Question 1

A share with a beta greater than 1.0 has lower nondiversifiable risk than a share with a beta of 1.0.

Accepted Answer

A share with a beta greater than 1.0 is considered more volatile and has higher nondiversifiable risk than a share with a beta of 1.0. A beta of 1.0 represents the average market risk, so a beta greater than 1.0 indicates higher than average risk.

Question 2

Briefly discuss why there is no reason to believe that the market will reward investors with additional returns for assuming unsystematic risk.

Accepted Answer

The answer of Briefly discuss why there is no reason...

Question 3

The rate on six-month Treasury notes currently 5%.Andvark Company stock has a beta of 1.69 and a required rate of return of 15.4%.According to CAPM,determine the return on the market portfolio.
A)11.15%
B)6.15%
C)17.07%
D)14.11%

Accepted Answer

The CAPM formula is: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: 15.4% = 5% + 1.69 * (Market Return - 5%). Solving for Market Return gives 11.15%.

Question 4

The expected return on the market portfolio is currently 11%.Battmobile Corporation shareholders require a rate of return of 23.0%,and the share has a beta of 2.5.According to CAPM,determine the risk-free rate.
A)17.5%
B)2.75%
C)3.0%
D)9.2%

Accepted Answer

Using the CAPM formula, we can solve for the risk-free rate.

23.0% = Rf + 2.5(11% - Rf)

23.0% = 2.5(11%) - 1.5Rf

23.0% - 2.5(11%) = -1.5Rf

Rf = (23.0% - 2.5(11%)) / -1.5

Rf = 3.0%

Therefore, the answer is C) 3.0%.

Question 5

The Elvis Alive Corporation,makers of Elvis memorabilia,has a beta of 2.35.The return on the market portfolio is 12%,and the risk-free rate is 2.5%.According to CAPM,what is the risk premium on a share with a beta of 1.0?
A)12.00%
B)22.33%
C)9.5%
D)14.5%

Accepted Answer

The risk premium for a share with a beta of 1.0 is the market risk premium, calculated as the return on the market portfolio minus the risk-free rate: 12% - 2.5% = 9.5%.

Question 6

Given the capital asset pricing model,a security with a beta of 1.5 should return ________,if the risk-free rate is 3% and the market return is 11%.
A)16.5%
B)14.0%
C)14.5%
D)15.0%

Accepted Answer

According to the Capital asset pricing model, the expected return of a security is calculated as follows:

Expected return = Risk-free rate + Beta * (Market return - Risk-free rate)

Plugging in the given values:

Expected return = 3% + 1.5 * (11% - 3%) 
Expected return = 15%

Therefore, the security with a beta of 1.5 should return 15%, hence the best choice is D.

Question 7

The security market line (SML)relates risk to return,for a given set of market conditions.If risk aversion increases,which of the following would most likely occur?
A)The market risk premium would increase.
B)Beta would increase.
C)The slope of the SML would increase.
D)The SML line would shift up.

Accepted Answer

The answer of The security market line (SML)relates risk to...

Question 8

You are going to invest all of your funds in one of three projects with the following distribution of possible returns: Project 1 Project 2
Standard Deviation 12% Standard Deviation 19.5%
Probability Return Probability Return
50% Chance 20% 30% Chance 30%
50% Chance -4% 40% Chance 10%
30% Chance -20%
Project 3
Standard Deviation 12%
Probability Return
10% Chance 30%
40% Chance 15%
40% Chance 10%
10% Chance -21%
If you are a risk-averse investor,which one should you choose?
A)Project 1
B)Project 2
C)Project 3

Accepted Answer

As a risk-averse investor, the best option would be to choose the project with the lowest standard deviation of returns. Among the three projects, Project 3 has the lowest standard deviation of 12% and also offers a positive expected return, thus making it the best choice. Project 1 has the same standard deviation but has a negative expected return, while Project 2 has a higher standard deviation of 19.5%, which makes it a riskier choice.

