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FIN 534 Week 9 Quiz 8

FIN 534 Week 9 Quiz 8

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FIN 534 Week 9 Quiz 8

 

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)

Answer

When held in isolation, Stock A has more risk than Stock B.

Stock B must be a more desirable addition to a portfolio than A.

Stock A must be a more desirable addition to a portfolio than B.

The expected return on Stock A should be greater than that on B.

The expected return on Stock B should be greater than that on A.

2 points

Question 2

Which of the following statements is CORRECT?

Answer

A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.

A two-stock portfolio will always have a lower beta than a one-stock portfolio.

If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.

A stock with an above-average standard deviation must also have an above-average beta.

2 points

Question 3

Which of the following statements is CORRECT?

Answer

The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.

If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio.

The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future.

The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.

It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, rRF.

2 points

Question 4

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM − rRF, is positive. Which of the following statements is CORRECT?

Answer

If the risk-free rate increases but the
market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.

Stock B's required rate of return is twice
that of Stock A.

If Stock A's required return is 11%, then the market risk premium is 5%.

If Stock B's required return is 11%, then
the market risk premium is 5%.

If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.

2 points

Question 5

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

Answer

The diversifiable risk of your portfolio will
likely decline, but the expected market risk should not change.

The expected return of your portfolio is likely
to decline.

The diversifiable risk will remain the same, but the market risk will likely decline.

Both the diversifiable risk and the market risk
of your portfolio are likely to decline.

The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.

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