Question;Question 1 of 20;Stock A has a beta of 1.2 and a standard deviation of 20;percent. Stock B has a beta of 0.8 and a standard deviation of 25 percent.;Portfolio P is a $200,000 portfolio consisting of $100,000 invested in Stock A;and $100,000 invested in Stock B. Which of the following statements is most;correct? (Assume that the required return is determined by the Security Market;Line.);A. a. Stock B has a;higher required rate of return than stock A.;B. b. Portfolio P has;a standard deviation of 22.5 percent.;C. c. Portfolio P has;a beta equal to 1.0.;D. d. Statements a;and b are correct.;E. e. Statements a;and c are correct.;Question 2 of 20;Which of the following statements is correct?;A. a. Portfolio;diversification reduces the variability of the returns on the individual stocks;held in the portfolio.;B. b. If an investor;buys enough stocks, he or she can, through diversification, eliminate virtually;all of the non-market (or company-specific) risk inherent in owning stocks.;Indeed, if the portfolio contained all publicly traded stocks, it would be;riskless.;C. c. The required;return on a firm's common stock is determined by its systematic (or market);risk. If the systematic risk is known, and if that risk is expected to remain;constant, then no other information is required to specify the firm's required;return.;D. d. A security's;beta measures its nondiversifiable (systematic, or market) risk relative to;that of an average stock.;E. e. A stock's beta;is less relevant as a measure of risk to an investor with a well-diversified;portfolio than to an investor who holds only that one stock.;Question 3 of 20;You have developed the following data on three stocks;Stock Standard;Deviation Beta;A 0.15 0.79;B 0.25 0.61;C 0.20 1.29;If you are a risk;minimizer, you should choose Stock _____ if it is to be held in isolation and;Stock _____ if it is to be held as part of a well-diversified portfolio.;A. A, A;B. A, B;C. B, A;D. C, A;E. C, B;Question 4 of 20;The risk-free rate, rRF, is 6 percent and the market risk;premium, (rM - rRF), is 5 percent. Assume that required returns are based on;the CAPM. Your $1 million portfolio consists of $700,000 invested in a stock;that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8.;Which of the following statements is correct?;A. a. The portfolio's;required return is less than 11 percent.;B. b. If the;risk-free rate remains unchanged but the market risk premium increases by 2;percentage points, the required return on your portfolio will increase by more;than 2 percentage points.;C. c. If the market;risk premium remains unchanged but expected inflation increases by 2 percentage;points, the required return on your portfolio will increase by more than 2;percentage points.;D. d. If the stock;market is efficient, your portfolio's expected return should equal the expected;return on the market, which is 11 percent.;E. e. None of the;above answers is correct.;Question 5 of 20;Which of the following statements is correct?;A. a. Market;participants are able to eliminate virtually all market risk if they hold a;large diversified portfolio of stocks.;B. b. Market;participants are able to eliminate virtually all company specific risk if they;hold a large diversified portfolio of stocks.;C. c. It is possible;to have a situation where the market risk of a single stock is less than that;of a well diversified portfolio.;D. d. Answers a and c;are correct.;E. e. Answers b and c;are correct.;Question 6 of 20;Inflation, recession, and high interest rates are economic;events which are characterized as;A. a.;Company-specific risk that can be diversified away.;B. b. Market risk.;C. c. Systematic risk;that can be diversified away.;D. d. Diversifiable;risk.;E. e. Unsystematic;risk that can be diversified away.;Risk and Return Part 2;Question 7 of 20;Calculate the required rate of return for Mercury Inc.;assuming that investors expect a 5 percent rate of inflation in the future. The;real risk-free rate is equal to 3 percent and the market risk premium is 5;percent. Mercury has a beta of 2.0, and its realized rate of return has;averaged 15 percent over the last 5 years.;A. a. 15%;B. b. 16%;C. c. 17%;D. d. 18%;E. e. 20%;Question 8 of 20;An investor is forming a portfolio by investing $50,000 in;stock A which has a beta of 1.50, and $25,000 in stock B which has a beta of;0.90. The return on the market is equal to 6 percent and Treasury bonds have a;yield of 4 percent. What is the required rate of return on the investor's;portfolio?;A. a. 6.6%;B. b. 6.8%;C. c. 5.8%;D. d. 7.0%;E. e. None of the;answers above is correct.;Question 9 of 20;Ripken Iron Works faces the following