| Question 1.1. Which of the following statements is CORRECT? (Points : 0.1) | A. The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks. B. If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio. C. The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future. D. The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks. E. It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, rRF. | | Question 2.2. Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM? (Points : 0.1) | A. If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated. B. Stock Y's realized return during the coming year will be higher than Stock X's return. C. If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount. D. Stock Y's return has a higher standard deviation than Stock X. E. If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y. | | Question 3.3. Inflation, recession, and high interest rates are economic events that are best characterized as being (Points : 0.1) | A. systematic risk factors that can be diversified away. B. company-specific risk factors that can be diversified away. C. among the factors that are responsible for market risk. D. risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. E. irrelevant except to governmental authorities like the Federal Reserve. | | Question 4.4. Which of the following statements is CORRECT? (Points : 0.1) | A. A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock. B. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless. C. The required return on a firm's common stock is, in theory, determined solely by its market risk. If the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return. D. Portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio. E. A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock. | | Question 5.5. Which of the following statements is CORRECT? (Points : 0.1) | A. A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected. B. Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk. C. A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0. D. A large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8. E. If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio. | |
