Question 1

In a portfolio of three different stocks, which of the following could NOT be true?

Accepted Answer

A)   The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.
B)   The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
C)   The beta of the portfolio is less than the betas of each of the individual stocks.
D)   The beta of the portfolio is greater than the beta of one or two of the individual stocks' betas.E) None of the above
F) A) and B)

Question 2

It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative.

Accepted Answer

A) True 
 B)False

Question 3

The slope of the SML is determined by the value of beta.

Accepted Answer

A) True 
 B)False

Question 4

The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by managerial actions.

Accepted Answer

A) True 
 B)False

Question 5

You have the following data on (1)  the average annual returns of the market for the past 5 years and (2)  similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B? 
0 ; \mathrm{b}_{\mathrm{B}}=1  . B)    \mathrm{b}_{\mathrm{A}}>+1 ; \mathrm{bB}_{\mathrm{B}}=0  . C)    \mathrm{b}_{\mathrm{A}}=0 ; \mathrm{bB}_{\mathrm{B}}=-1  . D)    \mathrm{b}_{\mathrm{A}}

Accepted Answer

A) 0 ; \mathrm{b}_{\mathrm{B}}=1 ">bA>0;bB=1 \mathrm{b}_{\mathrm{A}}>0 ; \mathrm{b}_{\mathrm{B}}=1 bA>0;bB=1 . B) +1 ; \mathrm{bB}_{\mathrm{B}}=0 ">bA>+1;bBB=0 \mathrm{b}_{\mathrm{A}}>+1 ; \mathrm{bB}_{\mathrm{B}}=0 bA>+1;bBB=0 . C) bA=0;bBB=−1 \mathrm{b}_{\mathrm{A}}=0 ; \mathrm{bB}_{\mathrm{B}}=-1 bA=0;bBB=−1 . D) bA<0;bB=0 \mathrm{b}_{\mathrm{A}}<0 ; \mathrm{b}_{\mathrm{B}}=0 bA<0;bB=0 . E) bA<−1;bB=1 b_{A}<-1 ; b_{B}=1 bA<−1;bB=1 . F) C) and D) G) A) and B)

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   The Capital Market Line (CML)  is a curved line that connects the risk-free rate and the market portfolio.
B)   The slope of the CML is ( rˆ M - rRF) /bM.
C)   All portfolios that lie on the CML to the right of  σ\sigmaσ M are inefficient.
D)   All portfolios that lie on the CML to the left of  σ\sigmaσ M are inefficient.
E)   The slope of the CML is ( rˆ M - rRF) / σ\sigmaσ M.. F) B) and E)
G) C) and E)

Question 7

Calculate the required rate of return for Mercury, Inc., assuming that (1)  investors expect a 4.0% rate of inflation in the future, (2)  the real risk-free rate is 3.0%, (3)  the market risk premium is 5.0%, (4)  Mercury has a beta of 1.00, and (5)  its realized rate of return has averaged 15.0% over the last 5 years.

Accepted Answer

A)   10.29%
B)   10.83%
C)   11.40%
D)   12.00%
E)   12.60%F) B) and C)
G) A) and E)

Question 8

Assume an economy in which there are three securities: Stock A with rA = 10% and  σ\sigmaσ A = 10%; Stock B with rB = 15% and σ\sigmaσ B = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0) . Which of the following statements is most CORRECT?

Accepted Answer

A)   The expected return on the investor's portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (S
D)   of approximately 20%.
B)   The expected return on the investor's portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (S
D)   of approximately 10%.
C)   The expected return on the investor's portfolio will probably have an expected return that is somewhat below 15% and a standard deviation (S
D)   that is between 10% and 20%.
D)   The investor's risk/return indifference curve will be tangent to the CML at a point where the expected return is in the range of 7% to 10%. E) B) and C)
F) A) and D)

Question 9

The Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1) stock is zero.

Accepted Answer

A) True 
 B)False

Question 10

The CAPM is a multi-period model which takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

Accepted Answer

A) True 
 B)False

Question 11

Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Accepted Answer

A)   Variance; correlation coefficient.
B)   Standard deviation; correlation coefficient.
C)   Beta; variance.
D)   Coefficient of variation; beta.
E)   Beta; beta.F) All of the above
G) A) and D)

Exam 24: Portfolio Theory, Asset Pricing Models, and Behavioral Finance

The Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1) stock is zero.

Correct Answer
verified

The CAPM is a multi-period model which takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

Correct Answer
verified

It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative.

Correct Answer
verified

Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Correct Answer
verified

The slope of the SML is determined by the value of beta.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
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Correct Answer
verified

The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by managerial actions.

Correct Answer
verified

In a portfolio of three different stocks, which of the following could NOT be true?

Correct Answer
verified

Assume an economy in which there are three securities: Stock A with rA = 10% and $\sigma$ A = 10%; Stock B with rB = 15% and $\sigma$ B = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0) . Which of the following statements is most CORRECT?

Correct Answer
verified

Exam 24: Portfolio Theory, Asset Pricing Models, and Behavioral Finance

The Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1) stock is zero.

Correct AnswerverifiedShow Answer

The CAPM is a multi-period model which takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

Correct AnswerverifiedShow Answer

It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative.

Correct AnswerverifiedShow Answer

Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

Correct AnswerverifiedShow Answer

The slope of the SML is determined by the value of beta.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by managerial actions.

Correct AnswerverifiedShow Answer

In a portfolio of three different stocks, which of the following could NOT be true?

Correct AnswerverifiedShow Answer

Assume an economy in which there are three securities: Stock A with rA = 10% and σ\sigmaσ A = 10%; Stock B with rB = 15% and σ\sigmaσ B = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0) . Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Assume an economy in which there are three securities: Stock A with rA = 10% and $\sigma$ A = 10%; Stock B with rB = 15% and $\sigma$ B = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0) . Which of the following statements is most CORRECT?

Correct Answer
verified