Question 1

Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all of her investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will be
A) 0.60.
B) 0.88.
C) 1.00.
D) 1.25.

Accepted Answer

The answer of Nicole holds three stocks in her portfolio:...

Question 2

Nico wants to invest all of his money in just two assets: the risk free asset and the market portfolio. What is Nico's portfolio beta if he invests a quarter of his money in the market portfolio and the rest in the risk free asset?
A) 0.00
B) 0.25
C) 0.75
D) 1.00

Accepted Answer

If Nico invests a quarter of his money in the market portfolio and the rest in the risk-free asset, then 75% of his money is invested in the risk-free asset which has a beta of 0. The remaining 25% of his money is invested in the market portfolio which will have its own beta. Therefore, Nico's portfolio beta will be (0.25 x beta of market portfolio) + (0.75 x 0) = 0.25 x beta of the market portfolio. So the correct answer is B, which means Nico's portfolio beta will be 0.25.

Question 3

Table 8.2
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: 
-The beta of the portfolio in Table 8.2, containing assets X, Y, and Z, is
A) 1.5.
B) 2.4.
C) 1.6.
D) 2.0.

Accepted Answer

To calculate the beta of the portfolio, we need to find the weighted average beta of the individual assets.

Weighted average beta = (Weight of Asset X * Beta of Asset X) + (Weight of Asset Y * Beta of Asset Y) + (Weight of Asset Z * Beta of Asset Z)

Weight of Asset X = 6,000/20,000 = 0.3
Beta of Asset X = 1.2

Weight of Asset Y = 9,000/20,000 = 0.45
Beta of Asset Y = 2.0

Weight of Asset Z = 5,000/20,000 = 0.25
Beta of Asset Z = 1.8

Weighted average beta = (0.3 * 1.2) + (0.45 * 2.0) + (0.25 * 1.8) = 1.6

Therefore, the beta of the portfolio is 1.6, which corresponds to choice C.

Question 4

Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. The expected risk free rate of return is 3 percent, the expected market return is 8 percent, and Tangshan has a beta of 1.20.
(a) What is the expected return based on the dividend valuation model?
(b) What is the required return based on the CAPM?
(c) Would Tangshan China be a good investment at this time? Explain

Accepted Answer

The answer of Tangshan China's stock is currently selling for...

Question 5

Table 8.3
Consider the following two securities X and Y. 
-Using the data from Table 8.3, what is the portfolio expected return if you invest 100 percent of your money in X, borrow an amount equal to half of your own investment at the risk free rate and invest your borrowings in asset X?
A) 15.0%
B) 22.5%
C) 25.0%
D) 27.5%

Accepted Answer

The portfolio return when 100 percent of your money is invested in asset X is simply the expected return of asset X which is 20%.

Now, when you borrow an amount equal to half of your own investment at the risk free rate and invest your borrowings in asset X, the portfolio return can be calculated as follows:

Weight of asset X = (100% + 50%)/2 = 75%
Weight of risk-free asset = (100% - 50%)/2 = 25%

Expected portfolio return = (Weight of asset X x Expected return of asset X) + (Weight of risk free asset x Risk free rate)
= (0.75 x 20%) + (0.25 x 4%) 
= 15% + 1% 
= 16%

Therefore, the portfolio expected return when you invest 100 percent of your money in X, borrow an amount equal to half of your own investment at the risk free rate and invest your borrowings in asset X would be 16%. However, this option is not listed in the answer choices. The closest answer choice is D - 27.5%, which is incorrect.

Question 6

An example of an external factor that affects a corporation's risk or beta, and hence required rate of return would be ________ by the company.
A) a change in the financing mix used
B) toxic spills.
C) a change in the asset mix
D) a change in top management.

Accepted Answer

Toxic spills are an external factor that affects a corporation's risk or beta, as it can lead to potential lawsuits, legal settlements, and damages to the company's reputation, ultimately affecting its financial performance and required rate of return. Changes in financing or asset mix or top management are internal factors that may affect a company's risk, but are not directly related to external factors.

Question 7

Table 8.2
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: 
-The beta of the portfolio in Table 8.2 indicates this portfolio
A) has more risk than the market.
B) has less risk than the market.
C) has an undetermined amount of risk compared to the market.
D) has the same risk as the market.

Accepted Answer

The answer of Table 8.2
You are going to invest $20,000...

