Deck 3: Risk and Return: Part II

Question 1

Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1) stock is zero.

Answer 1

False

Question 2

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

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.

Answer 2

E

Question 3

is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative.

Answer 3

True

Question 4

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

A) The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
B) The beta of the portfolio is less than the betas of each of the individual stocks.
C) The beta of the portfolio is greater than the beta of one or two of the individual stocks' betas.
D) The beta of the portfolio can not be equal to 1.
E) The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.

Question 5

Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

A) Standard deviation; correlation coefficient.
B) Beta; variance.
C) Coefficient of variation; beta.
D) Beta; beta.
E) Variance; correlation coefficient.

Question 6

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

Question 7

the returns of two firms are negatively correlated, then one of them must have a negative beta.

Question 8

Which of the following statements is CORRECT?

A) The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry.
B) The slope of the characteristic line is the stock's standard deviation.
C) The distance of the plot points from the characteristic line is a measure of the stock's market risk.
D) The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk.
E) "Characteristic line" is another name for the Security Market Line.

Question 9

Which of the following statements is CORRECT?

A) The typical R2 for a stock is about 0.94 and the typical R2 for a portfolio is about 0.6.
B) The typical R2 for a stock is about 0.3 and the typical R2 for a large portfolio is about 0.94.
C) The typical R2 for a stock is about 0.94 and the typical R2 for a portfolio is also about 0.94.
D) The typical R2 for a stock is about 0.6 and the typical R2 for a portfolio is also about 0.6.
E) The typical R2 for a stock is about 0.3 and the typical R2 for a portfolio is also about 0.3.

Question 10

SML relates required returns to firms' systematic (or market) riskThe slope and intercept of this line can be influenced by managerial actions.

Question 11

slope of the SML is determined by the value of beta.

Question 12

stock with a beta equal to -1.0 has zero systematic (or market) risk.

Question 13

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns, and the factors are specified to be (1) market returns, (2) dividend yields, and (3) changes in inflation.

Question 14

CAPM is a multi-period model which takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

Question 15

Which of the following statements is CORRECT?

A) The slope of the CML is (M - rRF)/bM.
B) All portfolios that lie on the CML to the right of M are inefficient.
C) All portfolios that lie on the CML to the left of M are inefficient.
D) The slope of the CML is (M - rRF)/M..
E) The Capital Market Line (CML) is a curved line that connects the risk-free rate and the market portfolio.

Question 16

portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.

Question 17

Which of the following is NOT a potential problem with beta and its estimation?

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 than the "true" or "expected future" beta.
B) The beta of "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) There is a wide confidence interval around a typical stock's estimated beta.
E) Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.

Question 18

you plotted the returns of Selleck & Company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on Selleck's stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.

Question 19

investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10 However, if stocks are held in portfolios, it is possible that the required return could be higher on the low standard deviation stock.

Question 20

Which of the following statements is CORRECT?

A) Richard Roll has argued that it is possible to test the CAPM to see if it is correct.
B) Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM.
C) Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable.
D) The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller.
E) Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.

Question 21

mother's holds well-diversified portfolio has an expected return of 12.0% and a beta of 1.20 She is in the process of buying 100 shares of Safety Corpat $10 a share and adding it to her portfolio Safety has an expected return of 15.0% and a beta of 2.00 The total value of your current portfolio is $9,000 What will the expected return and beta on the portfolio be after the purchase of the Safety stock? rp bp

A) 11.69%; 1.22
B) 12.30%; 1.28
C) 12.92%; 1.34
D) 13.56%; 1.41
E) 14.24%; 1.48

Question 22

Suppose that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Talcott Inc.'s beta is 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 yearsCalculate the required rate of return for Talcot Inc.

A) 10.29%
B) 10.83%
C) 11.40%
D) 12.00%
E) 12.60%

Question 23

stock you are holding has a beta of 2.0 and the stock is currently in equilibrium The required rate of return on the stock is 15% versus a required return on an average stock of 10% Now the required return on an average stock increases by 30.0% (not percentage points) The risk-free rate is unchanged By what percentage (not percentage points) would the required return on your stock increase as a result of this event?

A) 36.10%
B) 38.00%
C) 40.00%
D) 42.00%
E) 44.10%

Question 24

hold a portfolio consisting of a $5,000 investment in each of 20 different stocksThe portfolio beta is equal to 1.12 You have decided to sell a coal mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a mineral rights company stock (b = 2.00) What is the new beta of the portfolio?

A) 1.1139
B) 1.1700
C) 1.2311
D) 1.2927
E) 1.3573