Question 1

Which of the following statements is most correct?

Accepted Answer

Choice B is correct because company-specific risk can be diversified away through holding a large portfolio of stocks, but market risk cannot be fully eliminated. Choice C is correct because it is possible for a stock with lower market risk than a well-diversified portfolio if the stock is less volatile than the market. Therefore, answers b and c are both correct, making answer E the best choice.

Question 2

Which of the following statements is most correct?

Accepted Answer

The slope of the security market line measures the market risk premium, which is the additional return an investor expects to receive for taking on the risk of investing in the overall market. Statement A is incorrect because the slope only measures the market risk premium, not the beta of an individual security. Statement C is also incorrect because doubling the beta of a security will result in a more than proportional increase in its required return, but not necessarily a doubling of the required return.

Question 3

You observe the following information regarding Company X and Company Y: • Company X has a higher expected mean return than Company Y.
• Company X has a lower standard deviation than Company Y.
• Company X has a higher beta than Company Y.
Given this information, which of the following statements is most correct?

Accepted Answer

The answer of You observe the following information regarding Company...

Question 4

Which of the following is not a difficulty concerning beta and its estimation?

Accepted Answer

The beta of an "average stock," or "the market," is generally considered stable over time, as it represents the overall market risk, which does not drastically change frequently.

Question 5

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

Accepted Answer

In equilibrium, a higher beta indicates higher systematic risk and thus a higher expected return according to the Capital Asset Pricing Model (CAPM). Therefore, Stock A, with a beta of 1.5, should have a higher expected return than Stock B, which has a beta of 0.5.

Question 6

Inflation, recession, and high interest rates are economic events which are characterized as

Accepted Answer

These events are considered market risk, which is a type of systematic risk that affects the entire economy and cannot be diversified away.

Question 7

Which of the following statements is most correct?

Accepted Answer

Statement B is correct because the portfolio beta is the weighted average of the individual betas, leading to a lower risk if low beta stocks are included. Statement D is correct because diversifiable risk can be eliminated, but market risk remains.

Question 8

Stock A has a beta of 1.2 and a standard deviation of 20 percent. Stock B has a beta of 0.8 and a standard deviation of 25 percent. Portfolio P is a $200,000 portfolio consisting of $100,000 invested in Stock A and $100,000 invested in Stock B. Which of the following statements is most correct? (Assume that the required return is determined by the Security Market Line.)

Accepted Answer

The beta of Portfolio P is the weighted average of the betas of Stock A and Stock B, which is (0.5 * 1.2) + (0.5 * 0.8) = 1.0.

Question 9

Which of the following statements is most correct?

Accepted Answer

The beta coefficient is typically calculated by regressing stock returns against market returns, and the slope of the line of best fit in a scatter diagram can be used as beta.

Question 10

Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is most correct?

Accepted Answer

If market participants become more risk averse, the required return on Stock B will increase more than the required return for Stock A because Stock B has a higher beta, indicating higher sensitivity to market changes.

Question 11

Stock A and Stock B each have an expected return of 15 percent, a standard deviation of 20 percent, and a beta of 1.2. The returns of the two stocks are not perfectly correlated; the correlation coefficient is 0.6. You have put together a portfolio which is 50 percent Stock A and 50 percent Stock B. Which of the following statements is most correct?

Accepted Answer

The answer of Stock A and Stock B each have...

Question 12

Which of the following statements is incorrect?

Accepted Answer

The answer of Which of the following statements is incorrect?
...

Question 13

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 14

Which of the following statements is most correct?

Accepted Answer

None of the statements are correct. The correct statements are: A) The slope of the security market line is the market risk premium, not beta. B) A stock with a negative beta can still have a positive required rate of return if its return is uncorrelated with the market return. C) If a stock's beta doubles, its required rate of return will also double if the market risk premium remains constant. D) If a stock has a beta equal to 1.0, its required rate of return will increase or decrease proportionally with changes in the market risk premium.

Question 15

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

Accepted Answer

The beta of a portfolio is a weighted average of the betas of the individual stocks, so it cannot be less than the beta of each individual stock.

Question 16

Which of the following statements is most correct?

Accepted Answer

The Security Market Line (SML) is a graphical representation of the Capital Asset Pricing Model (CAPM), which shows the relationship between the expected return of a security and its market risk (beta). The slope and intercept of the SML are determined by market conditions and investor expectations, not by financial managers.

Question 17

Assume that investors become increasingly risk averse, so that the market risk premium increases. Also, assume that the risk-free rate and expected inflation remain the same. Which of the following is most likely to occur?

Accepted Answer

The answer of Assume that investors become increasingly risk averse,...

Question 18

Which of the following statements is most correct?

Accepted Answer

Option A is incorrect because even a highly diversified portfolio cannot completely eliminate market risk. Option B is incorrect because a portfolio with high beta stocks will have more market risk than a single stock with a lower beta. Option C is correct because company-specific risk can be reduced by forming a diversified portfolio, but the portfolio would still be subject to market risk. Therefore, options B and C are correct, and the answer is E.

Question 19

Which of the following statements is most correct?

Accepted Answer

The statement in option A is true. The negative beta of a stock indicates that it moves in the opposite direction of the overall market, and hence, its returns will be negatively correlated with the returns of most other stocks in the market. The beta value only shows the sensitivity of the stock to the market movements, and not its correlation with other stocks. Option B is incorrect because in a strong market, high beta stocks tend to outperform low beta stocks. Option C is incorrect because a high beta value indicates higher volatility and sensitivity to market movements, which may not necessarily be the case for Collections Inc. during a recession.

Question 20

Jane holds a large diversified portfolio of 100 randomly selected stocks and the portfolio's beta = 1.2. Each of the individual stocks in her portfolio has a standard deviation of 20 percent. Jack has the same amount of money invested in a single stock with a beta equal to 1.6 and a standard deviation of 20 percent. Which of the following statements is most correct?

Accepted Answer

Jane's portfolio has a lower beta than Jack's single stock investment, indicating that it has less systematic or market risk. This is because beta measures the sensitivity of a security's returns to market movements. However, Jane's portfolio may have more company-specific risk due to holding a larger number of stocks that are each subject to their own risks and uncertainties. Statement b is not necessarily correct since Jane's higher level of diversification may actually reduce her required rate of return, but this is not directly related to the given information about the beta and standard deviation of her portfolio.

Quiz 2: Risk and Return: Part I

Which of the following statements is most correct?

Which of the following statements is most correct?

Which of the following is not a difficulty concerning beta and its estimation?

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

Inflation, recession, and high interest rates are economic events which are characterized as

Which of the following statements is most correct?

Which of the following statements is most correct?

Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is most correct?

Which of the following statements is incorrect?

Which of the following statements is most correct?

Which of the following statements is most correct?

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

Which of the following statements is most correct?

Assume that investors become increasingly risk averse, so that the market risk premium increases. Also, assume that the risk-free rate and expected inflation remain the same. Which of the following is most likely to occur?

Which of the following statements is most correct?

Which of the following statements is most correct?