answer

A)   An increase in expected inflation could be expected to increase the required return on a riskless asset and on an average stock by the same amount,other things held constant.
B)   A graph of the SML would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
C)   If two "normal" or "typical" stocks were combined to form a 2-stock portfolio,the portfolio's expected return would be a weighted average of the stocks' expected returns,but the portfolio's standard deviation would probably be greater than the average of the stocks' standard deviations.
D)   If investors became more averse to risk,then (1) the slope of the SML would increase and (2) the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.
E)   The CAPM has been thoroughly tested,and the theory has been confirmed beyond any reasonable doubt.

Question 8

The risk and return characteristics of an investment should not be evaluated in isolation;instead,the risk return and return of an individual security should be analyzed in terms of how that security affects the risk and return of the portfolio in which it is held.

Accepted Answer

A) True 
 B)False

Question 9

You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks.The portfolio beta is equal to 1.15.You have decided to sell one of your stocks,a lead mining stock whose β = 1.0,for $5,000 net and to use the proceeds to buy $5,000 of stock in a steel company whose β = 2.0.What will be the new beta of the portfolio?

Accepted Answer

A)   1.12
B)   1.20
C)   1.22
D)   1.10
E)   1.15

Question 10

Berg Inc.has just paid a dividend of $2.00.Its stock is now selling for $48 per share.The firm is half as risky as the market.The expected return on the market is 14 percent,and the yield on U.S.Treasury bonds is 11 percent.If the market is in equilibrium,what rate of growth is expected?

Accepted Answer

A)   13%
B)   10%
C)   4%
D)   8%
E)   −2%

Question 11

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

Accepted Answer

A)   When held in isolation,Stock A has greater risk than Stock B.
B)   Stock B would be a more desirable addition to a portfolio than Stock A.
C)   Stock A would be a more desirable addition to a portfolio than Stock B.
D)   The expected return on Stock A will be greater than that on Stock B.
E)   The expected return on Stock B will be greater than that on Stock A.

Question 12

If I know for sure that the market will have a positive return over the next year,to maximize my rate of return,I should increase the beta of my portfolio.

Accepted Answer

A) True 
 B)False

Question 13

____ is the appropriate measure for stand-alone risk and ____ is the appropriate measure of risk when adding an asset to a diversified portfolio.

Accepted Answer

A)   beta;variance
B)   beta;standard deviation
C)   standard deviation;beta
D)   standard deviation;variance

Question 14

Which of the following statements is most correct?

Accepted Answer

A)   If beta doubles,the required return doubles.
B)   If a stock has a negative beta,its required return is negative.
C)   Higher beta stocks have more company-specific risk,but do not necessarily have more market risk.
D)   If a portfolio's beta increases from 1.2 to 1.5,its required rate of return will increase by an amount equal to its market risk premium.
E)   If two stocks have the same standard deviation and the correlation coefficient between the returns of two stocks equals zero,an equally weighted portfolio of the two stocks will have a standard deviation lower than that of the individual stocks.

Question 15

The beta of any portfolio can be computed as the

Accepted Answer

A)   slope of the security market line
B)   sum of the betas for each asset held in the portfolio divided by the number of assets in the portfolio.
C)   the standard deviation of the expected returns of the portfolio minus the risk-free rate.
D)   weighted average of the betas for each asset held in the portfolio.

Question 16

Which of the following statements is false?

Accepted Answer

A)   The coefficient of variation is a better measure of risk than the standard deviation if the expected returns of the securities being compared differ significantly.
B)   Managers cannot act in the best interests of their shareholders unless they know their shareholders' average time preference for receiving their money and what risks a typical shareholder is prepared to assume.
C)   Companies should deliberately increase their risk relative to the market only if the actions that increase the risk also increase the expected rate of return on the firm's assets by enough to completely compensate for the higher risk.
D)   If the expected rate of return for a particular investment,as seen by the marginal investor,exceeds its required rate of return,we should soon observe an increase in demand for the investment,and the price will likely increase until a price is established that equates the expected return with the required return.
E)   All of the above statements are correct.

Question 17

Motor Homes Inc.(MHI) is presently in a stage of abnormally high growth because of a surge in the demand for motor homes.The company expects earnings and dividends to grow at a rate of 20 percent for the next 4 years,after which time there will be no growth (g = 0) in earnings and dividends.The company's last dividend was $1.50.MHI has a beta of 1.6,the return on the market is currently 12.75 percent,and the risk-free rate is 4 percent.What should be the current price per share of common stock?

Accepted Answer

A)   $15.17
B)   $17.28
C)   $22.21
D)   $19.10
E)   None of the above.

Question 18

When comparing two different stocks with the same expected return but different standard deviations,you must compute the coefficient of variation to determine which stock is preferred.

Accepted Answer

A) True 
 B)False

Question 19

If the risk-free rate is 7 percent,the expected return on the market is 10 percent,and the expected return on Security J is 13 percent,what is the beta of Security J?