Question 8

Table 8.3
Consider the following two securities X and Y. 
-Using the data from Table 8.3, what is the portfolio expected return and the portfolio beta if you invest 35 percent in X, 45 percent in Y, and 20 percent in the risk-free asset?
A) 12.5%, 0.975
B) 12.5%, 1.975
C) 15.0%, 0.975
D) 15.0%, 1.975

Accepted Answer

Portfolio Expected Return = (0.35*12%) + (0.45*16%) + (0.20*6%) = 12.5%
Portfolio Beta = (0.35*1.2) + (0.45*1.6) + (0.20*0) = 0.975

Question 9

Nico owns 100 shares of stock X which has a price of $12 per share and 200 shares of stock Y which has a price of $3 per share. What is the proportion of Nico's portfolio invested in stock X?
A) 77%
B) 67%
C) 50%
D) 33%

Accepted Answer

First, we need to calculate the total value of Nico's investment:

Total value = (number of shares of stock X * price per share of stock X) + (number of shares of stock Y * price per share of stock Y)
Total value = (100 * $12) + (200 * $3)
Total value = $1200 + $600
Total value = $1800

Now, we can calculate the proportion of Nico's portfolio invested in stock X:

Proportion of portfolio = (value of stock X / total value) * 100%
Proportion of portfolio = ($1200 / $1800) * 100%
Proportion of portfolio = 0.67 * 100%
Proportion of portfolio = 67%

Therefore, Nico has 67% of his portfolio invested in stock X.

Question 10

Table 8.3
Consider the following two securities X and Y. 
-Using the data from Table 8.3, what is the systematic risk for a portfolio with two-thirds of the funds invested in X and one-third invested in Y?
A) 0.88
B) 1.17
C) 1.33
D) 1.67

Accepted Answer

To find the systematic risk of a portfolio, we need to use the following formula:

Systematic Risk = Weight of Security X * Beta of Security X + Weight of Security Y * Beta of Security Y

Plugging in the given data, we get:

Systematic Risk = (2/3) * 1.2 + (1/3) * 1.8 
Systematic Risk = 0.8 + 0.6 
Systematic Risk = 1.4

Therefore, the systematic risk for the portfolio is 1.4, which is closest to answer choice C (1.33).

Question 11

As randomly selected securities are combined to create a portfolio, the ________ risk of the portfolio decreases until 10 to 20 securities are included. The portion of the risk eliminated is ________ risk, while that remaining is ________ risk.
A) diversifiable; nondiversifiable; total
B) relevant; irrelevant; total
C) total; diversifiable; nondiversifiable
D) total; nondiversifiable; diversifiable

Accepted Answer

The risk that can be eliminated through diversification is known as diversifiable risk, while the risk that cannot be eliminated and remains is called nondiversifiable risk.

Question 12

Tangshan Antiques has a beta of 1.40, the annual risk-free rate of interest is currently 10 percent, and the required return on the market portfolio is 16 percent. The firm estimates that its future dividends will continue to increase at an annual compound rate consistent with that experienced over the 2000-2003 period.  (a) Estimate the value of Tangshan Antiques stock.
(b) A lawsuit has been filed against the company by a competitor, and the potential loss has increased risk, which is reflected in the company's beta, increasing it to 1.6. What is the estimated price of the stock following the filing of the lawsuit.

Accepted Answer

The answer of Tangshan Antiques has a beta of 1.40,...

Question 13

________ in the beta coefficient normally causes ________ in the required return and therefore ________ in the price of the stock, all else remaining the same.
A) An increase; an increase; an increase
B) An increase; a decrease; an increase
C) An increase; an increase; a decrease
D) A decrease; a decrease; a decrease

Accepted Answer

The answer of ________ in the beta coefficient normally causes...

Question 14

What is the expected market return if the expected return on asset X is 20 percent, its beta is 1.5, and the risk free rate is 5 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 22.5%

Accepted Answer

The expected market return can be calculated using the Capital Asset Pricing Model (CAPM) as follows: Expected Market Return = Risk Free Rate + Beta*(Expected Return on Asset X - Risk Free Rate).
Expected Market Return = 5% + 1.5*(20% - 5%) = 5% + 22.5% = 27.5%. However, the question asks for the expected market return, not the required return. Therefore, the answer is 15%, which is the expected return on asset X without considering its beta.

Question 15

If you expect the market to increase which of the following portfolios should you purchase?
A) A portfolio with a beta of 1.9.
B) A portfolio with a beta of 1.0.
C) A portfolio with a beta of 0.
D) A portfolio with a beta of -0.5.

