1. Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?

Answer

The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.

The beta of the portfolio is less than the average of the betas of the individual stocks.

The beta of the portfolio is equal to the average of the betas of the individual stocks.

The beta of the portfolio is larger than the average of the betas of the individual stocks.

The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.

2. Which of the following statements is CORRECT?

Answer

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 two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

3. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A	B
Price	$25	$25
Expected growth (constant)	10%	5%
Required return	15%	15%

Answer

Stock A has a higher dividend yield than Stock B.

Currently the two stocks have the same price, but over time Stock B's price will pass that of A.

Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's.

The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.

Stock A's expected dividend at t = 1 is only half that of Stock B