Week 8

Sibling Incorporated has a beta of 1.0. If the expected return on the market is 12%, what is the expected return on Sibling Incorporated's stock? a) 12% b) 14% c) 10% d) cannot be determined without the risk free rate

a) 12%

You are considering a new investment which is expected to earn 12%. The beta of this new investment is 0.6. Treasury Bills are earning 3%, and the S&P 500 is expected to earn 10%. Which one of the following statements is correct? a) The new investment is underpriced. b) The new investment has a negative alpha. c) The alpha of the new investment is zero. d) The market risk premium is 9%.

a) The new investment is underpriced.

A typical measure for the risk-free rate of return is the: a) U.S. Treasury Bill rate. b) prime lending rate. c) money market rate. d) short-term AAA-rated bond rate.

a) U.S. Treasury Bill rate.

Investment projects that plot above the security market line would be considered to have: a) a positive NPV. b) a negative NPV. c) a zero NPV. d) an excessively high discount rate.

a) a positive NPV.

Stock returns can be explained by the stock's _________ and the stock's __________. a) beta; unique risk. b) beta; market risk. c) unique risk; firm-specific risk. d) aggressive risk; defensive risk.

a) beta; unique risk.

What is the beta of a portfolio with an expected return of 12% if Treasury bills yield 6% and the market risk premium is 8%? a) 0.50 b) 0.75 c) 0.90 d) 1.50

b) 0.75

A U.S. Treasury bill has a beta of _____ while the overall market has a beta of _____. a) 0; 0 b) 0; 1 c) 1; 0 d) 1; 1 e) infinity; 1

b) 0; 1

What would you recommend to an investor who is considering an investment which, according to its beta, plots below the security market line (SML)? a) Invest; return is high relative to risk. b) Don't invest; risk is high relative to return. c) Invest; stocks revert to the SML over time. d) Don't invest; stocks below the SML have too much unique risk.

b) Don't invest; risk is high relative to return.

Which one of the following portfolios has the least amount of systematic risk? a) a portfolio that duplicates the overall market b) a portfolio comprised of 50 percent cash and 50 percent large-company stocks b) a portfolio consisting of various U.S. Treasury bills d) a stock portfolio with a portfolio beta of 1.8 e) a diversified portfolio with a portfolio beta of 0.7

b) a portfolio consisting of various U.S. Treasury bills

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset (or the market in general) is called the: a) risk premium. b) beta coefficient. c) standard deviation. d) mean. e) variance.

b) beta coefficient.

What will happen to the expected return on a stock with a beta of 1.5 and a market risk premium of 9% if the Treasury bill yield increases from 3% to 5%? a) The expected return will remain unchanged. b) The expected return will increase by 1.0%. c) The expected return will increase by 2.0%. d) The expected return will increase by 3.0%.

c) The expected return will increase by 2.0%.

An project you are evaluating has an IRR of 10%. The project's required return has been measured to be 16%. Therefore: a) The project is underpriced. b) The project has a positive alpha. c) You should reject the project. d) This project will increase firm value.

c) You should reject the project.

If the slope of the line measuring a stock's historic returns against the market's historic returns is positive, then the stock: a) has a beta greater than 1.0. b) has no unique risk. c) has a positive beta. d) plots above the security market line.

c) has a positive beta.

The slope of the security market line equals: a) one. b) beta. c) the market risk premium. d) the expected return on the market portfolio.

c) the market risk premium.

A company you are researching has common stock with a beta of 1. Currently, Treasury bills yield 3%, and the market portfolio offers an expected return of 9%. What is the required return on this common stock? a) 15.99% b) 24.50% c) 13.46% d) 9.00%

d) 9.00%

The difference between beta and standard deviation is best described as: a) Beta measures the risk of the market as a whole, while standard deviation measures the risk of individual stocks. b) Beta measures total volatility, while standard deviation measures total risk. c) Beta measures the market risk premium, while standard deviation measures risk. d) Beta measures the risk investors are compensated for, while standard deviation measures both systematic and unsystematic risk.

d) Beta measures the risk investors are compensated for, while standard deviation measures both systematic and unsystematic risk.

If the market portfolio is expected to offer returns of 16%, then what can be said about a portfolio expected to return 13%? a) It plots below the security market line. b) Part of the portfolio is invested in Treasury bills. c) The portfolio is not diversified. d) The portfolio's beta is less than 1.0.

d) The portfolio's beta is less than 1.0.