Question 9

The risk-return relationship for each financial asset is shown on
A)the capital market line.
B)the New York Stock Exchange market line.
C)the security market line.
D)none of the above.

Accepted Answer

The security market line (SML) represents the risk-return relationship for individual securities or portfolios. It shows the expected return an investor should receive for taking on a certain level of risk and is based on the Capital Asset Pricing Model (CAPM). The SML is used to determine whether an investment is appropriately priced and whether it has the potential to provide excess returns (alpha) based on its risk level.

Question 10

Hefty stock has a beta of 1.2.If the risk-free rate is 7% and the market risk premium is 6.5%,what is the required rate of return on Hefty?
A)14.8%
B)14.4%
C)12.4%
D)13.5%

Accepted Answer

The required rate of return can be calculated using the Capital Asset Pricing Model (CAPM) formula: Required Return = Risk-Free Rate + Beta * (Market Risk Premium). Plugging in the values: Required Return = 7% + 1.2 * 6.5% = 7% + 7.8% = 14.8%.

Question 11

The security market line (SML)relates risk to return,for a given set of market conditions.If expected inflation increases,which of the following would most likely occur?
A)The market risk premium would increase.
B)Beta would increase.
C)The slope of the SML would increase.
D)The SML line would shift up.

Accepted Answer

If expected inflation increases, the risk-free rate would increase as well. This would cause the SML line to shift up, as the expected return on all investments would increase to compensate for the higher risk-free rate. Therefore, the correct answer is D. The market risk premium and beta would not be affected by expected inflation. The slope of the SML would only change if the relationship between risk and return changes, which is not necessarily the case when inflation increases.

Question 12

Bell Weather,Inc.has a beta of 1.25.The return on the market portfolio is 12.5%,and the risk-free rate is 5%.According to CAPM,what is the required return on this share?
A)20.62%
B)9.37%
C)14.37%
D)15.62%

Accepted Answer

The answer of Bell Weather,Inc.has a beta of 1.25.The return...

Question 13

Provide an intuitive discussion of beta and its importance for measuring risk.

Accepted Answer

The answer of Provide an intuitive discussion of beta and...

Question 14

Huit Industries' ordinary shares have an expected return of 11.4% and a beta of 1.2.If the expected risk-free return is 3%,what is the expected return for the market (round your answer to the nearest .1%)?
A)7.7%
B)9.6%
C)10.0%
D)11.4%

Accepted Answer

The answer of Huit Industries' ordinary shares have an expected...

Question 15

Australian Treasury notes can be used to approximate the risk-free rate.

Accepted Answer

Australian Treasury notes are considered very low risk and are often used as a benchmark for the risk-free rate.

Question 16

Siebling Manufacturing Company's ordinary shares have a beta of .8.If the expected risk-free return is 2% and the market offers a premium of 8% over the risk-free rate,what is the expected return on Siebling's ordinary shares?
A)7.8%
B)13.4%
C)14.4%
D)8.4%

Accepted Answer

The expected return can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * Market Risk Premium. Here, it is 2% + 0.8 * 8% = 8.4%.

Question 17

CSG Limited's ordinary shares have a beta of 1.5.If the expected risk-free return is 2% and the expected return on the market is 14%,what is the expected return on the shares?
A)13.5%
B)21.0%
C)16.8%
D)20.0%

Accepted Answer

The expected return on the shares can be calculated using the Capital Asset Pricing Model (CAPM):

Expected return on shares = Risk-free rate + Beta of shares x (Expected return on market - Risk-free rate)
Expected return on shares = 2% + 1.5 x (14% - 2%)
Expected return on shares = 2% + 1.5 x 12%
Expected return on shares = 2% + 18%
Expected return on shares = 20%

Question 18

You are thinking about purchasing 1,000 shares in the following firms: Number of Shares Firm's Beta
Firm A 100 0.75
Firm B 200 1.47
Firm C 200 0.82
Firm D 600 1.60
If you purchase the number of shares specified,then the beta of your portfolio will be:
A)1.16.
B)1.35.
C)1.00.
D)Cannot be determined without knowing the share prices.

