Fin test 3

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 two-stock portfolio will always have a lower standard deviation than a one-stock portfolio. 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. A two-stock portfolio will always have a lower beta than a one-stock portfolio. If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio. A stock with an above-average standard deviation must also have an above-average beta.

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 one of the following guarantees is offered to common stock investors? No guarantees of any form. Guarantee only to receive a refund of principal. Guarantee to receive dividends. Guarantee to receive capital gains.

No guarantees of any form.

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%.

The expected return on Natter Corporation's stock is 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

The stock price is expected to be $54 a share one year from now.

Risks that are peculiar to a single firm:

are called specific risks.

The preferred stock of a given firm is generally __________ to investors than the same firm's common stock.

less risky

With respect to the notion that stock prices follow a random walk, many researchers have concluded that:

past stock price changes provide little useful information about future stock price changes.

The appropriate opportunity cost of capital is the return that investors give up on alternative investments that:

possess the same level of risk.

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 for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0. The effect of a change in the market risk premium depends on the slope of the yield curve. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%. 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. The effect of a change in the market risk premium depends on the level of the risk-free rate.

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 a company's beta doubles, then its required rate of return will also double. Other things held constant, if investors suddenly become convinced that there will be deflation in the economy, then the required returns on all stocks should increase. If a company's beta were cut in half, then its required rate of return would also be halved. If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase.

If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase.

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.

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? Beta is measured by the slope of the security market line. If the risk-free rate rises, then the market risk premium must also rise. If a company's beta is halved, then its required return will also be halved. If a company's beta doubles, then its required return will also double. The slope of the security market line is equal to the market risk premium, (rM - rRF).

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. 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 market risk premium.

If a stock's dividend is expected to grow at a constant rate of 5% a year, then which of the following statements is CORRECT? The stock is in equilibrium.

The stock's price one year from now is expected to be 5% above the current price.

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.

The semi-strong form of the efficient market hypothesis states that:

prices reflect all publicly available information.

When there are _________, it is simpler to value a business by discounting the free cash flow.

repurchases

Companies that are exposed to the business cycle:

tend to have high market risk.

The value of common stock will likely decrease if:

the discount rate increases.

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.

Investors are willing to purchase stocks having high P/E ratios because:

they expect these shares to have greater growth opportunities.

The variance of an investment's returns is a measure of the:

volatility of the rates of return.