Filters
Question type
Study Flashcards

A stock with a beta equal to −1.0 has zero systematic (or market) risk.

A) True
B) False

Correct Answer

verifed

verified

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns, and the factors are specified to be (1) market returns, (2) dividend yields, and (3) changes in inflation.

A) True
B) False

Correct Answer

verifed

verified

It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative.

A) True
B) False

Correct Answer

verifed

verified

Assume an economy in which there are three securities: Stock A with rA = 10% and ?A = 10%; Stock B with rB = 15% and ?B = 20%; and a riskless asset with rRF = 7%.Stocks A and B are uncorrelated (rAB = 0) .Which of the following statements is most CORRECT?


A) The expected return on the investor's portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (SD) of approximately 10%.
B) The expected return on the investor's portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (SD) that is between 10% and 20%.
C) The investor's risk/return indifference curve will be tangent to the CML at a point where the expected return is in the range of 7% to 10%.
D) Since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%.
E) The expected return on the investor's portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (SD) of approximately 20%.

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

Correct Answer

verifed

verified

You have the following data on three stocks:  Stock  Standard Deviation  Beta  A 0.150.79 B 0.250.61 C 0.201.29\begin{array} { c c c } \text { Stock } & \text { Standard Deviation } & \text { Beta } \\\text { A } & 0.15 & 0.79 \\\text { B } & 0.25 & 0.61 \\\text { C } & 0.20 & 1.29\end{array} As a 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; C.
C) C; A.
D) C; B.
E) A; A.

F) B) and C)
G) None of the above

Correct Answer

verifed

verified

The Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1) stock is zero.

A) True
B) False

Correct Answer

verifed

verified

The CAPM is a multi-period model which 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.

A) True
B) False

Correct Answer

verifed

verified

Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?


A) Standard deviation; correlation coefficient.
B) Beta; variance.
C) Coefficient of variation; beta.
D) Beta; beta.
E) Variance; correlation coefficient.

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

Correct Answer

verifed

verified

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 low standard deviation stock.

A) True
B) False

Correct Answer

verifed

verified

In a portfolio of three different stocks, which of the following could NOT be true?


A) The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
B) The beta of the portfolio is less than the betas of each of the individual stocks.
C) The beta of the portfolio is greater than the beta of one or two of the individual stocks' betas.
D) The beta of the portfolio cannot be equal to 1.
E) The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.

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

Correct Answer

verifed

verified

B

You hold a portfolio consisting of a $5,000 investment in each of 20 different stocks.The portfolio beta is equal to 1.12.You have decided to sell a coal mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a mineral rights company stock (b = 2.00) .What is the new beta of the portfolio?


A) 1.1139
B) 1.1700
C) 1.2311
D) 1.2927
E) 1.3573

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

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) The typical R2 for a stock is about 0.94 and the typical R2 for a portfolio is about 0.6.
B) The typical R2 for a stock is about 0.3 and the typical R2 for a large portfolio is about 0.94.
C) The typical R2 for a stock is about 0.94 and the typical R2 for a portfolio is also about 0.94.
D) The typical R2 for a stock is about 0.6 and the typical R2 for a portfolio is also about 0.6.
E) The typical R2 for a stock is about 0.3 and the typical R2 for a portfolio is also about 0.3.

F) All of the above
G) B) and E)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) Richard Roll has argued that it is possible to test the CAPM to see if it is correct.
B) Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM.
C) Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable.
D) The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller.
E) Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.

F) B) and C)
G) None of the above

Correct Answer

verifed

verified

E

Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true about these securities? (Assume market equilibrium.)


A) Stock B must be a more desirable addition to a portfolio than Stock A.
B) Stock A must be a more desirable addition to a portfolio than Stock B.
C) The expected return on Stock A should be greater than that on Stock B.
D) The expected return on Stock B should be greater than that on Stock A.
E) When held in isolation, Stock A has greater risk than Stock B.

F) None of the above
G) C) and E)

Correct Answer

verifed

verified

The SML relates required returns to firms' systematic (or market) risk.The slope and intercept of this line can be influenced by managerial actions.

