Answer Options:
a. True
b. False
Answer:
b. False
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. a. True b. False
Answer:
a. True
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. a. True b. False
Answer:
b
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:
a. True
b. False
Answer:
b. False
Question: If investors’ aversion to risk rose, causing the slope of the SML to increase, this would have a greater impact on the required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms. Other things held constant. a. True b. False
Answer:
a. True
Question: Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.
Answer Options:
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. a. True b. False
Answer:
a. True
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:
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 Options:
a. True
b. False
Answer:
a. True
Question: The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio. a. True b. False
Answer:
b
Question: If the returns of two firms are negatively correlated, then one of them must have a negative beta. a. True b. False
Answer:
b
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. a. True b. False
Answer:
a
Question: We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security. a. True b. False
Answer:
b
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
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
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
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
Answer:
b. False
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. a. True b. False
Answer:
a
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. a. True b. False
Answer:
a
Question: When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or short-term rates for RF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and (3) how to measure the market risk premium, RPM. These problems leave us unsure of the true value of rs. a. True b. False
Answer:
a. True
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:
a. True
b. False
Answer:
b. False
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 Options:
a. True
b. False
Answer:
b. False
Question: A stock with a beta equal to –1.0 has zero systematic (or market) risk. a. True b. False
Answer:
b
Question: Managers should under no conditions take actions that increase their firm’s risk relative to the market, regardless of how much those actions would increase the firm’s expected rate of return. 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 Options:
a. True
b. False
Answer:
a. True