Accepted Answer

A portfolio with a beta of 1.9 is more volatile than the market, hence it will increase more than the market when the market is increasing.

Question 16

Table 8.2
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: 
-Given the information in Table 8.2, what is the expected annual return of this portfolio?
A) 11.4%
B) 10.0%
C) 11.0%
D) 11.7%

Accepted Answer

The answer of Table 8.2
You are going to invest $20,000...

Question 17

The beta of a portfolio is
A) the sum of the betas of all assets in the portfolio.
B) irrelevant, only the betas of the individual assets are important.
C) does not change over time.
D) is the weighted average of the betas of the individual assets in the portfolio.

Accepted Answer

The beta of a portfolio is the weighted average of the betas of the individual assets in the portfolio. This means that the individual betas of each asset are important, but they must be weighted according to their proportion in the portfolio. The beta of a portfolio can change over time as the individual betas and weightings change.

Question 18

Table 8.3
Consider the following two securities X and Y. 
-Which asset (X or Y) in Table 8.3 has the least total risk? Which has the least systematic risk?
A) X; X.
B) X; Y.
C) Y; X.
D) Y; Y.

Accepted Answer

The answer of Table 8.3
Consider the following two securities X...

Question 19

The beta coefficient is an index that measures the degree of movement of an asset's return in response to a change in the market return.

Accepted Answer

This statement is true. The beta coefficient is a measure of an asset's systematic risk, or risk that cannot be diversified away, and is commonly used in finance to assess the volatility of a stock or portfolio in relation to the overall market. A beta of 1 indicates that the stock moves in perfect correlation with the market, a beta greater than 1 indicates higher volatility than the market, while a beta less than 1 indicates lower volatility than the market.

Question 20

What is Nico's portfolio beta if he invests an equal amount in asset X with a beta of 0.60, asset Y with a beta of 1.60, the risk-free asset, and the market portfolio?
A) 1.20
B) 1.00
C) 0.80
D) 0.60

Accepted Answer

The answer of What is Nico's portfolio beta if he...

Quiz 8: Risk and Return

Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all of her investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will be

Nico wants to invest all of his money in just two assets: the risk free asset and the market portfolio. What is Nico's portfolio beta if he invests a quarter of his money in the market portfolio and the rest in the risk free asset?

Table 8.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: -The beta of the portfolio in Table 8.2, containing assets X, Y, and Z, is

Table 8.3 Consider the following two securities X and Y. -Using the data from Table 8.3, what is the portfolio expected return if you invest 100 percent of your money in X, borrow an amount equal to half of your own investment at the risk free rate and invest your borrowings in asset X?

An example of an external factor that affects a corporation's risk or beta, and hence required rate of return would be ________ by the company.

Table 8.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: -The beta of the portfolio in Table 8.2 indicates this portfolio

Table 8.3 Consider the following two securities X and Y. -Using the data from Table 8.3, what is the portfolio expected return and the portfolio beta if you invest 35 percent in X, 45 percent in Y, and 20 percent in the risk-free asset?

Nico owns 100 shares of stock X which has a price of $12 per share and 200 shares of stock Y which has a price of $3 per share. What is the proportion of Nico's portfolio invested in stock X?

Table 8.3 Consider the following two securities X and Y. -Using the data from Table 8.3, what is the systematic risk for a portfolio with two-thirds of the funds invested in X and one-third invested in Y?

As randomly selected securities are combined to create a portfolio, the risk of the portfolio decreases until 10 to 20 securities are included. The portion of the risk eliminated is risk, while that remaining is risk.

in the beta coefficient normally causes in the required return and therefore in the price of the stock, all else remaining the same.

What is the expected market return if the expected return on asset X is 20 percent, its beta is 1.5, and the risk free rate is 5 percent?

If you expect the market to increase which of the following portfolios should you purchase?

Table 8.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: -Given the information in Table 8.2, what is the expected annual return of this portfolio?

The beta of a portfolio is

Table 8.3 Consider the following two securities X and Y. -Which asset (X or Y) in Table 8.3 has the least total risk? Which has the least systematic risk?

The beta coefficient is an index that measures the degree of movement of an asset's return in response to a change in the market return.

What is Nico's portfolio beta if he invests an equal amount in asset X with a beta of 0.60, asset Y with a beta of 1.60, the risk-free asset, and the market portfolio?