Accepted Answer

The answer of You are thinking about purchasing 1,000 shares...

Question 19

The market risk premium is measured by
A)beta.
B)market return less risk-free rate.
C)Treasury note rate.
D)standard deviation.

Accepted Answer

The market risk premium is the additional return an investor expects over the risk-free rate in order to invest in a risky asset such as stocks. Therefore, the market risk premium is measured by subtracting the risk-free rate (usually the Treasury note rate) from the market return. Option B represents this calculation. Beta measures the systemic risk of a stock, not the market risk premium. Standard deviation measures the amount of risk in a stock or portfolio, but is not specifically related to the market risk premium.

Question 20

Marjen shares have a required return of 20%.The expected market return is 15%,and the beta of Marjen's share is 1.5.Calculate the risk-free rate.
A)4%
B)5%
C)6%
D)7%

Accepted Answer

The capital asset pricing model (CAPM) can be used to calculate the required return of a stock, given its beta and the expected market return. The formula is:

Required Return = Risk-Free Rate + Beta × (Expected Market Return - Risk-Free Rate)

Plugging in the given values, we get:

20% = RF + 1.5 × (15% - RF)

Solving for RF, we get:

RF = 5%

Therefore, the risk-free rate is 5%, and the best choice is B.

Quiz 8: Risk and Return - Capital Market Theory

A share with a beta greater than 1.0 has lower nondiversifiable risk than a share with a beta of 1.0.

Briefly discuss why there is no reason to believe that the market will reward investors with additional returns for assuming unsystematic risk.

The rate on six-month Treasury notes currently 5%.Andvark Company stock has a beta of 1.69 and a required rate of return of 15.4%.According to CAPM,determine the return on the market portfolio.

The expected return on the market portfolio is currently 11%.Battmobile Corporation shareholders require a rate of return of 23.0%,and the share has a beta of 2.5.According to CAPM,determine the risk-free rate.

The Elvis Alive Corporation,makers of Elvis memorabilia,has a beta of 2.35.The return on the market portfolio is 12%,and the risk-free rate is 2.5%.According to CAPM,what is the risk premium on a share with a beta of 1.0?

Given the capital asset pricing model,a security with a beta of 1.5 should return ________,if the risk-free rate is 3% and the market return is 11%.

The security market line (SML) relates risk to return,for a given set of market conditions.If risk aversion increases,which of the following would most likely occur?

The risk-return relationship for each financial asset is shown on

Hefty stock has a beta of 1.2.If the risk-free rate is 7% and the market risk premium is 6.5%,what is the required rate of return on Hefty?

The security market line (SML) relates risk to return,for a given set of market conditions.If expected inflation increases,which of the following would most likely occur?

Bell Weather,Inc.has a beta of 1.25.The return on the market portfolio is 12.5%,and the risk-free rate is 5%.According to CAPM,what is the required return on this share?

Provide an intuitive discussion of beta and its importance for measuring risk.

Huit Industries' ordinary shares have an expected return of 11.4% and a beta of 1.2.If the expected risk-free return is 3%,what is the expected return for the market (round your answer to the nearest .1%) ?

Australian Treasury notes can be used to approximate the risk-free rate.

Siebling Manufacturing Company's ordinary shares have a beta of .8.If the expected risk-free return is 2% and the market offers a premium of 8% over the risk-free rate,what is the expected return on Siebling's ordinary shares?

CSG Limited's ordinary shares have a beta of 1.5.If the expected risk-free return is 2% and the expected return on the market is 14%,what is the expected return on the shares?

You are thinking about purchasing 1,000 shares in the following firms: Number of Shares Firm's Beta Firm A 100 0.75 Firm B 200 1.47 Firm C 200 0.82 Firm D 600 1.60 If you purchase the number of shares specified,then the beta of your portfolio will be:

The market risk premium is measured by

Marjen shares have a required return of 20%.The expected market return is 15%,and the beta of Marjen's share is 1.5.Calculate the risk-free rate.