Question 1

Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?
A) 0.97
B) 1.02
C) 1.12
D) 1.21

Accepted Answer

Beta of portfolio= (total investment in stock A x beta of stock A + total investment in stock B x beta of stock B + total investment in stock C x beta of stock C)/ Total investment in portfolio
Beta of portfolio= (100,000 x 0.85 + 200,000 x 1.05 + 300,000 x 1.25)/600,000 = 1.12

Question 2

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

Accepted Answer

This statement is true. The required rate of return for an asset takes into account the risk associated with the investment. The risk-free rate is the rate of return that can be earned on a risk-free investment (such as a US Treasury bond), and the risk premium is the additional return an investor requires for taking on additional risk.

Question 3

What is diversifying among different kinds of assets known as?
A) Portfolio funding
B) Capital asset classification
C) Asset allocation
D) Multi-diversification

Accepted Answer

Diversifying among different kinds of assets is known as asset allocation. This strategy helps to spread risk across different types of assets, such as stocks, bonds, and real estate, to minimize the impact of market fluctuations on the overall portfolio. It is important to note that simply owning multiple assets does not ensure diversification. It is essential to carefully consider the characteristics of each asset and their relationship to one another.

Question 4

Stock A has a beta of 1.2 and a standard deviation of returns of 14%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the risk-free rate of return increases and the market risk premium remains constant,then
A) the required return on stock B will increase more than the required return on stock A.
B) the required returns on stocks A and B will both increase by the same amount.
C) the required returns on stocks A and B will not change.
D) the required return on stock A will increase more than the required return on stock B.

Accepted Answer

The answer of Stock A has a beta of 1.2...

Question 5

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

Accepted Answer

The security market line represents the relationship between expected return and risk, and any stock that plots above it has a higher expected return than its required return based on its level of risk. This suggests that the stock is underpriced, since investors are not demanding enough return to compensate them for the level of risk involved.

Question 6

The risk-free rate of interest is 4% and the market risk premium is 9%.Howard Corporation has a beta of 2.0,and last year generated a return of 16% with a standard deviation of returns of 27%.The required return on Howard Corporation stock is
A) 36%.
B) 34%.
C) 26%.
D) 22%.

Accepted Answer

The answer of The risk-free rate of interest is 4%...

Question 7

According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's risk premium.

Accepted Answer

According to the Capital Asset Pricing Model (CAPM), a security's required rate of return is equal to the risk-free rate plus the security's beta multiplied by the market's risk premium. Therefore, for each unit increase in beta, the required rate of return will also increase by an amount equal to the market's risk premium.

Question 8

A typical measure for the risk-free rate of return is the
A) U.S. Treasury Bill rate.
B) prime lending rate.
C) money market rate.
D) short-term AAA-rated bond rate.

Accepted Answer

The risk-free rate of return is the rate of return on an investment that carries no risk, such as U.S. government bonds. The U.S. Treasury Bill rate is considered the most common measure of the risk-free rate of return because it is backed by the U.S. government, which is considered to have a low probability of default. By comparison, other choices like the prime lending rate, money market rate, or short-term AAA-rated bond rate all carry some level of risk and thus would not be considered a true measure of the risk-free rate of return.

Question 9

An investor currently holds the following portfolio:
 If the risk-free rate of return is 4% and the market risk premium is 9%,then the required return on the portfolio is
A) 14.00%.
B) 17.91%.
C) 21.91%.
D) 23.85%.

Accepted Answer

The answer of An investor currently holds the following portfolio:
...

Question 10

The T-bill return is used in the CAPM model as the risk free rate.

Accepted Answer

This statement is true. The CAPM model uses the risk free rate as the baseline for comparison against returns from other investments, and T-bills are often considered a proxy for the risk free rate as they are backed by the full faith and credit of the US government.

Question 11

Which of the following measures the average relationship between a stock's returns and the market's returns?
A) Coefficient of validation
B) Standard deviation
C) Geometric regression
D) Beta coefficient

Accepted Answer

The beta coefficient measures the average relationship between a stock's returns and the market's returns. The other options - coefficient of validation, standard deviation, and geometric regression - do not measure this relationship.

Question 12

The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.

Accepted Answer

This statement is true. The CAPM (Capital Asset Pricing Model) defines the relationship between expected return and systematic risk (measured by beta) for an individual security or a portfolio. The theory states that the expected return of an investment is dependent on the level of systematic risk it bears - the higher the risk, the higher the expected return.

Question 13

Which of the following statements is most correct regarding beta?
A) Beta must be calculated using at least 5 years of monthly returns data to be accurate.
B) Beta can only be measured properly using daily returns.
C) Beta for a particular company remains constant over time.
D) Even professionals may not agree on the measurement of beta.

Accepted Answer

Beta is a measure of a stock's volatility in relation to the market, and its calculation can vary depending on the data used and the methodology applied. As a result, even professionals may disagree on the measurement of beta. Therefore, option D is the most correct statement. Options A and B are incorrect because beta can be calculated using different time intervals and frequencies, although longer intervals may provide more accurate estimates. Option C is also incorrect because beta can change over time as a result of changes in the underlying market or industry conditions.

