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Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each.The portfolio's beta is 1.12.Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80.What will the portfolio's new beta be?


A) 1.286
B) 1.255
C) 1.224
D) 1.194
E) 1.165

F) B) and D)
G) A) and E)

Correct Answer

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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.

A) True
B) False

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According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation.Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

A) True
B) False

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Which of the following statements is CORRECT?


A) A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable.
B) If a stock has a negative beta, its expected return must be negative.
C) A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5.
D) According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns.
E) If the returns on two stocks are perfectly positively correlated and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.

F) B) and C)
G) A) and B)

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We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.

A) True
B) False

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If the price of money (e.g., interest rates and equity capital costs) increases due to an increase in anticipated inflation, the risk-free rate will also increase.If there is no change in investors' risk aversion, then the market risk premium (rM − rRF) will remain constant.Also, if there is no change in stocks' betas, then the required rate of return on each stock as measured by the CAPM will increase by the same amount as the increase in expected inflation.

A) True
B) False

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Consider the following information and then calculate the required rate of return for the Universal Investment Fund, which holds 4 stocks.The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:  Stock  Investment  B eta  A $200,0001.50 B $300,000−0.50 C $500,0001.25 D $1,000,0000.75\begin{array}{crr}\text { Stock } & \text { Investment } & \text { B eta } \\\text { A } & \$ 200,000 & 1.50 \\\text { B } & \$ 300,000 & -0.50 \\\text { C } & \$ 500,000 & 1.25 \\\text { D } & \$ 1,000,000 & 0.75\end{array}


A) 9.58%
B) 10.09%
C) 10.62%
D) 11.18%
E) 11.77%

F) C) and D)
G) B) and E)

Correct Answer

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You observe the following information regarding Companies X and Y: ∙ Company X has a higher expected return than Company Y. ∙ Company X has a lower standard deviation of returns than Company Y. ∙ Company X has a higher beta than Company Y. Given this information, which of the following statements is CORRECT?


A) Company X has a lower coefficient of variation than Company Y.
B) Company X has less market risk than Company Y.
C) Company X's returns will be negative when Y's returns are positive.
D) Company X's stock is a better buy than Company Y's stock.
E) Company X has more diversifiable risk than Company Y.

F) B) and C)
G) A) and D)

Correct Answer

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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

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Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.

A) True
B) False

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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

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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.

A) True
B) False

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Shirley Paul's 2-stock portfolio has a total value of $100,000.$37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42.What is her portfolio's beta?


A) 1.17
B) 1.23
C) 1.29
D) 1.35
E) 1.42

F) C) and E)
G) D) and E)

Correct Answer

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Which of the following statements is CORRECT?


A) A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.
B) A two-stock portfolio will always have a lower beta than a one-stock portfolio.
C) If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.
D) A stock with an above-average standard deviation must also have an above-average beta.
E) A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

F) D) and E)
G) A) and B)

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If markets are in equilibrium, which of the following conditions will exist?


A) Each stock's expected return should equal its required return as seen by the marginal investor.
B) All stocks should have the same expected return as seen by the marginal investor.
C) The expected and required returns on stocks and bonds should be equal.
D) All stocks should have the same realized return during the coming year.
E) Each stock's expected return should equal its realized return as seen by the marginal investor.

F) B) and D)
G) B) and E)

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Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF.Meanwhile, investors are afraid of a recession, so the market risk premium, (rM − rRF) , has increased.Under these conditions, with other things held constant, which of the following statements is most correct?


A) The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0.
B) Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices.
C) The prices of all stocks would decline, but the decline would be greatest for high-beta stocks.
D) The prices of all stocks would increase, but the increase would be greatest for high-beta stocks.
E) The required return on all stocks would increase by the same amount.

F) A) and E)
G) A) and D)

Correct Answer

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Which of the following statements is CORRECT?


A) The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt.
B) If two "normal" or "typical" stocks were combined to form a 2-stock portfolio, the portfolio's expected return would be a weighted average of the stocks' expected returns, but the portfolio's standard deviation would probably be greater than the average of the stocks' standard deviations.
C) If investors become more risk averse, then (1) the slope of the SML would increase and (2) the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.
D) An increase in expected inflation, combined with a constant real risk-free rate and a constant market risk premium, would lead to identical increases in the required returns on a riskless asset and on an average stock, other things held constant.
E) A graph of the SML as applied to individual stocks would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.

F) B) and D)
G) B) and C)

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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.Your portfolio consists of 50% A and 50% B.Which of the following statements is CORRECT?


A) The portfolio's expected return is 15%.
B) The portfolio's standard deviation is greater than 20%.
C) The portfolio's beta is greater than 1.2.
D) The portfolio's standard deviation is 20%.
E) The portfolio's beta is less than 1.2.

F) B) and C)
G) B) and D)

Correct Answer

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You are considering investing in one of the these three stocks:  Stock  Standard Deviation  Beta  A 20%0.59 B 10%0.61 C 12%1.29\begin{array} { c c c } \text { Stock } & \text { Standard Deviation } & \text { Beta } \\\text { A } & 20 \% & 0.59 \\\text { B } & 10 \% & 0.61 \\\text { C } & 12 \% & 1.29\end{array} If you are a strict risk minimizer, you would 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; B.
B) B; A.
C) C; A.
D) C; B.
E) A; A.

F) A) and E)
G) A) and D)

Correct Answer

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Which of the following statements is CORRECT?


A) If the risk-free rate rises, then the market risk premium must also rise.
B) If a company's beta is halved, then its required return will also be halved.
C) If a company's beta doubles, then its required return will also double.
D) The slope of the security market line is equal to the market risk premium, (rM − rRF) .
E) Beta is measured by the slope of the security market line.

F) B) and C)
G) C) and E)

Correct Answer

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