Question: A stock’s beta measures its diversifiable risk relative to the diversifiable risks of other firms. a. True b. False
Correct Answer: b. False
Question: A stock’s beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio. a. True b. False
Correct Answer: b. False
Question: If the returns of two firms are negatively correlated, then one of them must have a negative beta. a. True b. False
Correct Answer: b. False
Question: A stock with a beta equal to –1.0 has zero systematic (or market) risk. a. True b. False
Correct Answer: b. False
Question: Is it possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative. a. True b. False
Correct Answer: a. True
Question: Portfolio A has but one security, while Portfolio B has 100 securities. Because of diversification effects, we would expect Portfolio B to have the lower risk. However, it is possible for Portfolio A to be less risky. a. True b. False
Correct Answer: b. False
Question: We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB. a. True b. False
Correct Answer: b. False
Question: A stock’s beta measures its diversifiable risk relative to the diversifiable risks of other firms. a. True b. False
Correct Answer: b. False
Question: A stock’s beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio. a. True b. False
Correct Answer: b. False
Question: If the returns of two firms are negatively correlated, then one of them must have a negative beta. a. True b. False
Correct Answer: b. False
Question: A stock with a beta equal to –1.0 has zero systematic (or market) risk. a. True b. False
Correct Answer: b. False
Question: It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative. a. True b. False
Correct Answer: a. True
Question: Under the CAPM, the required rate of return on a firm’s common stock is determined only by the firm’s market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm’s required rate of return.
Answer Options: a. True b. False Correct Answer: b. False
Question: A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.
Answer Options: a. True b. False Correct Answer: a. True
Question: Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock’s price, other things held constant.
Answer Options: a. True b. False Correct Answer: a. True
Question: The slope of the SML is determined by the value of beta.
Answer Options: a. True b. False Correct Answer: b. False
Question: The slope of the SML is determined by investors’ aversion to risk. The greater the average investor’s risk aversion, the steeper the SML.
Answer Options: a. True b. False Correct Answer: a. True
Question: If you plotted the returns of a company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.
Answer Options: a. True b. False Correct Answer: b. False
Question: If you plotted the returns on a given stock against those of the market, and if you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the stock should be greater than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue into the future.
Answer Options: a. True b. False Correct Answer: b. False