Accepted Answer

A)   1.0
B)   1.5
C)   2.0
D)   2.5
E)   3.0

Question 20

Assume that a new law is passed which restricts investors to holding only one asset.A risk-averse investor is considering two possible assets as the asset to be held in isolation.The assets' possible returns and related probabilities (i.e. ,the probability distributions) are as follows:  Which asset should be preferred?

Accepted Answer

A)   Asset X,since its expected return is higher.
B)   Asset Y,since its beta is probably lower.
C)   Either one,since the expected returns are the same.
D)   Asset X,since its standard deviation is lower.
E)   Asset Y,since its coefficient of variation is lower and its expected return is higher.

Exam 11: Risk and Rates of Return

Berg Inc.has just paid a dividend of $2.00.Its stock is now selling for $48 per share.The firm is half as risky as the market.The expected return on the market is 14 percent,and the yield on U.S.Treasury bonds is 11 percent.If the market is in equilibrium,what rate of growth is expected?

Correct Answer
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Which of the following statements is most correct?

Correct Answer
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Correct Answer
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Correct Answer
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Which of the following statements is correct?

Correct Answer
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Correct Answer
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is the appropriate measure for stand-alone risk and is the appropriate measure of risk when adding an asset to a diversified portfolio.

Correct Answer
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If I know for sure that the market will have a positive return over the next year,to maximize my rate of return,I should increase the beta of my portfolio.

Correct Answer
verified

The distributions of rates of return for Companies AA and BB are given below: We can conclude from the above information that any rational risk-averse investor will add Security AA to a well-diversified portfolio over Security BB.

Correct Answer
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Correct Answer
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Stock A has a beta of 1.5 and Stock B has a beta of 0.5.Which of the following statements must be true about these securities? (Assume the market is in equilibrium. )

Correct Answer
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Which of the following statements is most correct?

Correct Answer
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If the risk-free rate is 7 percent,the expected return on the market is 10 percent,and the expected return on Security J is 13 percent,what is the beta of Security J?

Correct Answer
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Given the following information,determine which beta coefficient for Stock A is consistent with equilibrium: r_s = 11.3%;r_RF = 5%;r_M = 10%

Correct Answer
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When comparing two different stocks with the same expected return but different standard deviations,you must compute the coefficient of variation to determine which stock is preferred.

Correct Answer
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The beta of any portfolio can be computed as the

Correct Answer
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Which of the following statements is false?

Correct Answer
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The risk and return characteristics of an investment should not be evaluated in isolation;instead,the risk return and return of an individual security should be analyzed in terms of how that security affects the risk and return of the portfolio in which it is held.

Correct Answer
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Risk averse investors require rates of return for investments with risk.

Correct Answer
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Correct Answer
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Exam 11: Risk and Rates of Return

Berg Inc.has just paid a dividend of $2.00.Its stock is now selling for $48 per share.The firm is half as risky as the market.The expected return on the market is 14 percent,and the yield on U.S.Treasury bonds is 11 percent.If the market is in equilibrium,what rate of growth is expected?

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

____ is the appropriate measure for stand-alone risk and ____ is the appropriate measure of risk when adding an asset to a diversified portfolio.

Correct AnswerverifiedShow Answer

If I know for sure that the market will have a positive return over the next year,to maximize my rate of return,I should increase the beta of my portfolio.

Correct AnswerverifiedShow Answer

The distributions of rates of return for Companies AA and BB are given below: We can conclude from the above information that any rational risk-averse investor will add Security AA to a well-diversified portfolio over Security BB.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

If the risk-free rate is 7 percent,the expected return on the market is 10 percent,and the expected return on Security J is 13 percent,what is the beta of Security J?

Correct AnswerverifiedShow Answer

Given the following information,determine which beta coefficient for Stock A is consistent with equilibrium: rs = 11.3%;rRF = 5%;rM = 10%

Correct AnswerverifiedShow Answer

When comparing two different stocks with the same expected return but different standard deviations,you must compute the coefficient of variation to determine which stock is preferred.

Correct AnswerverifiedShow Answer

The beta of any portfolio can be computed as the

Correct AnswerverifiedShow Answer

Which of the following statements is false?

Correct AnswerverifiedShow Answer

The risk and return characteristics of an investment should not be evaluated in isolation;instead,the risk return and return of an individual security should be analyzed in terms of how that security affects the risk and return of the portfolio in which it is held.

Correct AnswerverifiedShow Answer

Risk averse investors require ____ rates of return for investments with ____ risk.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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is the appropriate measure for stand-alone risk and is the appropriate measure of risk when adding an asset to a diversified portfolio.

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Given the following information,determine which beta coefficient for Stock A is consistent with equilibrium: r_s = 11.3%;r_RF = 5%;r_M = 10%

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Risk averse investors require rates of return for investments with risk.

Correct Answer
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Correct Answer
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