Question 1

Which of the following statements is CORRECT? A)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. B)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. C)The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks. D)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, r_RF. E)The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.

Accepted Answer

Statement B is correct because it accurately describes how the beta coefficient of a stock is determined through regression analysis of past returns against market returns, and acknowledges that historical beta may not be the same as future beta.

Question 2

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 1/3 of its value invested in each stock.Each stock has a standard deviation of 25%,and their returns are independent of one another,i.e.,the correlation coefficients between each pair of stocks is zero.Assuming the market is in equilibrium,which of the following statements is CORRECT?
A)Portfolio P's expected return is equal to the expected return on Stock A.
B)Portfolio P's expected return is less than the expected return on Stock B.
C)Portfolio P's expected return is equal to the expected return on Stock B.
D)Portfolio P's expected return is greater than the expected return on Stock C.
E)Portfolio P's expected return is greater than the expected return on Stock B.

Accepted Answer

The expected return of Portfolio P is a weighted average of the expected returns of Stocks A, B, and C, taking into account their betas. Since the portfolio is evenly distributed among stocks with betas of 0.8, 1.0, and 1.2, the portfolio's effective beta is the average of these, which is 1.0. The expected return of a portfolio in an equilibrium market is determined by its beta relative to the market. Since Stock B has a beta of 1.0, which matches the market's beta, and Portfolio P also averages to a beta of 1.0, their expected returns would be equal, assuming the market is in equilibrium and the Capital Asset Pricing Model (CAPM) holds.

Question 3

Which of the following statements is CORRECT?
A)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.
B)A two-stock portfolio will always have a lower beta than a one-stock portfolio.
C)If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.
D)A stock with an above-average standard deviation must also have an above-average beta.
E)A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

Accepted Answer

A portfolio that consists of stocks that are not highly correlated with "the market" will have a lower systematic risk and therefore less risky than a portfolio of stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations. Diversifying across different stocks with low correlation reduces the risk of the portfolio.

Question 4

Which of the following statements is CORRECT?
A)The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.
B)It is impossible to have a situation where the market risk of a single stock is less than that of a portfolio that includes the stock.
C)Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount.
D)An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.
E)An investor can eliminate virtually all market risk if he or she holds a very large and well-diversified portfolio of stocks.

Accepted Answer

Diversifiable risk, also known as unsystematic risk, can be eliminated through diversification. This means that by holding a large, well-diversified portfolio of stocks, an investor can eliminate most of the risk that is specific to individual companies (such as industry-specific risks or company-specific risks). However, market risk (also known as systematic risk) cannot be eliminated through diversification, as it is inherent in the overall market and affects all stocks. Therefore, choice E is incorrect. Choice A is also incorrect because while a high correlation between stocks does mean they move in the same direction, it does not necessarily mean the portfolio is less risky. Choice B is false because it is possible for a single stock to have less market risk than a portfolio that includes the stock if the portfolio includes other stocks with higher market risk. Finally, choice C is incorrect because adding additional stocks to a portfolio can still slightly reduce its risk even if it already includes 40 or more stocks.

Question 5

You have a portfolio P that consists of 50% Stock X and 50% Stock Y.Stock X has a beta of 0.7 and Stock Y has a beta of 1.3.The standard deviation of each stock's returns is 20%.The stocks' returns are independent of each other,i.e.,the correlation coefficient,r,between them is zero.Given this information,which of the following statements is CORRECT? A)The required return on Portfolio P is equal to the market risk premium (r_M − r_RF). B)Portfolio P has a beta of 0.7. C)Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, r_RF. D)Portfolio P has the same required return as the market (r_M). E)Portfolio P has a standard deviation of 20%.

Accepted Answer

The beta of Portfolio P is the weighted average of the betas of Stock X and Stock Y. Since Stock X has a beta of 0.7 and Stock Y has a beta of 1.3, and each stock makes up 50% of the portfolio, the portfolio's beta is (0.7*0.5 + 1.3*0.5) = 1.0. A portfolio with a beta of 1.0 has the same systematic risk as the market, hence it has the same required return as the market.

Question 6

Which of the following statements is CORRECT?
A)Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk.
B)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.
C)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.
D)If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.
E)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.

Accepted Answer

Diversifiable risk, also known as unsystematic risk or company-specific risk, can be reduced by forming a large portfolio. However, even highly-diversified portfolios will still be subject to market (or systematic) risk, which cannot be eliminated through diversification.

Question 7

Recession,inflation,and high interest rates are economic events that are best characterized as being
A)company-specific risk factors that can be diversified away.
B)among the factors that are responsible for market risk.
C)risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.
D)irrelevant except to governmental authorities like the Federal Reserve.
E)systematic risk factors that can be diversified away.

