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Which of the following is correct?


A) Diversifiable risk, which is measured by the stock's beta, can be lowered by adding more stocks to the portfolio in which the stock is held.
B) Diversifiable risk, which is measured by the standard deviation, can be lowered by adding more stocks to the portfolio in which the stock is held.
C) Systematic risk, which is measured by the stock's beta, cannot be diversified away by adding more stocks to the portfolio in which the stock is held.
D) Diversifiable risk, which is measured by the stock's expected return, can be lowered by adding more stocks to the portfolio in which the stock is held.

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

Correct Answer

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Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true,assuming the CAPM is correct?


A) Stock A would be a more desirable addition to a portfolio than Stock B.
B) In equilibrium, the expected return on Stock B will be greater than that on Stock A.
C) Stock B would be a more desirable addition to a portfolio than Stock A.
D) In equilibrium, the expected return on Stock A will be greater than that on Stock B.

E) None of the above
F) A) and B)

Correct Answer

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If the expected rate of return for a particular stock,as seen by the marginal investor,exceeds its required rate of return,we should soon observe an increase in demand for the stock,and the price will likely increase until a price is established that equates the expected return with the required return.The sooner this equilibrium is reached,the more efficient the market is judged to be.

A) True
B) False

Correct Answer

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Which of the following statements is correct?


A) When company-specific risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.
B) Portfolio diversification reduces the variability of returns on an individual stock.
C) Risk refers to the chance that some unfavourable event will occur, and a probability distribution is completely described by a listing of the likelihoods of unfavourable events.
D) The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line.

E) A) and D)
F) B) and C)

Correct Answer

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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 is a portfolio with 50% invested in Stock A and 50% invested in B.Which of the following statements is correct?


A) Portfolio P has a standard deviation of 25% and a beta of 1.0.
B) 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.
C) Portfolio P has more market risk than Stock A but less market risk than Stock B.
D) Stock A should have a higher expected return than Stock B as viewed by the marginal investor.

E) B) and D)
F) A) and C)

Correct Answer

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Which of the following statements is correct?


A) The slope of the security market line is equal to the market risk premium.
B) Lower beta stocks have higher required returns.
C) A stock's beta indicates its company-specific risk.
D) Two securities with the same stand-alone risk will have the same betas.

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

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Bob has a $50,000 stock portfolio with a beta of 1.2,an expected return of 10.8%,and a standard deviation of 25%.Becky also has a $50,000 portfolio,but it has a beta of 0.8,an expected return of 9.2%,and a standard deviation that is also 25%.The correlation coefficient,r,between Bob's and Becky's portfolios is zero.If Bob and Becky marry and combine their portfolios,which statement about their combined $100,000 portfolio is true?


A) The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
B) The combined portfolio's beta will be equal to a simple average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.
C) The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
D) The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations, 25%.

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

Correct Answer

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Stock A has a beta of 1.2 and a standard deviation of 25%.Stock B has a beta of 1.4 and a standard deviation of 20%.Portfolio AB was created by investing in a combination of Stocks A and B.Portfolio AB has a beta of 1.25 and a standard deviation of 18%.Which of the following statements is correct?


A) Stock A has more market risk than Portfolio AB.
B) Stock A has more market risk than Stock B but less stand-alone risk.
C) Portfolio AB has more money invested in Stock A than in stock B.
D) Portfolio AB has the same amount of money invested in each of the two stocks.

E) B) and C)
F) A) and D)

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Assume that two investors each hold a portfolio,and that portfolio is their only asset.Investor A's portfolio has a beta of minus 2.0,while Investor B's portfolio has a beta of plus 2.0.Assuming that the unsystematic risks of the stocks in the two portfolios are the same,then the two investors face the same amount of risk.However,the holders of either portfolio could lower their risks,and by exactly the same amount,by adding some "normal" stocks with beta = 1.0.

A) True
B) False

Correct Answer

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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? (Assume that the risk-free rate is a constant.)


A) 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.
B) The effect of a change in the market risk premium depends on the slope of the yield curve.
C) If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
D) 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.

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

Correct Answer

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Stock X has a beta of 0.7 and Stock Y has a beta of 1.3.The standard deviation of each stock's returns is 20%.The stocks' returns are independent of each other,i.e.,the correlation coefficient,r,between them is zero.Portfolio P consists of 50% X and 50% Y.Given this information,which of the following statements is correct?


A) The required return on Portfolio P is equal to the market risk premium (rM - rRF) .
B) Portfolio P has a beta of 0.7.
C) Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
D) Portfolio P has the same required return as the market (rM) .

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

Correct Answer

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Stocks A,B,and C all have an expected return of 10% and a standard deviation of 25%.Stocks A and B have returns that are independent of one another,i.e.,their correlation coefficient,r,equals zero.Stocks A and C have returns that are negatively correlated with one another,i.e.,r is less than 0.Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B.Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C.Which of the following statements is correct?


A) Portfolio AC has an expected return that is greater than 25%.
B) Portfolio AB has a standard deviation that is greater than 25%.
C) Portfolio AB has a standard deviation that is equal to 25%.
D) Portfolio AC has a standard deviation that is less than 25%.

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

Correct Answer

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Which statement about risk is true?


A) An investor can eliminate virtually all market risk if he or she holds a very large and well-diversified portfolio of stocks.
B) The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.
C) 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.
D) An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.

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

Correct Answer

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Assume that you manage a $10.75 million mutual fund that has a beta of 1.05 and a 9.50% required return.The risk-free rate is 4.20%.You now receive another $5.25 million,which you invest in stocks with an average beta of 0.65.What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium,then find the new portfolio beta.)


A) 9.07%
B) 9.30%
C) 9.53%
D) 9.77%

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

Correct Answer

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Nile Foods' stock has a beta of 1.4,while Elba Eateries' 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?


A) 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 Nile since it has a higher beta.
B) If the market risk premium increases but the risk-free rate remains unchanged, Nile's required return will increase because it has a beta greater than 1.0 but Elba's will decline because it has a beta less than 1.0.
C) Since Nile's beta is twice that of Elba's, its required rate of return will also be twice that of Elba's.
D) If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.

E) All of the above
F) A) and D)

Correct Answer

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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 - rRF,is 6%.Assume that the market is in equilibrium.Portfolio AB has 50% invested in Stock A and 50% invested in Stock B.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?


A) Stock A's beta is 0.8333.
B) Since the two stocks have zero correlation, Portfolio AB is riskless.
C) Stock B's beta is 1.0000.
D) Portfolio AB's required return is 11%.

E) None of the above
F) B) and D)

Correct Answer

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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

Correct Answer

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Hocking Manufacturing Company has a beta of 0.65,while Levine Industries has a beta of 1.40.The required return on the stock market is 11.00%,and the risk-free rate is 4.25%.What is the difference between Hocking's and Levine's required rates of return? (Hint: First find the market risk premium,then find the required returns on the stocks.)


A) 4.34%
B) 4.57%
C) 4.81%
D) 5.06%

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

Correct Answer

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In the absence of a risk-free rate,what is the minimum variance portfolio?


A) It is always efficient.
B) It is never efficient.
C) It is usually efficient.
D) It is usually the optimal portfolio.

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

Correct Answer

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