Q06 Q06 Q06

Risk is defined as the chance (probability) of actually observing outcomes that are greater than expected, or favorable.Such outcomes are more desirable than observing less-than-expected events, so the possibility that positive outcomes will occur must be emphasized when evaluating risk.

Free

Unlocked

True False

Q11 Q11 Q11

Because of differences in the expected returns of different securities, the standard deviation is not always an adequate measure of risk.However, the coefficient of variation always will allow an investor to properly compare the relative risks of any two securities.

Free

Unlocked

True False

Q12 Q12 Q12

Assume Stock A has a standard deviation of 0.21 while Stock B has a standard deviation of 0.10.If both Stock A and Stock B must be held in isolation, and if investors are risk averse, we can conclude that Stock A will have a greater required return.However, if the assets could be held in portfolios, it is conceivable that the required return could be higher on the low standard deviation stock.

Free

Unlocked

True False

Q14 Q14 Q14

While the portfolio return is a weighted average of realized security returns, portfolio risk is not necessarily a weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and actually reduce the riskiness of a portfolio.

Free

Unlocked

True False

Q17 Q17 Q17

The tighter the probability distribution, the less variability there is and the less likely it is that the actual outcome will be close to the expected value; consequently the more likely it is that the actual return will be much different from the expected return.

Free

Unlocked

True False

Q41 Q41 Q41

Assume you are considering combining two investments to form a portfolio and you are very concerned with the risk that will result from the combination.If you want to attain the greatest effect from diversification, you would prefer that the assets are related.

Free

Unlocked

Multiple Choice

Q57 Q57 Q57

HR Corporation has a beta of 2.0, while LR Corporation's beta is 0.5.The risk-free rate is 10%, and the required rate of return on an average stock is 15%.Now the expected rate of inflation built into rRF falls by 3 percentage points, the real risk-free rate remains constant, the required return on the market falls to 11%, and the betas remain constant.When all of these changes are made, what will be the difference in required returns on HR's and LR's stocks?

Free

Unlocked

Multiple Choice

Q59 Q59 Q59

Assume that a new law is passed which restricts investors to holding only one asset.A risk-averse investor is considering two possible assets as the asset to be held in isolation.The assets' possible returns and related probabilities (i.e., the probability distributions) are as follows: Which asset should be preferred?

Free

Unlocked

Multiple Choice

Q62 Q62 Q62

Oakdale Furniture Inc.has a beta coefficient of 0.7 and a required rate of return of 15 percent.The market risk premium is currently 5 percent.If the inflation premium increases by 2 percentage points, and Oakdale acquires new assets which increase its beta by 50 percent, what will be Oakdale's new required rate of return?

Free

Unlocked

Multiple Choice

Q63 Q63 Q63

Company X has beta = 1.6, while Company Y's beta = 0.7.The risk-free rate is 7%, and the required rate of return on an average stock is 12%.Now the expected rate of inflation built into rRF rises by 1 percentage point, the real risk-free rate remains constant, the required return on the market rises to 14%, and betas remain constant.After all of these changes have been reflected in the data, by how much will the required return on Stock X exceed that on Stock Y?

Free

Unlocked

Multiple Choice

Q64 Q64 Q64

You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks.The portfolio beta is equal to 1.15.You have decided to sell one of your stocks, a lead mining stock whose β = 1.0, for $5,000 net and to use the proceeds to buy $5,000 of stock in a steel company whose β = 2.0.What will be the new beta of the portfolio?

Free

Unlocked

Multiple Choice

Q65 Q65 Q65

You are managing a portfolio of 10 stocks which are held in equal amounts.The current beta of the portfolio is 1.64, and the beta of Stock A is 2.0.If Stock A is sold, what would the beta of the replacement stock have to be to produce a new portfolio beta of 1.55?

Free

Unlocked

Multiple Choice

Q66 Q66 Q66

You have been asked to use a CAPM analysis to choose between stocks R and s, with your choice being the one whose expected rate of return exceeds its required rate of by the widest margin.The risk-free rate is 6%, and the required return on an average stock (or "the market") is 10%.Your security analyst tells you that Stock S's expected rate of return is = 11%, while Stock R's expected rate of return in = 13%.The CAPM is assumed to be a valid method for selecting stocks, but the expected return for any given investor (such as you) can differ from the required rate of return for a given stock.The following past rates of return are to be used to calculate the two stocks' beta

Free

Unlocked

Multiple Choice