Answer:
Options for Question 85:
Question: A stock with a beta equal to –1.0 has zero systematic (or market) risk.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data.
Answer Choices:
a. True
b. False
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:
Question: If the price of money (e.g., interest rates and equity capital costs) increases due to an increase in anticipated inflation, the risk-free rate will also increase. If there is no change in investors’ risk aversion, then the market risk premium (rM – rF) will remain constant. Also, if there is no change in stocks’ betas, then the required rate of return on each stock as measured by the CAPM will increase by the same amount as the increase in expected inflation.
Answer:
Options:
Question: When working with the CAPM, which of the following factors can be determined with the most precision?
Answer Choices:
a. The market risk premium (RPM).
b. The beta coefficient, bi, of a relatively safe stock.
c. The most appropriate risk-free rate, RRF.
d. The expected rate of return on the market, rM.
e. The beta coefficient of “the market,” which is the same as the beta of an average stock.
Answer:
e. The beta coefficient of “the market,” which is the same as the beta of an average stock
Question: Assume that the risk-free rate is 5%. Which of the following statements is CORRECT?
Answer:
Options for Question 87:
Question: According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock’s contribution to the riskiness of a well-diversified portfolio.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: The SML relates required returns to firms’ systematic (or market) risk. The slope and intercept of this line can be influenced by a manager’s actions.
Answer:
Options:
Question: Diversification will normally reduce the riskiness of a portfolio of stocks.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.
Answer Choices:
a. True
b. False
Answer:
b. False
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: