FIN310- Chapter 8
A project's expected return is 15%, which represents a 35% return in a boom and a 5% return in a stagnant economy. What is the probability of a boom if these are the only two economic states?
33.33%
What is the standard deviation of returns of a portfolio that produced returns of 10%, 15%, 25%, and 30%?
7.9%
What is the expected return on a portfolio that will decline in value by 13% in a recession, will increase by 16% in normal times, and will increase by 23% during boom times? Each scenario has an equal likelihood of occurrence?
8.67%
Which of the following statements is CORRECT?
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.
Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?
Coefficient of variation; beta.
Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)
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.
Which of the following statements is CORRECT?
If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rate of return on an average stock will remain unchanged, but required returns on stocks with betas less than 1.0 will rise.
Which one of the following guarantees is offered to common stock investors?
No guarantees of any form.
A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?
Stock B.
For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?
The beta of the portfolio is equal to the weighted average of the betas of the individual stocks.
Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. You have a portfolio that consists of 50% A and 50% B. Which of the following statements is CORRECT?
The portfolio's expected return is 15%.
Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM - rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?
The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A.
Which of the following statements is CORRECT?
The slope of the security market line is equal to the market risk premium, (rM - rRF).
Which of the following statements is CORRECT?
The slope of the security market line is equal to the market risk premium.
Other things held constant, if the expected inflation rate decreases and investors also become more risk-averse, the Security Market Line would be affected as follows:
The y-axis intercept would decline, and the slope would increase.
Risks that are peculiar to a single firm:
are called specific risks.
The appropriate opportunity cost of capital is the return that investors give up on alternative investments that:
possess the same level of risk.
Companies that are exposed to the business cycle:
tend to have high market risk.
An estimation of the opportunity cost of capital for projects that have an "average" level of risk is the expected rate of return on:
the market portfolio.
The variance of an investment's returns is a measure of the:
volatility of the rates of return.