Question 1

Based on the security market line,Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%.Robo-Tech has a standard deviation of returns of 18%.Therefore
A)Friendly must have a standard deviation of returns of less than 18% because Friendly is less risky than Robo-Tech.
B)all rational investors will prefer Friendly over Robo-Tech.
C)for a well-diversified investor,Friendly is less risky than Robo-Tech.
D)the beta for Friendly must be greater than the beta for Robo-Tech because Friendly is the better buy for a risk-averse investor.

Accepted Answer

The security market line shows that the required return of a stock is determined by its beta, which measures its risk relative to the overall market. Given that Robo-Tech has a required return of 14% and a standard deviation of returns of 18%, it must have a higher beta than Friendly Insurance Company, which has a required return of 10%. For a well-diversified investor, the relevant measure of risk is the stock's contribution to a portfolio's overall risk, not its standalone risk. Therefore, it is possible for a less volatile stock like Friendly to have a lower standard deviation of returns than a more volatile stock like Robo-Tech, while still having a higher beta due to the stock's correlation with the overall market. Hence, option C is the correct choice.

Question 2

Surf and Spray Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the market risk premium is 7.5%,the risk-free rate of return is
A)4.1%.
B)3.4%.
C)2.0%.
D)1.5%.

Accepted Answer

The answer of Surf and Spray Inc.has a beta equal...

Question 3

Green Company stock has a beta of 2 and a required return of 23%,while Gold Company stock has a beta of 1.0 and a required return of 14%.The standard deviation of returns for Green Company is 10% more than the standard deviation for Gold Company.The expected return on the market portfolio according to the CAPM is
A)9%.
B)10%.
C)12%.
D)14%.

Accepted Answer

The answer of Green Company stock has a beta of...

Question 4

Wildings,Inc.common stock has a beta of 1.2.If the expected risk free return is 4% and the expected market risk premium is 9%,what is the expected return on Wildings' stock?
A)10.0%
B)12.0%
C)13.8%
D)14.8%

Accepted Answer

The answer of Wildings,Inc.common stock has a beta of 1.2.If...

Question 5

Anchor Incorporated has a beta of 1.0.If the expected return on the market is 15%,what is the expected return on Anchor Incorporated's stock?
A)15%
B)14%
C)18%
D)cannot be determined without the risk free rate

Accepted Answer

Since Anchor Incorporated's beta is 1.0, it has the same level of systematic risk as the market. Therefore, the expected return on its stock will also be the same as the expected return on the market, which is 15%.

Question 6

You determine that LMN common stock has an expected return of 24%.LMN has a Beta of 1.5.The risk-free rate is 5%,and the market expected return is 15%.Which of the following is most likely to happen?
A)You and other investors will buy up LMN stock and its price will rise.
B)You and other investors will sell LMN stock and its return will fall.
C)You and other investors will buy up LMN stock and its return will rise.
D)You and other investors will sell LMN stock and its price will fall.

Accepted Answer

According to the Capital Asset Pricing Model (CAPM), the expected return of a stock can be calculated using the formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). For LMN, the expected return using CAPM would be 5% + 1.5 * (15% - 5%) = 20%. However, the actual expected return is 24%, which is higher than the CAPM prediction. This indicates that the stock is undervalued, leading investors to buy the stock, causing its price to rise until the expected return aligns with the CAPM prediction.

Question 7

You hold a portfolio with the following securities:  What is the expected return for the market,according to the CAPM?
A)14.0%
B)13.8%
C)12.0%
D)10.0%

Accepted Answer

The answer of You hold a portfolio with the following...

Question 8

White Company stock has a beta of 2 and a required return of 23%,while Black Company stock has a beta of 1.0 and a required return of 14%.The standard deviation of returns for White Company is 10% more than the standard deviation for Black Company.The risk free rate of return according to the CAPM is
A)4%.
B)5%.
C)6%.
D)impossible to determine with the information given

Accepted Answer

The answer of White Company stock has a beta of...

Question 9

The beta of ABC Co.stock is the slope of
A)the security market line.
B)the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills.
C)the arbitrage pricing line.
D)the characteristic line for a plot of ABC Co.returns against the returns of the market portfolio for the same period.

Accepted Answer

Beta is the measure of systematic risk of a stock with respect to the market portfolio. The characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period gives us the beta value. Therefore, option D is the correct answer.

Question 10

You are going to add one of the following three projects to your already well-diversified portfolio.  Assume the risk-free rate of return is 2% and the market risk premium is 8%.If you are a risk averse investor,which project should you choose?
A)Project 1
B)Project 2
C)Project 3
D)Either Project 2 or Project 3 because the higher expected return on project 3 offsets its higher risk.

Accepted Answer

The answer of You are going to add one of...

Question 11

The appropriate measure for risk according to the capital asset pricing model is
A)the standard deviation of a firm's cash flows.
B)alpha.
C)the standard deviation of a firm's stock returns.
D)beta.

Accepted Answer

The appropriate measure for risk according to the capital asset pricing model is beta. Beta measures the sensitivity of a security's returns to the returns on the overall market. A beta of 1 indicates that the security's returns will move in line with the market, while a beta greater than 1 indicates that the security's returns will be more volatile than the market, and a beta less than 1 indicates that the security's returns will be less volatile than the market. Therefore, beta is a useful measure of risk for investors seeking to understand how a security will perform in relation to the overall market.

Question 12

Wendy purchased 800 shares of Robotics Stock at $3 per share on 1/1/09.Wendy sold the shares on 12/31/09 for $3.45.Genetics stock has a beta of 1.3,the risk-free rate of return is 3%,and the market risk premium is 8%.The required return on Genetics Stock is
A)13.4%.
B)16.5%.
C)17.6%.
D)21.1%.