Accepted Answer

Recession, inflation, and high interest rates are macroeconomic events that affect the overall market and are considered part of market risk. These events can have a broad impact on multiple companies and sectors, making them difficult to diversify away. Therefore, portfolio managers and security analysts should take these events into consideration when making investment decisions.

Question 8

Stock A's beta is 1.7 and Stock B's beta is 0.7.Which of the following statements must be true,assuming the CAPM is correct?
A)In equilibrium, the expected return on Stock B will be greater than that on Stock A.
B)When held in isolation, Stock A has more risk than Stock B.
C)Stock B would be a more desirable addition to a portfolio than A.
D)In equilibrium, the expected return on Stock A will be greater than that on B.
E)Stock A would be a more desirable addition to a portfolio then Stock B.

Accepted Answer

According to CAPM, the expected return of a stock is based on its beta, where higher beta implies higher expected return. Therefore, with a beta of 1.7, Stock A is expected to have a higher return than Stock B with a beta of 0.7, making option D the correct choice. Option A is incorrect because it incorrectly assumes that higher beta always means higher expected return. Option B is wrong because beta is a measure of systematic risk and not total risk. Option C is not necessarily true as it depends on the specific portfolio and its required level of risk and return.  Option E is also incorrect because it assumes that lower beta always means a more desirable addition to a portfolio, which is not necessarily true.

Question 9

Stocks A,B,and C are similar in some respects: Each has an expected return of 10% and a standard deviation of 25%.Stocks A and B have returns that are independent of one another; i.e.,their correlation coefficient,r,equals zero.Stocks A and C have returns that are negatively correlated with one another; i.e.,r is less than 0.Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B.Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C.Which of the following statements is CORRECT?
A)Portfolio AC has an expected return that is greater than 25%.
B)Portfolio AB has a standard deviation that is greater than 25%.
C)Portfolio AB has a standard deviation that is equal to 25%.
D)Portfolio AC has a standard deviation that is less than 25%.
E)Portfolio AC has an expected return that is less than 10%.

Accepted Answer

Since Stocks A and C are negatively correlated, combining them in a portfolio (Portfolio AC) will result in diversification benefits, reducing the portfolio's overall risk. Therefore, the standard deviation of Portfolio AC will be less than the individual standard deviations of Stocks A or C, which are 25%.

Question 10

Charlie and Lucinda each have $50,000 invested in stock portfolios.Charlie's has a beta of 1.2,an expected return of 10.8%,and a standard deviation of 25%.Lucinda's 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 Charlie's and Lucinda's portfolios is zero.If Charlie and Lucinda marry and combine their portfolios,which of the following best describes their combined $100,000 portfolio?
A)The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.
B)The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
C)The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations, 25%.
D)The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations, 25%.
E)The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.

Accepted Answer

When combining portfolios, the beta of the combined portfolio is not a simple weighted average of the betas of the individual portfolios. Instead, it is a weighted average that takes into account the correlation between the portfolios. However, in this case, we are told that the correlation coefficient between Charlie's and Lucinda's portfolios is zero, meaning there is no correlation. Therefore, the combined portfolio's beta will be equal to a simple weighted average of the betas of the individual portfolios, which is (1.2*0.5) + (0.8*0.5) = 1.0.

The expected return of the combined portfolio is a simple weighted average of the expected returns of the individual portfolios, which is (0.108*0.5)+(0.092*0.5) = 10.0%. Therefore, choice B is incorrect.

The standard deviation of the combined portfolio takes into account not only the standard deviation of the individual portfolios but also the correlation between them. However, in this case, we are told the correlation coefficient is 0, meaning there is no correlation. Therefore, the standard deviation of the combined portfolio will be less than the simple average of the standard deviations of the individual portfolios, which is (0.25*0.5) + (0.25*0.5) = 25%. Therefore, choice C is incorrect.

The correct answer is A.

Question 11

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. $$\begin{array} { c c c c } 
\text { Stock } & \begin{array} { c } 
\text { Expected } \
\text { Return }
\end{array} & \begin{array} { c } 
\text { Standard } \
\text { Deviation }
\end{array} & \text { Beta } \
\mathrm { A } & 10 \% & 20 \% & 1.0 \
 \mathrm { B } & 10 \% & 10 \% & 1.0 \
\mathrm { C }& 12 \% & 12 \% & 1.4
\end{array}$$ 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?
A)Portfolio AB's coefficient of variation is greater than 2.0.
B)Portfolio AB's required return is greater than the required return on Stock A.
C)Portfolio ABC's expected return is 10.66667%.
D)Portfolio ABC has a standard deviation of 20%.
E)Portfolio AB has a standard deviation of 20%.

Accepted Answer

Portfolio ABC's expected return is calculated as the weighted average of the expected returns of Stocks A, B, and C, which is $(10\% + 10\% + 12\%)/3 = 10.66667\%$.

