Reference no: EM13796604
1. True or False. The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.
2. True or False. Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.
3. True or False. Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.
4. You are considering investing in one of these three stocks:
Stock Standard Deviation Beta
A 20% 0.59
B 10% 0.61
C 12% 1.29
If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.
a. A; B.
b. B; A.
c. C; A.
d. C; B.
e. A; A.
5. Which of the following statements is CORRECT?
a. The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.
b. An investor can eliminate almost all risk if he or she holds a very large and well diversified portfolio of stocks.
c. Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount.
d. An investor can eliminate almost all diversifiable risk if he or she holds a very large, well- diversified portfolio of stocks.
e. An investor can eliminate almost all market risk if he or she holds a very large and well diversified portfolio of stocks.
6. Recession, inflation, and high interest rates are economic events that are best characterized as being
a. company-specific risk factors that can be diversified away.
b. among the factors that are responsible for market risk.
c. risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.
d. irrelevant except to governmental authorities like the Federal Reserve.
e. systematic risk factors that can be diversified away.
7. Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?
a. The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.
b. The beta of the portfolio is less than the average of the betas of the individual stocks.
c. The beta of the portfolio is equal to the average of the betas of the individual stocks.
d. The beta of the portfolio is larger than the average of the betas of the individual stocks.
e. The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.
8. Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)
a. The effect of a change in the market risk premium depends on the slope of the yield curve.
b. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
c. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
d. The effect of a change in the market risk premium depends on the level of the risk-free rate.
e. If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
9. Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occur?
a. The required rate of return will decline for stocks whose betas are less than 1.0.
b. The required rate of return on the market, rM, will not change as a result of these changes.
c. The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk
d. The required rate of return on a riskless bond will decline.
e. The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.
10. Freedman Flowers' stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate of return?
a. 9.41%
b. 9.65%
c. 9.90%
d. 10.15%
e. 10.40%
11. Zacher Co.'s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%.
What is the firm's required rate of return?
a. 11.36%
b. 11.65%
c. 11.95%
d. 12.25%
e. 12.55%
12. Porter Plumbing's stock had a required return of 11.75% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.)
a. 14.38%
b. 14.74%
c. 15.11%
d. 15.49%
e. 15.87%
13. Returns for the Alcoff Company over the last 3 years are shown below. What is the volatility of the firm's returns? Note that this company has been publicly traded since 1991 and the data below is for 3 of those years.
Year Return
2010 21.00%
2009 -12.50%
2008 25.00%
a. 20.08%
b. 20.59%
c. 21.11%
d. 21.64%
e. 22.18%