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Exam 6: The Meaning and Measurement of Risk and Return

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Question 1

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Beta is a measurement of the relationship between a security's returns and the general market's returns.

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Question 2

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Stock A has a beta of 1.2 and a standard deviation of returns of 18%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the market risk premium increases,then

A) the required return on stock B will increase more than the required return on stock A.
B) the required returns on stocks A and B will both increase by the same amount.
C) the required returns on stocks A and B will remain the same.
D) the required return on stock A will increase more than the required return on stock B.

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Question 3

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A stock with a beta of 1 has systematic or market risk equal to the "typical" stock in the marketplace.

Which of the following is/are true?

As the required rate of return of an investment decreases,the market price of the investment decreases.

Of the following,which differs in meaning from the other three?

Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return.What is the expected amount of return this investment will produce?

An investor currently holds the following portfolio: The investor is worried that the beta of his portfolio is too high,so he wants to sell some stock C and add stock D,which has a beta of 1.0,to his portfolio.If the investor wants his portfolio to have a beta of 1.72,how much stock C must he replace with stock D?

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the least risky investment?

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk free rate is 4%.What is the risk premium on the market?

According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's risk premium.

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the highest risk investment?

Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?

The realized rate of return,or holding period return,is equal to the holding period dollar gain divided by the price at the beginning of the period.

Changes in the general economy,like changes in interest rates or tax laws represent what type of risk?

Stock W has the following returns for various states of the economy: Stock W's standard deviation of returns is

Negative historical returns are not possible during periods of high volatility (high standard deviations of returns)due to the risk-return tradeoff.

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

The risk-return tradeoff that investors face on a day-to-day basis is based on realized rates of return because expected returns involve too much uncertainty.

Assume that you have $100,000 invested in a stock that is returning 14%,$150,000 invested in a stock that is returning 18%,and $200,000 invested in a stock that is returning 15%.What is the expected return of your portfolio?