Question 12

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio,which currently consists of 3 average stocks?
A)The expected return of your portfolio is likely to decline.
B)The diversifiable risk will remain the same, but the market risk will likely decline.
C)Both the diversifiable risk and the market risk of your portfolio are likely to decline.
D)The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.
E)The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change.

Accepted Answer

As more randomly selected stocks are added to the portfolio, the diversifiable risk (risk that can be eliminated through diversification) will likely decline, but the market risk (systematic risk) should not change significantly. Therefore, the expected return of the portfolio should remain relatively stable, while the diversifiable risk decreases.

Question 13

Stocks A and B are quite similar: Each has an expected return of 12%,a beta of 1.2,and a standard deviation of 25%.The returns on the two stocks have a correlation of 0.6.Portfolio P has 50% in Stock A and 50% in Stock B.Which of the following statements is CORRECT?
A)Portfolio P has a standard deviation that is greater than 25%.
B)Portfolio P has an expected return that is less than 12%.
C)Portfolio P has a standard deviation that is less than 25%.
D)Portfolio P has a beta that is less than 1.2.
E)Portfolio P has a beta that is greater than 1.2.

Accepted Answer

Portfolio P is a combination of Stocks A and B, so its expected return can be calculated as follows:

Expected Return of Portfolio P = (Weight of Stock A x Expected Return of Stock A) + (Weight of Stock B x Expected Return of Stock B)
Expected Return of Portfolio P = (0.5 x 12%) + (0.5 x 12%)
Expected Return of Portfolio P = 12%

Similarly, the beta of Portfolio P can be calculated as follows:

Beta of Portfolio P = (Weight of Stock A x Beta of Stock A) + (Weight of Stock B x Beta of Stock B)
Beta of Portfolio P = (0.5 x 1.2) + (0.5 x 1.2)
Beta of Portfolio P = 1.2

To calculate the standard deviation of Portfolio P, we need to use the formula for the standard deviation of a portfolio:

Standard Deviation of Portfolio P = SQRT [(Weight of Stock A x Standard Deviation of Stock A)^2 + (Weight of Stock B x Standard Deviation of Stock B)^2 + 2 x Weight of Stock A x Weight of Stock B x Standard Deviation of Stock A x Standard Deviation of Stock B x Correlation Coefficient]

Standard Deviation of Portfolio P = SQRT [(0.5 x 25%)^2 + (0.5 x 25%)^2 + 2 x 0.5 x 0.5 x 25% x 25% x 0.6]
Standard Deviation of Portfolio P = SQRT [(0.25)^2 + (0.25)^2 + 0.15]
Standard Deviation of Portfolio P = 0.3872 or 38.72%

Therefore, choice C is correct, and Portfolio P has a standard deviation that is less than 25%.

Question 14

Which of the following statements is CORRECT?
A)A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable.
B)If a stock has a negative beta, its expected return must be negative.
C)A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5.
D)According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns.
E)If the returns on two stocks are perfectly positively correlated and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.

Accepted Answer

The answer of Which of the following statements is CORRECT?
A)A...

Question 15

Stock X has a beta of 0.7 and Stock Y has a beta of 1.7.Which of the following statements must be true,according to the CAPM?
A)Stock Y's realized return during the coming year will be higher than Stock X's return.
B)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.
C)Stock Y's return has a higher standard deviation than Stock X.
D)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.
E)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.

Accepted Answer

According to the CAPM, the required return on a stock increases by the same amount as the increase in the market risk premium. This is because the market risk premium represents the additional return investors demand for taking on more risk in the overall market. It is not related to the individual betas of specific stocks. Therefore, 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. The other statements are not necessarily true based on the information given about the betas of the two stocks in the question.

Question 16

Stock A has an expected return of 12%,a beta of 1.2,and a standard deviation of 20%.Stock B also has a beta of 1.2,but its expected return is 10% and its standard deviation is 15%.Portfolio AB has $300,000 invested in Stock A and $100,000 invested in Stock B.The correlation between the two stocks' returns is zero (that is,r_A,B = 0).Which of the following statements is CORRECT? A)The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued. B)The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued. C)Portfolio AB's expected return is 11.0%. D)Portfolio AB's beta is less than 1.2. E)Portfolio AB's standard deviation is 17.5%.

Accepted Answer

CA) According to the Capital Asset Pricing Model (CAPM), the expected return on a stock is determined by its beta. Since both stocks have the same beta but different expected returns, if Stock A's expected return of 12% is considered correctly priced, then Stock B, with a lower expected return of 10%, would be overvalued.C) The expected return of Portfolio AB can be calculated by taking a weighted average of the expected returns of Stock A and Stock B. With $300,000 invested in Stock A and $100,000 in Stock B, the total investment is $400,000. The weighted expected return is (0.75 * 12%) + (0.25 * 10%) = 9% + 2.5% = 11.5%. However, due to the rounding or potential misinterpretation in the calculation, the intended answer seems to be 11.0%, indicating a slight discrepancy in the calculation provided.

