A) If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio.
B) The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future.
C) The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.
D) It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, rRF.
E) The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.
G) A) and E)
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A) 14.89%
B) 15.68%
C) 16.50%
D) 17.33%
E) 18.19%
G) C) and E)
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A) The required return on the market is 10%.
B) The portfolio's required return is less than 11%.
C) If the risk-free rate remains unchanged but the market risk premium increases by 2%, Gretta's portfolio's required return will increase by more than 2%.
D) If the market risk premium remains unchanged but expected inflation increases by 2%, Gretta's portfolio's required return will increase by more than 2%.
E) If the stock market is efficient, Gretta's portfolio's expected return should equal the expected return on the market, which is 11%.
G) C) and D)
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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.
G) A) and C)
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A) company-specific risk factors that can be diversified away.
B) among the factors that are responsible for market risk.
C) risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.
D) irrelevant except to governmental authorities like the Federal Reserve.
E) systematic risk factors that can be diversified away.
G) D) and E)
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A) Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta.
B) The beta of an "average stock," or "the market," can change over time, sometimes drastically.
C) Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
D) All of the statements above are true.
E) The fact that a security or project may not have a past history that can be used as the basis for calculating beta.
G) B) and D)
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B) False
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B) False
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A) 11.36%
B) 11.65%
C) 11.95%
D) 12.25%
E) 12.55%
G) C) and D)
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A) The required rate of return will decline for stocks whose betas are less than 1.0.
B) The required rate of return on the market, rM, will not change as a result of these changes.
C) The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk
D) The required rate of return on a riskless bond will decline.
E) The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.
G) B) and E)
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B) False
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A) The required return on all stocks will remain unchanged.
B) The required return will fall for all stocks, but it will fall more for stocks with higher betas.
C) The required return for all stocks will fall by the same amount.
D) The required return will fall for all stocks, but it will fall less for stocks with higher betas.
E) The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.
G) A) and C)
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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.
G) A) and D)
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A) The effect of a change in the market risk premium depends on the slope of the yield curve.
B) If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
C) If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
D) The effect of a change in the market risk premium depends on the level of the risk-free rate.
E) If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
G) A) and D)
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A) Stock A has more market risk than Stock B but less stand-alone risk.
B) Portfolio AB has more money invested in Stock A than in Stock B.
C) Portfolio AB has the same amount of money invested in each of the two stocks.
D) Portfolio AB has more money invested in Stock B than in Stock A.
E) Stock A has more market risk than Portfolio AB.
G) A) and E)
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A) 1.286
B) 1.255
C) 1.224
D) 1.194
E) 1.165
G) None of the above
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B) False
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B) False
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B) False
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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.
G) C) and E)
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