probability;distribution;State of the Economy;Boom;Normal;Recession Probability;of State;Occurring;0.25;0.50;0.25 Stock's;Expected Return if this State Occurs;25%;15;5;What is the coefficient of variation on the company's stock?;(Assume that the standard deviation is calculated using the population;statistic.);A. 0.06;B. 0.47;C. 0.54;D. 0.67;E. 0.71;Question 10 of 20;Company X has a beta of 1.6, while Company Y's beta is 0.7.;The risk-free rate is 7 percent, and the required rate of return on an average;stock is 12 percent. Now the expected rate of inflation built into rRF rises by;1 percentage point, the real risk-free rate remains constant, the required;return on the market rises to 14 percent, and betas remain constant. After all;of these changes have been reflected in the data, by how much will the required;return on Stock X exceed that on Stock Y?;A. a. 3.75%;B. b. 4.20%;C. c. 4.82%;D. d. 5.40%;E. e. 5.75%;Question 11 of 20;If rRF = 5%, rM = 11%, and b = 1.6 for Stock X, what is rx;the required rate of return for Stock X?;A. a. 13.7%;B. b. 16.8%;C. c. 14.6%;D. d. 15.8%;E. e. 12.9%;Question 12 of 20;Jan Middleton owns a 3-stock portfolio with a total;investment value equal to $600,000.;Stock;A;B;C;Total Investment;$200,000;200,000;200,000;$600,000 Beta;0.5;1.0;1.5;What is the weighted average beta of Jan's 3-stock;portfolio?;A. 0.8;B. 1.4;C. 1.0;D. 2.4;E. 1.8;Question 13 of 20;Stock A has a beta of 1.6, Stock B has a beta of 0.6, the;expected rate of return on an average stock is 12 percent, and the risk-free;rate of return is 7 percent. By how much does the required return on the;riskier stock exceed the required return on the less risky stock?;A. a. 5.00%;B. b. 4.25%;C. c. 6.00%;D. d. 3.75%;E. e. 4.75%;Question 14 of 20;You are managing a portfolio of 10 stocks which are held in;equal dollar amounts. The current beta of the portfolio is 1.55, and the beta;of Stock A is 2.0. If Stock A is sold and the proceeds are used to purchase a;replacement stock, what does the beta of the replacement stock have to be to;change the portfolio beta to 1.7?;A. a. 4.4;B. b. 5.3;C. c. 3.2;D. d. 3.5;E. e. 4.1;Question 15 of 20;Consider the following information for the Alachua;Retirement Fund, with a total investment of $6 million.;Stock;A;B;C;D;Total Investment;$600,000;900,000;1,500,000;3,000,000;$6,000,000 Beta;1.2;-0.4;1.5;0.8;The market required rate of return is 12 percent, and the;risk-free rate is 6 percent. What is its required rate of return?;A. 8.98%;B. 9.45%;C. 10.50%;D. 11.56%;E. 11.01%;Question 16 of 20;If the risk-free rate is 8 percent, the expected return on;the market is 13 percent, and the expected return on Security J is 18 percent;then what is the beta of Security J?;A. a. 1.90;B. b. 2.00;C. c. 2.20;D. d. 1.75;E. e. 2.75;Question 17 of 20;Which is the best measure of risk for an asset held in a;well-diversified portfolio?;A. a. Variance;B. b. Standard;deviation;C. c. Beta;D. d. Semi-variance;E. e. Expected value;Question 18 of 20;In a portfolio of three different stocks, which of the;following could not be true?;A. a. The riskiness;of the portfolio is less than the riskiness of each stock held in isolation.;B. b. The riskiness;of the portfolio is greater than the riskiness of one or two of the stocks.;C. c. The beta of the;portfolio is less than the beta of each of the individual stocks.;D. d. The beta of the;portfolio is greater than the beta of one or two of the individual stocks;E. e. The beta of the;portfolio is equal to the beta of one of the individual stocks.;Question 19 of 20;If investors expected inflation to increase in the future;and they also became more risk averse, what could be said about the change in;the Security Market Line (SML)?;A. a. The SML would;shift up and the slope would increase.;B. b. The SML would;shift up and the slope would decrease.;C. c. The SML would;shift down and the slope would increase.;D. d. The SML would;shift down and the slope would decrease.;E. e. The SML would;remain unchanged.;Question 20 of 20;Which of the following statements is correct?;A. a. The SML relates;required returns to firms' market risk. The slope and intercept of this line;cannot be controlled by the financial manager.;B. b. The slope of;the SML is determined by the value of beta.;C. c. If you plotted;the returns of a given stock against those of the market, and if you found that;the slope of the regression line was negative, then 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 on into the future.;D. d. If investors;become less risk averse, the slope of the Security Market Line will increase.;E. e. Statements a;and c are both true.
Paper#50047 | Written in 18-Jul-2015Price : $23