Ch 12 finance

Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic risk associated with an individual security? A) Zero B) Security beta multiplied by the market rate of return C) Market risk premium D) Risk-free rate of return E) Security beta multiplied by the market risk premium

A) Zero

The slope of the security market line represents the : A) market rate of return. B) risk premium on an individual asset. C) market risk premium. D) risk-free rate. E) beta coefficient

C) market risk premium.

Macro-economic events only are reflected in the performance of the market portfolio because: A) the market portfolio contains only risk-free securities .B) the specific risks have been diversified away. C) only macro events are tracked by economists. D) the firm-specific events would be too numerous to quantify.

.B) the specific risks have been diversified away.

Which one of the following is the vertical intercept of the security market line? A) Risk-free rate B) Market rate of return C) Market risk premium D) Individual security beta multiplied by the market risk premium

A) Risk-free rate

Investors require a risk premium as compensation for bearing ________. A) systematic risk B) alpha risk C) residual risk D) unsystematic risk

A) systematic risk

Standard deviation measures ________ risk while beta measures ________ risk. A) total; systematic B) total; unsystematic C) systematic; unsystematic D) unsystematic; systematic

A) total; systematic

What is the beta of a U.S. Treasury bill? A) 1.0 B) 0 C) 1.0

B) 0

What would you recommend to an investor who is considering an investment that plots below the security market line? A) Don't invest; All stocks below the SML are low-growth stocks. B) Don't invest; The risk is high relative to the expected return. C) Invest; The expected return is high relative to the risk. D) Invest; All stocks revert to the SML over time.

B) Don't invest; The risk is high relative to the expected return

In practice, the market portfolio is often represented by: A) an investor's mutual fund portfolio. B) a diversified stock market index. C) a portfolio of U.S. Treasury securities. D) the historic highest record of stock market returns.

B) a diversified stock market index.

If a stock consistently goes down (up) by 1.6% when the market portfolio goes down (up) by 1.2%, then its beta equals: A) 1.24 B) 1.33 C) 1.04 D) 1.40

Beta = 1.6/1.2 = 1.33 times

What is the beta of a 3-stock portfolio including 25% of stock A with a beta of 0.90, 40% of stock B with a beta of 1.05, and 35% of stock C with a beta of 1.73? A) 1.25 B) 1.0 C) 1.22 D) 1.17

Beta of portfolio=Respective weights*Respective betas =(0.25*0.9)+(0.4*1.05)+(0.35*1.73) which is equal to =1.25(Approx)

Which one of the following portfolios will have a beta of zero? A) A portfolio with a zero variance of returns B) A portfolio that consists of a single stock C) A portfolio comprised solely of U. S. Treasury bills D) A portfolio that is equally as risky as the overall market

C) A portfolio comprised solely of U. S. Treasury bills

You believe that Alpha stock which has a beta of 1.32 will return 16.0% this coming year. The market is expected to return 11.4% and T-bills return 3.8%. According to CAPM, which one of these statements is correct given this information? A) The stock plots to the left of the market on a security market line graph. B) The risk premium on the stock is too low given the stock's beta. C) The stock is currently underpriced. D) The stock plots below the security market line.

C) The stock is currently underpriced.

Why should stock market investors ignore firm specific risk when calculation required rate of return? A) There is no mathematic method for quantifying firm-specific risks. B) Firm-specific risks are compensated by the risk-free rate. C) Beta includes a component to compensate for specific risk. D) Firm-specific risk can be diversified away.

D) Firm-specific risk can be diversified away.

A stock with a beta greater than 1.0 would be termed:A) an aggressive stock, expected to decrease more than the market increases. B) a defensive stock, expected to decrease more than the market increases. C) a defensive stock, expected to increase more than the market decreases. D) an aggressive stock, expected to increase more than the market increases.

D) an aggressive stock, expected to increase more than the market increases.

The capital asset pricing model (CAPM): A) assumes the market risk premium is constant over time. B) assumes the market has a beta of zero and the risk-free rate is positive. C) applies to portfolios but not to individual securities. D) rewards investors based on total risk assumed. E) considers the relationship between the fluctuations in a security's returns versus the market's returns.

E) considers the relationship between the fluctuations in a security's returns versus the market's returns.

According to the capital asset pricing model (CAPM), the expected return on a security will be affected by all of the following except the: A) market rate of return. B) security's beta. C) market risk premium. D) risk-free rate. E) security's standard deviation.

E) security's standard deviation.

Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? A) .5 B) .7 C) 1.2 D) 1

Expected return = Risk free rate + Beta * (Market return-Risk free ratae) 0.17 = 0.05 + Beta * (0.15-0.05) 0.17-0.5 = Beta * 0.10 Beta = 0.12/0.10 = 1.2

A stock has a beta of 1.24, the risk-free rate is 3.8%, and the market rate of return is 9.2%. What is the stock's expected rate of return? A) 10.50% B) 14.61% C) 15.21% D) 11.41%

Re = rf + (rm - rf) * β = 3.8 + ( 9.2 - 3.8)1.24 Re = the required rate of return on equity rf = the risk free rate rm - rf = the market risk premium β = beta coefficient = unsystematic risk = 10.50%

The security market line displays the relationship between expected return and beta.

false

Beta measures a stock's sensitivity to market risks.

true

Market risk premium is defined as the difference between the market rate of return and the risk-free interest rate.

true

The CAPM states that the expected risk premium on any security equals its beta times the market risk premium.

true

The capital asset pricing model (CAPM) assumes that the stock market is dominated by well-diversified investors who are concerned only with market risk.

true