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Exam 9: Risk and Rates of Return

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Question 61

True/False

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Diversification will normally reduce the riskiness of a portfolio of stocks.

A) True
B) False

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Question 62

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CCC Corp has a beta of 1.5 and is currently in equilibrium.The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%.Now the required return on an average stock increases by 37.5% (not percentage points) .Neither betas nor the risk-free rate change.What would CCC's new required return be? Do not round your intermediate calculations.

A) 19.92%
B) 17.10%
C) 17.45%
D) 17.63%
E) 20.09%

F) C) and E)
G) C) and D)

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Question 63

Multiple Choice

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Which of the following statements is CORRECT?

Mulherin's stock has a beta of 1.23,its required return is 10.00%,and the risk-free rate is 2.30%.What is the required rate of return on the market? (Hint: First find the market risk premium. ) Do not round your intermediate calculations.

Consider the following information for three stocks,A,B,and C.The stocks' returns are positively but not perfectly positively correlated with one another,i.e. ,the correlations are all between 0 and 1. Portfolio AB has half of its funds invested in Stock A and half in Stock B.Portfolio ABC has one third of its funds invested in each of the three stocks.The risk-free rate is 5%,and the market is in equilibrium,so required returns equal expected returns.Which of the following statements is CORRECT?

If investors are risk averse and hold only one stock,we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10.However,if stocks are held in portfolios,it is possible that the required return could be higher on the stock with the lower standard deviation.

Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,the standard deviation.

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero,which is the risk-free rate.

Even if the correlation between the returns on two securities is +1.0,if the securities are combined in the correct proportions,the resulting 2-asset portfolio will have less risk than either security held alone.

The SML relates required returns to firms' systematic (or market)risk.The slope and intercept of this line can be influenced by a manager's actions.

Managers should under no conditions take actions that increase their firm's risk relative to the market,regardless of how much those actions would increase the firm's expected rate of return.

Jane has a portfolio of 20 average stocks,and Dick has a portfolio of 2 average stocks.Assuming the market is in equilibrium,which of the following statements is CORRECT?

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Returns for the Dayton Company over the last 3 years are shown below.What's the standard deviation of the firm's returns? (Hint: This is a sample,not a complete population,so the sample standard deviation formula should be used. ) Do not round your intermediate calculations. ​

You have the following data on three stocks: If you are a strict risk minimizer,you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

For a portfolio of 40 randomly selected stocks,which of the following is most likely to be true?

If an investor buys enough stocks,he or she can,through diversification,eliminate all of the market risk inherent in owning stocks,but as a general rule it will not be possible to eliminate all diversifiable risk.

Which of the following statements is CORRECT?

The coefficient of variation,calculated as the standard deviation of expected returns divided by the expected return,is a standardized measure of the risk per unit of expected return.