Answer:
for Question 50:
Question: Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%. Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%. Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B. The correlation between the two stocks’ returns is zero (that is, rAB = 0). Which of the following statements is CORRECT?
Answer:
Options for Question 80:
Question: Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is CORRECT?
Answer:
Options for Question 79:
Question: Stocks A, B, and C all have an expected return of 10% and a standard deviation of 25%. Stocks A and B have returns that are independent of one another, i.e., their correlation coefficient, r, equals zero. Stocks A and C have returns that are negatively correlated with one another, i.e., r is less than 0. Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B. Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C. Which of the following statements is CORRECT?
Answer:
Options for Question 75:
Question: The key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio. The risk of the asset held in isolation is not relevant under the CAPM. a . True
Answer Choices:
b. False
Answer:
a. True
Question: The slope of the SML is determined by the value of beta.
Answer:
Options:
Question: Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is CORRECT?
Answer:
Options for Question 73:
Question: The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.
Answer:
Options:
Question: In a portfolio of three randomly selected stocks, which of the following could NOT be true, i.e., which statement is false?
Answer:
Options for Question 78:
Question: 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 Choices:
a. If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B’s.
b. Stock B must have a higher dividend yield than Stock A.
c. Stock A must have a higher dividend yield than Stock B.
d. If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B’s.
e. Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.
Answer:
a
Question: When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio’s risk.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: Assume that two investors each hold a portfolio, and that portfolio is their only asset. Investor A’s portfolio has a beta of minus 2.0, while Investor B’s portfolio has a beta of plus 2.0. Assuming that the unsystematic risks of the stocks in the two portfolios are the same, then the two investors face the same amount of risk. However, the holders of either portfolio could lower their risks, and by exactly the same amount, by adding some “normal” stocks with beta = 1.0.
Answer:
Options for Question 48:
Question: Assume that the risk-free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT?
Answer Choices:
a. An index fund with beta = 1.0 should have a required return of 11%.
b. If a stock has a negative beta, its required return must also be negative.
c. An index fund with beta = 1.0 should have a required return less than 11%.
d. If a stock’s beta doubles, its required return must also double.
e. An index fund with beta = 1.0 should have a required return greater than 11%.
Answer:
a
Question: The firm’s cost of external equity raised by issuing new stock is the same as the required rate of return on the firm’s outstanding common stock.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)
Answer:
Options for Question 82:
Question: Someone who is risk averse has a general dislike for risk and a preference for certainty. If risk aversion exists in the market, then investors in general are willing to accept somewhat lower returns on less risky securities. Different investors have different degrees of risk aversion, and the end result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return) than investors who have more tolerance for risk.
Answer Choices:
a. True
b. False
Answer:
a. True
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.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: If the returns of two firms are negatively correlated, then one of them must have a negative beta.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: A stock’s beta measures its diversifiable risk relative to the diversifiable risks of other firms.
Answer Choices:
a. True
b. False
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.
Answer Choices:
a. True
b. False
Answer:
a. True