Exam 2: Risk and Return-Part I

A) 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.
B) 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.
C) the beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.
D) 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.
E) the beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.

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A) stock y's realized return during the coming year will be higher than stock x's return.
B) if the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount.
C) stock y's return has a higher standard deviation than stock x.
D) if the market risk premium declines, but the risk-free rate is unchanged, stock x will have a larger decline in its required return than will stock y.
E) if you invest $50,000 in stock x and $50,000 in stock y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.

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A) sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta.
B) the beta of an "average stock," or "the market," can change over time, sometimes drastically.
C) sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
D) all of the statements above are true.
E) the fact that a security or project may not have a past history that can be used as the basis for calculating beta.

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A) 1.07
B) 1.13
C) 1.18
D) 1.24
E) 1.30

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A) the capm has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt.
B) if two "normal" or "typical" stocks were combined to form a 2-stock portfolio, the portfolio's expected return would be a weighted average of the stocks' expected returns, but the portfolio's standard deviation would probably be greater than the average of the stocks' standard deviations.
C) if investors become more risk averse, then (1) the slope of the sml would increase and (2) the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.
D) an increase in expected inflation, combined with a constant real risk-free rate and a constant market risk premium, would lead to identical increases in the required returns on a riskless asset and on an average stock, other things held constant.
E) a graph of the sml as applied to individual stocks would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.

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False

A) if investors become more risk averse but rrf does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.
B) an investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky. since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk.
C) there is no reason to think that the slope of the yield curve would have any effect on the slope of the sml.
D) assume that the required rate of return on the market, rm, is given and fixed at 10%. if the yield curve were upward sloping, then the security market line (sml) would have a steeper slope if 1-year treasury securities were used as the risk-free rate than if 30-year treasury bonds were used for rrf.
E) if mutual fund a held equal amounts of 100 stocks, each of which had a beta of 1.0, and mutual fund b held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0. thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds.

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A) if the marginal investor becomes more risk averse, the required return on stock b will increase by more than the required return on stock a.
B) an equally weighted portfolio of stocks a and b will have a beta lower than 1.2.
C) if the marginal investor becomes more risk averse, the required return on stock a will increase by more than the required return on stock b.
D) if the risk-free rate increases but the market risk premium remains constant, the required return on stock a will increase by more than that on stock b.
E) stock b's required return is double that of stock a's.

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A) the required return on stock a will increase by less than the increase in the market risk premium, while the required return on stock c will increase by more than the increase in the market risk premium.
B) the required return on the average stock will remain unchanged, but the returns of riskier stocks (such as stock c) will increase while the returns of safer stocks (such as stock a) will decrease.
C) the required returns on all three stocks will increase by the amount of the increase in the market risk premium.
D) the required return on the average stock will remain unchanged, but the returns on riskier stocks (such as stock c) will decrease while the returns on safer stocks (such as stock a) will increase.
E) the required return of all stocks will remain unchanged since there was no change in their betas.

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A

A) the required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0.
B) since the overall return on the market stays constant, the required return on each individual stock will also remain constant.
C) the required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0.
D) the required return of all stocks will fall by the amount of the decline in the market risk premium.
E) the required return of all stocks will increase by the amount of the increase in the risk-free rate.

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A) your portfolio has a standard deviation less than 30%, and its beta is greater than 1.6.
B) your portfolio has a beta equal to 1.6, and its expected return is 15%.
C) your portfolio has a beta greater than 1.6, and its expected return is greater than 15%.
D) your portfolio has a standard deviation greater than 30% and a beta equal to 1.6.
E) your portfolio has a standard deviation of 30%, and its expected return is 15%.

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B

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A) stock b has a higher required rate of return than stock a.
B) portfolio p has a standard deviation of 22.5%.
C) more information is needed to determine the portfolio's beta.
D) portfolio p has a beta of 1.0.
E) stock a's returns are less highly correlated with the returns on most other stocks than are b's returns.

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