A) True
B) False

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) The slope of the CML is (
r~\tilde r M ? rRF) /bM.
B) All portfolios that lie on the CML to the right of ?M are inefficient.
C) All portfolios that lie on the CML to the left of ?M are inefficient.
D) The slope of the CML is (
r~\tilde{r} M ? rRF) /?M.
E) The Capital Market Line (CML) is a curved line that connects the risk-free rate and the market portfolio.

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

Correct Answer

verifed

verified

D

Suppose that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Talcott Inc.'s beta is 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.Calculate the required rate of return for Talcot Inc.


A) 10.29%
B) 10.83%
C) 11.40%
D) 12.00%
E) 12.60%

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

Correct Answer

verifed

verified

Consider the information below for Postman Builders Inc.Suppose that the expected inflation rate and thus the inflation premium increase by 2.0 percentage points, and Postman acquires risky assets that increase its beta by the indicated percentage.What is the firm's new required rate of return?  Beta: 1.50 Required return (rs) 10.20% RPM: 6.00% Percentage increase in beta: 20%\begin{array} { l r } \text { Beta: } & 1.50 \\\text { Required return } \left( \mathrm { r } _ { \mathrm { s } } \right) & 10.20 \% \\\text { RPM: } & 6.00 \% \\\text { Percentage increase in beta: } & 20 \%\end{array}


A) 14.00%
B) 14.70%
C) 15.44%
D) 16.21%
E) 17.02%

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

Correct Answer

verifed

verified

If you plotted the returns of Selleck & 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 Selleck's 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.

A) True
B) False

Correct Answer

verifed

verified

You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B.Which of the possible answers best describes the historical betas for A and B?  Years  Market  Stock A  Stock B 10.030.160.052−0.050.200.0530.010.180.054−0.100.250.0550.060.140.05\begin{array} { c r r c } \text { Years } & \text { Market } & \text { Stock A } & \text { Stock B } \\\hline 1 & 0.03 & 0.16 & 0.05 \\2 & -0.05 & 0.20 & 0.05 \\3 & 0.01 & 0.18 & 0.05 \\4 & -0.10 & 0.25 & 0.05 \\5 & 0.06 & 0.14 & 0.05\end{array}


A) bA > +1; bB = 0.
B) bA = 0; bB = ?1.
C) bA < 0; bB = 0.
D) bA < ?1; bB = 1.
E) bA > 0; bB = 1.

F) C) and D)
G) All of the above

Correct Answer

verifed

verified

Showing 1 - 20 of 31

Related Exams

Exam 1

An Overview of Financial Management and the Financial Environment

39 Questions

Exam 2

Financial Statements, Cash Flow, and Taxes

75 Questions

Exam 3

Analysis of Financial Statements

103 Questions

Exam 4

Time Value of Money

163 Questions

Exam 5

Bonds, Bond Valuation, and Interest Rates

100 Questions

Exam 6

Risk and Return

146 Questions

Exam 7

Corporate Valuation and Stock Valuation

91 Questions

Exam 8

Financial Options and Applications in Corporate Finance

27 Questions

Exam 9

The Cost of Capital

87 Questions

Exam 10

The Basics of Capital Budgeting: Evaluating Cash Flows

107 Questions

Exam 11

Cash Flow Estimation and Risk Analysis

78 Questions

Exam 12

Corporate Valuation and Financial Planning

45 Questions

Exam 13

Corporate Governance

51 Questions

Exam 14

Distributions to Shareholders: Dividends and Repurchases

57 Questions

Exam 15

Capital Structure Decisions

97 Questions

Exam 16

Supply Chains and Working Capital Management

131 Questions

Exam 17

Multinational Financial Management

49 Questions

Exam 18

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

13 Questions

Exam 19

Lease Financing

22 Questions

Exam 20

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

30 Questions

Exam 21

Dynamic Capital Structures and Corporate Valuation

35 Questions

Exam 22

Mergers and Corporate Control

42 Questions

Exam 23

Enterprise Risk Management

14 Questions

Exam 24

Bankruptcy, Reorganization, and Liquidation

12 Questions

Exam 26

Real Options

19 Questions

Exam 27

Providing and Obtaining Credit

38 Questions

Exam 28

Advanced Issues in Cash Management and Inventory Control

29 Questions

Exam 29

Pension Plan Management

10 Questions

Exam 30

Financial Management in Not-For-Profit Businesses

10 Questions

Show Answer