Answer Choices:
a. True
b. False
Answer:
b. False
Question: Since the market return represents the expected return on an average stock, the market return reflects a certain amount of risk. As a result, there exists a market risk premium, which is the amount over and above the risk-free rate that is required to compensate stock investors for assuming an average amount of risk.
Answer:
Options:
Question: Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT?
Answer:
Options for Question 88:
Question: Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.
Answer Choices:
a. True
b. False
Answer:
a. True
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.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: Which of the following statements is CORRECT, assuming stocks are in equilibrium?
Answer Choices:
a. The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.
b. Assume that the required return on a given stock is 13%. If the stock’s dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well.
c. A stock’s dividend yield can never exceed its expected growth rate.
d. A required condition for one to use the constant growth model is that the stock’s expected growth rate exceeds its required rate of return.
e. Other things held constant, the higher a company’s beta coefficient, the lower its required rate of return.
Answer:
a
Question: Stocks A and B each have an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of +0.6. Portfolio P has 50% in Stock A and 50% in Stock B. Which of the following statements is CORRECT?
Answer:
Options for Question 74:
Question: An individual stock’s diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: An increase in a firm’s expected growth rate would cause its required rate of return to
Answer Choices:
a. increase.
b. decrease.
c. fluctuate less than before.
d. fluctuate more than before.
e. possibly increase, possibly decrease, or possibly remain constant.
Answer:
e
Question: Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. You have portfolio that consists of 50% of Stock A and 50% of Stock B. Which of the following statements is CORRECT?
Answer:
Options for Question 76:
Question: The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.
Answer Choices:
a. True
b. False
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: