FIN 534 Quiz 4

Question 1

Which of the following statements is CORRECT?

Question 2

During the coming year, the market risk premium (rM ? rRF), is expected to fall, while the risk-free rate, rRF, is expected to remain the same. Given this forecast, which of the following statements is CORRECT?

Question 3

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)

Question 4

Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is CORRECT?

Question 5

Bob has a $50,000 stock portfolio with a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%. Becky also has a $50,000 portfolio, but it has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%. The correlation coefficient, r, between Bob's and Becky's portfolios is zero. If Bob and Becky marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?

Question 6

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?

Question 7

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?

Question 8

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.

Question 9

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?

Question 10

Which of the following statements is CORRECT?

Question 11

Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has equal amounts invested in each of the three stocks. Each of the stocks has a standard deviation of 25%. The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero). Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged. Which of the following statements is CORRECT?

Question 12

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

Question 13

Assume that the risk-free rate is 5%. Which of the following statements is CORRECT?

Question 14

Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

Question 15

Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?

Question 16

Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT?

Expected dividend, D1 $3.00

Current Price, P0 $50

Expected constant growth rate 6.0%

Question 17

A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

Question 18

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

Required return 10% 12%

Market price $25 $40

Expected growth 7% 9%

Question 19

If in the opinion of a given investor a stocks expected return exceeds its required return, this suggests that the investor thinks

Question 20

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

Question 21

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

Question 22

An increase in a firms expected growth rate would cause its required rate of return to

Question 23

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

X Y

Price $30 $30

Expected growth (constant) 6% 4%

Required return 12% 10%

Question 24

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

Question 25

Which of the following statements is CORRECT?

Question 26

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 $40

Expected growth 7% 9%

Expected return 10% 12%

Question 27

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A B

Beta 1.10 0.90

Constant growth rate 7.00% 7.00%

Question 28

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

Question 29

If markets are in equilibrium, which of the following conditions will exist?

Question 30

Which of the following statements is CORRECT?