Question 1

In historical data, we see that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following answers correctly ranks investments from highest to lowest risk (and return) , where the security with the highest risk is shown first, the one with the lowest risk lastσ

Accepted Answer

A)   large-company stocks, small-company stocks, long-term corporate bonds, u.s. treasury bills, long-term government bonds.
B)   small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, u.s. treasury bills.
C)   u.s. treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks.
D)   large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, u.s. treasury bills.
E)   small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, u.s. treasury bills.F) C) and D)
G) A) and B)

Question 2

If you randomly select stocks and add them to your portfolio, which of the following statements best describes what you should expectσ

Accepted Answer

A)   adding more such stocks will increase the portfolio's expected rate of return.
B)   adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.
C)   adding more such stocks will have no effect on the portfolio's risk.
D)   adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk.
E)   adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.F) C) and D)
G) A) and B)

Question 3

Consider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1.   Expected  Standard  Stock  Return  Deviation  Beta A10%20%1.0B10%10%1.0C10%12%1.4\begin{array}{cccc}&	ext { Expected }&	ext { Standard }&\	ext { Stock }&	ext { Return }& 	ext { Deviation } & 	ext { Beta } \A&10 \% &20\%& 1.0 \B&10 \% & 10 \% & 1.0 \C&10 \% & 12 \% &1.4\end{array} Stock ABC​ Expected  Return 10%10%10%​ Standard  Deviation 20%10%12%​ Beta 1.01.01.4​ 
Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns. Which of the following statements is CORRECTσ

Accepted Answer

A)   portfolio ab's coefficient of variation is greater than 2.0.
B)   portfolio ab's required return is greater than the required return on stock a.
C)   portfolio abc's expected return is 10.66667%.
D)   portfolio abc has a standard deviation of 20%.
E)   portfolio ab has a standard deviation of 20%. F) All of the above
G) D) and E)

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

Accepted Answer

A) True 
 B)False

Question 6

Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

Accepted Answer

A)   5.80%
B)   5.95%
C)   6.09%
D)   6.25%
E)   6.40%F) A) and B)
G) B) and D)

Question 7

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?

Accepted Answer

A)   1.286
B)   1.255
C)   1.224
D)   1.194
E)   1.165F) C) and D)
G) A) and B)

Question 8

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?

Accepted Answer

A)   1.17
B)   1.23
C)   1.29
D)   1.35
E)   1.42F) None of the above
G) C) and D)

Question 9

The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECTσ

Accepted Answer

A)   diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic)  risk.
B)   a large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0.
C)   a large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8.
D)   if you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.
E)   a large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected.F) A) and E)
G) A) and D)

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

Assume that the market is in equilibrium and that Portfolio AB has 50% invested in Stock A and 50% invested in Stock B. Stock A has an expected return of 10% and a standard deviation of 20%. Stock B has an expected return of 13% and a standard deviation of 30%. The risk-free rate is 5% and the market risk premium, rM σ rRF, is 6%. The returns of Stock A and Stock B are independent of one another, i.e., the correlation coefficient between them is zero. Which of the following statements is CORRECT?

Accepted Answer

A)   since the two stocks have zero correlation, portfolio ab is riskless.
B)   stock b's beta is 1.0000.
C)   portfolio ab's required return is 11%.
D)   portfolio ab's standard deviation is 25%.
E)   stock a's beta is 0.8333.F) A) and B)
G) A) and C)

Question 13

Which of the following are the factors for the Fama-French model?

Accepted Answer

A)   the excess market return, a debt factor, and a book-to-market factor.
B)   the excess market return, a size factor, and a debt.
C)   a debt factor, a size factor, and a book-to-market factor.
D)   the excess market return, an industrial production factor, and a book-to-market factor.
E)   the excess market return, a size factor, and a book-to-market factor.F) C) and D)
G) B) and D)

Question 14

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM -rRF)  were to increase but the risk-free rate (rRF)  remained constant, which of the following would occur?

Accepted Answer

A)   the required return would decrease by the same amount for both stock a and stock b.
B)   the required return would increase for stock a but decrease for stock b.
C)   the required return on portfolio p would remain unchanged.
D)   the required return would increase for stock b but decrease for stock a.
E)   the required return would increase for both stocks but the increase would be greater for stock b than for stock a.F) C) and D)
G) B) and C)

Question 15

Dixon Food's stock has a beta of 1.4, while Clark Café's stock has a beta of 0.7. Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM - rRF) , equals 4%. Which of the following statements is CORRECT?

Accepted Answer

A)   if the market risk premium increases but the risk-free rate remains unchanged, dixon's required return will increase because it has a beta greater than 1.0 but clark's required return will decline because it has a beta less than 1.0.
B)   since dixon's beta is twice that of clark's, its required rate of return will also be twice that of clark's.
C)   if the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.
D)   if the market risk premium decreases but the risk-free rate remains unchanged, dixon's required return will decrease because it has a beta greater than 1.0 and clark's will also decrease, but by more than dixon's because it has a beta less than 1.0.
E)   if the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for dixon since it has a higher beta.F) A) and C)
G) C) and D)

Question 16

The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.

Accepted Answer

A) True 
 B)False

Question 17

Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is 0.6. Portfolio P has 50% invested in Stock A and 50% invested in B. Which of the following statements is CORRECT?

Accepted Answer

A)   based on the information we are given, and assuming those are the views of the marginal investor, it is apparent that the two stocks are in equilibrium.
B)   portfolio p has more market risk than stock a but less market risk than b.
C)   stock a should have a higher expected return than stock b as viewed by the marginal investor.
D)   portfolio p has a coefficient of variation equal to 2.5.
E)   portfolio p has a standard deviation of 25% and a beta of 1.0.F) All of the above
G) B) and E)

Question 18

We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

Accepted Answer

A) True 
 B)False

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%. Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%. Portfolio AB has $300,000 invested in Stock A and $100,000 invested in Stock B. The correlation between the two stocks' returns is zero (that is, rA,B = 0) . Which of the following statements is CORRECTσ

Accepted Answer

A)   the stocks are not in equilibrium based on the capm; if a is valued correctly, then b is overvalued.
B)   the stocks are not in equilibrium based on the capm; if a is valued correctly, then b is undervalued.
C)   portfolio ab's expected return is 11.0%.
D)   portfolio ab's beta is less than 1.2.
E)   portfolio ab's standard deviation is 17.5%.F) B) and C)
G) A) and E)

Exam 2: Risk and Return-Part I

The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Correct Answer
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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.

Correct Answer
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Correct Answer
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Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Dixon Food's stock has a beta of 1.4, while Clark Café's stock has a beta of 0.7. Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM - rRF) , equals 4%. Which of the following statements is CORRECT?

Correct Answer
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If you randomly select stocks and add them to your portfolio, which of the following statements best describes what you should expectσ

Correct Answer
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Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

Correct Answer
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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?

Correct Answer
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Which of the following statements is CORRECTσ

Correct Answer
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The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.

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.

Correct Answer
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Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM -rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

Correct Answer
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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?

Correct Answer
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Which of the following are the factors for the Fama-French model?

Correct Answer
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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.

Correct Answer
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We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

Correct Answer
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Exam 2: Risk and Return-Part I

The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Dixon Food's stock has a beta of 1.4, while Clark Café's stock has a beta of 0.7. Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM - rRF) , equals 4%. Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If you randomly select stocks and add them to your portfolio, which of the following statements best describes what you should expectσ

Correct AnswerverifiedShow Answer

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECTσ

Correct AnswerverifiedShow Answer

The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM -rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Which of the following are the factors for the Fama-French model?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

Correct AnswerverifiedShow Answer

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