Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

DHF Company has a beta of 1.5 and is currently in equilibrium.The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%.Now the required return on an average stock increases by 30.0% (not percentage points) .Neither betas nor the risk-free rate change.What would DHF's new required return be?

Accepted Answer

A)  14.89%
B)  15.68%
C)  16.50%
D)  17.33%
E)  18.19%F) B) and C)
G) D) and E)

Question 3

Which of the following statements is CORRECT?

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) C) and E)
G) A) and D)

Question 4

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

Question 5

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.

Accepted Answer

A) True 
 B)False

Exam 2: Risk and Return: Part I

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

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 (r_M − r_RF) were to increase but the risk-free rate (r_RF) remained constant,which of the following would occur?

Correct Answer
verified

Exam 2: Risk and Return: Part I

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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 (r_M − r_RF) were to increase but the risk-free rate (r_RF) remained constant,which of the following would occur?

Correct Answer
verified