Question 14

The S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate.

Accepted Answer

The CAPM (Capital Asset Pricing Model) does not specify that the S&P 500 or any specific index must be used as the measure of market return; it requires the use of a broad market portfolio, which can be represented by different indexes depending on the market being analyzed.

Question 15

The capital asset pricing model
A) provides a risk-return trade off in which risk is measured in terms of the market volatility.
B) provides a risk-return trade off in which risk is measured in terms of beta.
C) measures risk as the coefficient of variation between security and market rates of return.
D) depicts the total risk of a security.

Accepted Answer

The capital asset pricing model provides a risk-return trade off where risk is measured in terms of beta, which represents the systematic risk of a security. Beta is a measure of a stock's volatility in relation to the market as a whole. Therefore, option B is the correct answer.

Question 16

Stock A has a beta of 1.2 and a standard deviation of returns of 18%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the market risk premium increases,then
A) the required return on stock B will increase more than the required return on stock A.
B) the required returns on stocks A and B will both increase by the same amount.
C) the required returns on stocks A and B will remain the same.
D) the required return on stock A will increase more than the required return on stock B.

Accepted Answer

The required return on a stock is influenced by its beta, which measures its sensitivity to market movements. A higher beta indicates a higher sensitivity to market changes. Since Stock B has a higher beta (1.8) compared to Stock A (1.2), an increase in the market risk premium will result in a larger increase in the required return for Stock B than for Stock A.

Question 17

Assume that you have $165,000 invested in a stock whose beta is 1.25,$85,000 invested in a stock whose beta is 2.35,and $235,000 invested in a stock whose beta is 1.11.What is the beta of your portfolio?
A) 1.37
B) 2.01
C) 1.85
D) 1.57

Accepted Answer

The beta of a portfolio is found by taking the weighted average of the betas of the individual stocks in the portfolio. Using the formula:

Beta of portfolio = (Beta of stock A x Value of stock A in portfolio) + (Beta of stock B x Value of stock B in portfolio) + (Beta of stock C x Value of stock C in portfolio)

Beta of portfolio = (1.25 x $165,000) + (2.35 x $85,000) + (1.11 x $235,000) / ($165,000 + $85,000 + $235,000)

Beta of portfolio = $206,250 + $199,750 + $260,850 / $485,000

Beta of portfolio = $666,850 / $485,000

Beta of portfolio = 1.37

Therefore, the answer is A) 1.37

Question 18

An investor currently holds the following portfolio:
 The beta for the portfolio is
A) 1.99.
B) 1.77.
C) 1.45.
D) 1.27.

Accepted Answer

The answer of An investor currently holds the following portfolio:
...

Question 19

If the Beta for stock A equals zero,then
A) stock A's required return is equal to the required return on the market portfolio.
B) stock A's required return is equal to the risk-free rate of return.
C) stock A has a guaranteed return.
D) stock A's required return is greater than the required return on the market portfolio.

Accepted Answer

If the beta for stock A equals zero, it means that the stock is not correlated with the market and therefore, its required return is equal to the risk-free rate of return.

Question 20

According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's return.

Accepted Answer

The answer of According to the CAPM,for each unit of...

Quiz 6: The Meaning and Measurement of Risk and Return

Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?

The required rate of return for an asset is equal to the risk-free rate plus a risk premium.

What is diversifying among different kinds of assets known as?

Stock A has a beta of 1.2 and a standard deviation of returns of 14%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the risk-free rate of return increases and the market risk premium remains constant,then

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

The risk-free rate of interest is 4% and the market risk premium is 9%.Howard Corporation has a beta of 2.0,and last year generated a return of 16% with a standard deviation of returns of 27%.The required return on Howard Corporation stock is

According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's risk premium.

A typical measure for the risk-free rate of return is the

An investor currently holds the following portfolio: If the risk-free rate of return is 4% and the market risk premium is 9%,then the required return on the portfolio is

The T-bill return is used in the CAPM model as the risk free rate.

Which of the following measures the average relationship between a stock's returns and the market's returns?

The CAPM designates the risk-return tradeoff existing in the market,where risk is defined in terms of beta.

Which of the following statements is most correct regarding beta?

The S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate.

The capital asset pricing model

Stock A has a beta of 1.2 and a standard deviation of returns of 18%.Stock B has a beta of 1.8 and a standard deviation of returns of 18%.If the market risk premium increases,then

Assume that you have $165,000 invested in a stock whose beta is 1.25,$85,000 invested in a stock whose beta is 2.35,and $235,000 invested in a stock whose beta is 1.11.What is the beta of your portfolio?

An investor currently holds the following portfolio: The beta for the portfolio is

If the Beta for stock A equals zero,then

According to the CAPM,for each unit of Beta an asset's required rate of return increases by the market's return.