Upgrade to remove ads
Only $35.99/year

FIN 221 Ch 8 Practice Quiz

Terms in this set (10)

Stock X has a beta of 0.6, while Stock Y has a beta of 1.4. Which of the following statements is CORRECT?
Stock Y must have a higher expected return and a higher standard deviation than Stock X.
A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a required return that exceeds that of the overall market.
If the market risk premium decreases (but expected inflation is unchanged), the required return on both stocks will decrease but the decrease will be greater for Stock Y.
If expected inflation increases (but the market risk premium is unchanged), the required return on both stocks will decrease by the same amount.
If expected inflation decreases (but the market risk premium is unchanged), the required return on both stocks will decrease but the decrease will be greater for Stock Y.
If the market risk premium decreases (but expected inflation is unchanged), the required return on both stocks will decrease but the decrease will be greater for Stock Y.
A highly risk-averse investor is considering adding one additional stock to a 4-stock portfolio. Two stocks are under consideration. Both have an expected return,, of 15%. However, the distribution of possible returns associated with Stock A has a standard deviation of 12%, while Stock B's standard deviation is 8%. Both stocks are equally highly correlated with the market, with r equal to 0.75 for both stocks. Which stock should this risk-averse investor add to his/her portfolio?
Stock A.
Stock B.
Either A or B.
Neither A nor B.
Add A, since its beta is lower.
Stock B
Which of the following statements is CORRECT?
An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks.
An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well diversified portfolio of stocks.
The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.
It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock.
Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk at all.
An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well diversified portfolio of stocks.
Which of the following statements is CORRECT?
If you plotted the returns of a given stock against those of the market, and 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 less than the risk-free rate for a well-diversified investor, assuming that investors in the market expect the observed relationship to continue on into the future.
The slope of the SML is determined by the value of beta.
The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by managers.
If investors become less risk averse, the slope of the Security Market Line will increase.
If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock.
If you plotted the returns of a given stock against those of the market, and 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 less than the risk-free rate for a well-diversified investor, assuming that investors in the market expect the observed relationship to continue on into the future.
Which of the following statements is CORRECT?
Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis, while the other has a beta of -0.6. The returns on the stock with the negative beta will be negatively correlated with returns on most other stocks in the market.
Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be very strong in the immediate future. That is, you are convinced that the market is about to rise sharply. You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the expected market move.
Collections Inc. is in the business of collecting past-due accounts for other companies, i.e., it is a collection agency. Collections' revenues, profits, and stock price tend to rise during recessions. This suggests that Collections Inc.'s beta should be quite high, say 2.0, because it does so much better than most other companies when the economy is weak.
You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should re-balance your portfolio to include more high-beta stocks.
If the market risk premium remains constant, but the risk-free rate declines, then the returns on low beta stock will rise while those on high beta stocks will decline.
Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis, while the other has a beta of -0.6. The returns on the stock with the negative beta will be negatively correlated with returns on most other stocks in the market.
Magee Company's stock has a beta of 1.20, the risk-free rate is 4.50%, and the market risk premium is 5.00%. What is Magee's required return?
10.25%
10.50%
10.75%
11.00%
11.25%
10.50%
The risk-free rate, rRF, is 6%. The overall stock market has an expected return of 12%. Hazlett, Inc. has a beta of 1.2. What is the required return of Hazlett, Inc. stock?
12.0%
12.2%
12.8%
13.2%
13.5%
13.2%
Given the following probability distribution, what are the expected return and the standard deviation of returns for Security J?
State : 1 2 3
Pi: 0.2 0.6 0.2
kJ: 10% 15 20

15%; 6.50%
12%; 5.18%
15%; 3.16%
15%; 10.00%
20%; 5.00%
15%; 3.16%
Niendorf Corporation's stock has a required return of 13.00%, the risk-free rate is 7.00%, and the market risk premium is 4.00%. Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2.00%. What is Niendorf's new required return?
14.00%
15.00%
16.00%
17.00%
18.00%
16.00%
A $10 million portfolio that consists of the following five stocks:
Stock
Amount Invested
Beta
A
$4 million
1.2
B
2 million
1.1
C
2 million
1.0
D
1 million
0.7
E
1 million
0.5
The portfolio has a required return of 11%, and the market risk premium is 5%. What is the required return on Stock C?
7.2%
10.0%
10.9%
11.0%
11.5%
10.9%
Other sets by this creator