Accepted Answer

The answer of Wendy purchased 800 shares of Robotics Stock...

Question 13

Which of the following is the slope of the security market line?
A)beta
B)one
C)It varies,and is steeper for riskier securities.
D)the market risk premium

Accepted Answer

The slope of the security market line is represented by the market risk premium, which is the extra return an investor expects to receive for holding a risky asset compared to a risk-free asset. The market risk premium represents the compensation for bearing the additional risk associated with investing in the stock market.

Question 14

The return on the market portfolio is currently 12%.Mobile Phone Corporation stockholders require a rate of return of 30% and the stock has a beta of 3.2.According to CAPM,determine the risk-free rate.
A)9.80%
B)6.50%
C)4.64%
D)3.82%

Accepted Answer

Using the CAPM formula:
r = rf + beta * (rm - rf)
where r = required rate of return, beta = 3.2, rm = 12%, and solving for rf:
30% = rf + 3.2 * (12% - rf)
30% = rf + 0.384 - 3.2rf
2.816rf = -0.216
rf = -0.077 = 3.82% (rounded to two decimal places)

Therefore, the correct choice is D.

Question 15

You hold a portfolio made up of the following stocks:  If the market's expected return is 14%,and the risk free rate of return is 5%,what is the expected return of the portfolio?
A)17.010%
B)16.700%
C)15.935%
D)14.698%

Accepted Answer

The answer of You hold a portfolio made up of...

Question 16

Surf and Spray Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the risk free rate of return is 4.2%,the expected return on the market portfolio is
A)21%.
B)19.2%.
C)13.4%.
D)10.2%.

Accepted Answer

The answer of Surf and Spray Inc.has a beta equal...

Question 17

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk free rate is 4%.According to CAPM,what is the required rate of return on Collectible's stock?
A)37.5%
B)31.5%
C)26.5%
D)23.5%

Accepted Answer

According to CAPM, the required rate of return for a security is calculated as follows:
Required rate of return = risk-free rate + beta * (market risk premium)
where beta is the measure of the security's volatility in relation to the overall market, and the market risk premium is the difference between the expected return on the market and the risk-free rate.
Here, the risk-free rate is given as 4%, and the market risk premium is (15% - 4%) = 11%.

So, the required rate of return for Marble Corp is:
Required rate of return = 4% + 2.5 * 11% = 31.5%

Therefore, the best choice is B) 31.5%, which is the required rate of return according to the CAPM for Marble Corp's stock.

Question 18

Decker Corp.common stock has a required return of 17.5% and a beta of 1.75.If the expected risk free return is 3%,what is the expected return for the market based on the CAPM?
A)11.29%
B)14.29%
C)13.35%
D)15.27%

Accepted Answer

The answer of Decker Corp.common stock has a required return...

Question 19

The rate on T-bills is currently 2%.Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%.According to CAPM,determine the return on the market portfolio.
A)27.5%
B)19.0%
C)14.0%
D)12.0%

Accepted Answer

The answer of The rate on T-bills is currently 2%.Environment...

Question 20

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk free rate is 4%.What is the risk premium on the market?
A)5%
B)6%
C)9.00%
D)11%

Accepted Answer

The answer of Marble Corp.has a beta of 2.5 and...

Quiz 6: The Meaning and Measurement of Risk and Return

Based on the security market line,Robo-Tech stock has a required return of 14% and Friendly Insurance Company has a required return of 10%.Robo-Tech has a standard deviation of returns of 18%.Therefore

Surf and Spray Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the market risk premium is 7.5%,the risk-free rate of return is

Wildings,Inc.common stock has a beta of 1.2.If the expected risk free return is 4% and the expected market risk premium is 9%,what is the expected return on Wildings' stock?

Anchor Incorporated has a beta of 1.0.If the expected return on the market is 15%,what is the expected return on Anchor Incorporated's stock?

You determine that LMN common stock has an expected return of 24%.LMN has a Beta of 1.5.The risk-free rate is 5%,and the market expected return is 15%.Which of the following is most likely to happen?

You hold a portfolio with the following securities: What is the expected return for the market,according to the CAPM?

The beta of ABC Co.stock is the slope of

You are going to add one of the following three projects to your already well-diversified portfolio. Assume the risk-free rate of return is 2% and the market risk premium is 8%.If you are a risk averse investor,which project should you choose?

The appropriate measure for risk according to the capital asset pricing model is

Wendy purchased 800 shares of Robotics Stock at $3 per share on 1/1/09.Wendy sold the shares on 12/31/09 for $3.45.Genetics stock has a beta of 1.3,the risk-free rate of return is 3%,and the market risk premium is 8%.The required return on Genetics Stock is

Which of the following is the slope of the security market line?

The return on the market portfolio is currently 12%.Mobile Phone Corporation stockholders require a rate of return of 30% and the stock has a beta of 3.2.According to CAPM,determine the risk-free rate.

You hold a portfolio made up of the following stocks: If the market's expected return is 14%,and the risk free rate of return is 5%,what is the expected return of the portfolio?

Surf and Spray Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the risk free rate of return is 4.2%,the expected return on the market portfolio is

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk free rate is 4%.According to CAPM,what is the required rate of return on Collectible's stock?

Decker Corp.common stock has a required return of 17.5% and a beta of 1.75.If the expected risk free return is 3%,what is the expected return for the market based on the CAPM?

The rate on T-bills is currently 2%.Environment Help Company stock has a beta of 1.5 and a required rate of return of 17%.According to CAPM,determine the return on the market portfolio.

Marble Corp.has a beta of 2.5 and a standard deviation of returns of 20%.The return on the market portfolio is 15% and the risk free rate is 4%.What is the risk premium on the market?