Answer Choices:
a. Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.
b. One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring, whereas scenario analysis cannot account for probabilities.
c. Well-diversified stockholders do not need to consider market risk when determining required rates of return.
d. Market risk is important, but it does not have a direct effect on stock prices because it only affects beta.
e. Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.
Answer:
e. Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.
Question: If investors become less averse to risk, the slope of the Security Market Line (SML) will increase.
Answer Choices:
a. True
b. False
Answer:
b. False
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:
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:
Question: The CAPM is a multi-period model that takes account of differences in securities’ maturities, and it can be used to determine the required rate of return for any given level of systematic risk.
Answer:
Options for Question 49:
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: The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.
Answer:
Options:
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.
Answer Choices:
a. True
b. False
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.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments’ stand-alone risk.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the lower standard deviation.
Answer Choices:
a. True
b. False
Answer:
a. True
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: Which of the following statements is CORRECT?
Answer Choices:
a. While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
b. The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market.
c. Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks.
d. Money markets are markets for long-term debt and common stocks.
e. A liquid security is a security whose value is derived from the price of some other “underlying” asset.
Answer:
Options:
Question: The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?
Answer Choices:
a. The two stocks must have the same dividend per share.
b. If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
c. If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
d. The two stocks must have the same dividend growth rate.
e. The two stocks must have the same dividend yield.
Answer:
b
Question: Stock X has a beta of 0.7 and Stock Y has a beta of 1.3. The standard deviation of each stock’s returns is 20%. The stocks’ returns are independent of each other, i.e., the correlation coefficient, r, between them is zero. Portfolio P consists of 50% X and 50% Y. Given this information, which of the following statements is CORRECT?
Answer:
Options for Question 81:
Question: Which of the following statements is CORRECT?
Answer Choices:
a. The slope of the security market line is equal to the market risk premium.
b. Lower beta stocks have higher required returns.
c. A stock’s beta indicates its diversifiable risk.
d. Diversifiable risk cannot be completely diversified away.
e. Two securities with the same stand-alone risk must have the same betas.
Answer:
a
Question: Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?
Answer:
Options for Question 53:
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: Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has 1/3 of its value invested in each stock. Each stock has a standard deviation of 25%, and their returns are independent of one another, i.e., the correlation coefficients between each pair of stocks is zero. Assuming the market is in equilibrium, which of the following statements is CORRECT?
Answer:
Options for Question 77: