Finance Exam 3 Multiple Choice
Stock A has a standard deviation of 20% and a beta of 0.59. Stock B has a standard deviation of 10% and a beta of 0.61. Stock C has a standard deviation of 12% and a beta of 1.29. If you are a strict risk minimizer, you would choose Stock ___ if it is to be held in isolation and Stock ___ if it is to be held as part of a well-diversified portfolio. A, A A, B B, A C, A C, B
A, B
Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio? Adding more stocks will reduce the portfolio's unsystematic risk Adding more stocks will increase the portfolio's expected rate of return Adding more stocks will reduce the portfolio's beta and systematic risk Adding more stocks will have no effect on the portfolio's risk Adding more stocks will reduce the portfolio's market risk but not it's unsystematic risk
Adding more stocks will reduce the portfolio's unsystematic risk
Inflation, recession and high interest rates are economic events that are best characterized as being Systematic risk factors that can be diversified away Company specific risk factors that can be diversified away Among the factors that are responsible for market risk Risks that are beyond the control of investors, and thus should not be considered by security analysts or portfolio managers Irrelevant except to governmental authorities like the Federal Reserve
Among the factors that are responsible for market risk
Which of the following statements is correct? An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks The higher the correlation between stocks in a portfolio, the lower the risk inherent in the portfolio. An investor can eliminate virtually all diversifiable risk if they hold a very large, well diversified portfolio of stocks
An investor can eliminate virtually all diversifiable risk if they hold a very large, well diversified portfolio of stocks
Which is the best measure of risk for a single asset held in isolation, and which is the best measure of risk for an asset held in a diverse portfolio? Variance, correlation coefficient Standard deviation, correlation coefficient Beta, variance Coefficient of variation, beta Beta, beta
Coefficient of variation, beta
A stock's beta is more relevant as a measure of risk to an investor that holds only one stock than to an investor who holds a well diversified portfolio True False
False
An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks into the portfolio in which the stock is held True False
False
Which of the following statements is correct? (Assume that the risk-free rate is a constant) If MRP increases by 1%, then the required return will increase for stocks with a beta greater than 1, but decrease for stocks with a beta less than 1. The effect of a change in the MRP depends on the slope of the yield curve If the MRP increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1 The effect of a change in MRP depends on the level of the risk free rate
If the MRP increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1
Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct? Stock A would be a more desirable addition to a portfolio than Stock B In equilibrium, the expected return on Stock B will be greater than that on Stock A When held in isolation, Stock A has more risk than Stock B Stock B would be a more desirable addition to a portfolio than A. In equilibrium, the expected return on stock A would be greater than that on B.
In equilibrium, the expected return on stock A would be greater than that on B.
Stock A has a beta of 0.8, stock B has a beta of 1, and stock C has a beta of 1.2 Portfolio P has 1/3 of its value invested in each stock, which has a standard deviation of 25%. Assuming the market is in equilibrium, which of the following statements is correct? Portfolio's expected return is more than that of Stock B Portfolio's expected return is equal to that of Stock A Portfolio's expected return is equal to that of Stock B Portfolio's expected return is more than that of Stock C
Portfolio's expected return is equal to that of Stock B
For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true? The riskiness of the portfolio is the same as that of each of the stocks if each was held in isolation The beta of the portfolio is less than the weighted average of the betas of the individual stocks the beta of the portfolio is equal to the weighted average of the betas of the individual stocks The beta of the portfolio is larger than the weighted average of the betas of the individual stocks
The beta of the portfolio is equal to the weighted average of the betas of the individual stocks
Which of the following statements is correct? The slope of the security market line is equal to the MRP Lower beta stocks have higher required returns A stock's beta indicates its diversifiable risk Diversifiable risk cannot be completely diversified away Two securities with the same stand-alone risk must have the same betas
The slope of the security market line is equal to the MRP
Which of the following statements is correct? The constant growth model is often appropriate for evaluating companies without a stable history of growth, but are expected to reach stable growth If a stock's r(s)=12% and g=5%, then the stock's expected dividend yield is 5%. The stock valuation model can be used to value firms who's dividends are expected to decline at a constant rate The price of a stock is the PV of all expected future dividends
The stock valuation model can be used to value firms whose dividends are expected to decline at a constant rate
If a stock's dividend is expected to grow at a constant 5% a year, which of the following statements is correct? The stock is in equilibrium. The expected return on the stock is 5% a year The stock's dividend yield is 5% The price of the stock is expected to decline in the future The stock's required return must be equal to or less than 5% The stock's price one year from now is expected to be 5% higher than the current price
The stock's price one year from now is expected to be 5% higher than the current price
According to CAPM, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. thus, the relative risk of a stock is the stock's contribution to the riskiness of a well diversified portfolio. True False
True
Because of differences in expected returns on different investments, the standard deviation is not always an adequate measure of risk. However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments stand alone risk. True False
True
Diversification will normally reduce the riskiness of a portfolio of stocks True False
True
One key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both the risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio. The risk of the asset held in isolation is not relevant under the CAPM. True False
True
Risk aversion implies that investors require higher expected returns on riskier securities than on less risky securities True False
True
Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse. True False
True
The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standard measure of the risk per unit of expected return. True False
True
When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk. True False
True