Question 17

If you randomly select stocks and add them to your portfolio,which of the following statements best describes what you should expect?
A)Adding more such stocks will increase the portfolio's expected rate of return.
B)Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.
C)Adding more such stocks will have no effect on the portfolio's risk.
D)Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk.
E)Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.

Accepted Answer

Adding more randomly selected stocks will likely increase diversification in the portfolio, reducing the unsystematic or diversifiable risk. However, it will not necessarily reduce the portfolio's systematic risk or market risk. Therefore, the best choice is E.

Question 18

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.Your portfolio consists of 50% A and 50% B.Which of the following statements is CORRECT?
A)The portfolio's expected return is 15%.
B)The portfolio's standard deviation is greater than 20%.
C)The portfolio's beta is greater than 1.2.
D)The portfolio's standard deviation is 20%.
E)The portfolio's beta is less than 1.2.

Accepted Answer

The expected return of a portfolio is the weighted average of the expected returns of the individual assets in the portfolio. Since both stocks have an expected return of 15% and the portfolio is equally weighted, the portfolio's expected return is also 15%.

The portfolio's standard deviation is calculated using the formula:

σP = √ [(wA^2 x σA^2) + (wB^2 x σB^2) + 2(wA x wB x σA x σB x ρAB)]

where:
wA = weight of stock A in the portfolio
σA = standard deviation of stock A
wB = weight of stock B in the portfolio
σB = standard deviation of stock B
ρAB = correlation coefficient between stocks A and B

Substituting the values given:
wA = 0.5, wB = 0.5, σA = σB = 20%, ρAB = 0.6

σP = √ [(0.5^2 x 0.2^2) + (0.5^2 x 0.2^2) + 2(0.5 x 0.5 x 0.2 x 0.2 x 0.6)]
σP = √ [(0.5 x 0.2)^2 + (0.5 x 0.2)^2 + 2(0.5 x 0.5 x 0.2 x 0.2 x 0.6)]
σP = √ [0.02 + 0.02 + 0.024]
σP = √0.064
σP = 0.253

Therefore, the portfolio's standard deviation is greater than 20%.

The portfolio's beta is calculated using the formula:

βP = wA x βA + wB x βB

Substituting the values given:
wA = 0.5, wB = 0.5, βA = βB = 1.2

βP = 0.5 x 1.2 + 0.5 x 1.2
βP = 1.2

Therefore, the portfolio's beta is equal to 1.2.

Option D is incorrect as the portfolio's standard deviation is greater than 20%. Option E is incorrect as the portfolio's beta is equal to 1.2, which is the same as the beta of the individual assets.

Question 19

Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?
A)The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.
B)The beta of the portfolio is less than the average of the betas of the individual stocks.
C)The beta of the portfolio is equal to the average of the betas of the individual stocks.
D)The beta of the portfolio is larger than the average of the betas of the individual stocks.
E)The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.

Accepted Answer

The beta of the portfolio is computed as a weighted average of the betas of the individual stocks, where the weights are the dollar amounts invested in each stock. Since each stock is equally likely to be selected and the weights are equal, the beta of the portfolio will be the same as the average of the betas of the individual stocks. Option A and E are not true as diversification reduces risk. Option B and D are not true as the beta of a portfolio is a weighted average of the betas of individual stocks, not a simple average.

Question 20

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium,r_M − r_RF,is positive.Which of the following statements is CORRECT? A)Stock B's required rate of return is twice that of Stock A. B)If Stock A's required return is 11%, then the market risk premium is 5%. C)If Stock B's required return is 11%, then the market risk premium is 5%. D)If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's. E)If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.

Accepted Answer

The answer of The risk-free rate is 6%; Stock A...

Quiz 29: Basic Financial Tools: a Review

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Recession,inflation,and high interest rates are economic events that are best characterized as being

Stock A's beta is 1.7 and Stock B's beta is 0.7.Which of the following statements must be true,assuming the CAPM is correct?

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio,which currently consists of 3 average stocks?

Stocks A and B are quite similar: Each has an expected return of 12%,a beta of 1.2,and a standard deviation of 25%.The returns on the two stocks have a correlation of 0.6.Portfolio P has 50% in Stock A and 50% in Stock B.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Stock X has a beta of 0.7 and Stock Y has a beta of 1.7.Which of the following statements must be true,according to the CAPM?

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

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.Your portfolio consists of 50% A and 50% B.Which of the following statements is CORRECT?

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

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium,rM − rRF,is positive.Which of the following statements is CORRECT?

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium,r_M − r_RF,is positive.Which of the following statements is CORRECT?