Question 1

You determine that XYZ common stock has an expected return of 24%.XYZ 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 XYZ stock and its price will rise.
B) You and other investors will sell XYZ stock and its return will fall.
C) You and other investors will buy up XYZ stock and its return will rise.
D) You and other investors will sell XYZ stock and its price will fall.

Accepted Answer

The expected return of XYZ stock (24%) is higher than the required return calculated using the CAPM (5% + 1.5*(15%-5%) = 20%). This suggests the stock is undervalued, leading investors to buy it, causing its price to rise.

Question 2

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 expected return on the market portfolio according to the CAPM is
A) 9%.
B) 10%.
C) 12%.
D) 14%.

Accepted Answer

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

Question 3

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 4

Emery 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 Emery Inc.has a beta equal to 1.8...

Question 5

Stanley 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 CAPM formula is: Expected return = Risk-free rate + Beta * (Expected market return - Risk-free rate)Plugging in the given values, we get: 17.5% = 3% + 1.75 * (Expected market return - 3%)Solving for the expected market return, we get: Expected market return = 11.29%

Question 6

Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/09.Bill sold the shares on 12/31/09 for $3.45.Robotics stock has a beta of 1.9,the risk-free rate of return is 4%,and the market risk premium is 9%.The required return on Robotics Stock is
A) 15.0%.
B) 16.5%.
C) 17.6%.
D) 21.1%.

Accepted Answer

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

Question 7

Collectibles 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 Collectibles Corp.has a beta of 2.5 and...

Question 8

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 9

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

According to the capital asset pricing model (CAPM), beta is the appropriate measure for risk. Beta measures the sensitivity of an asset's or a portfolio's returns to market movements. It represents the degree to which the returns of a particular asset or portfolio move in response to variations in the market or benchmark index. A high-beta stock is expected to exhibit higher volatility and greater risk, while a low-beta stock is expected to be less volatile and less risky. Therefore, beta is a critical input in the CAPM, which is used widely to estimate the expected return on an asset or a portfolio.

Question 10

Billings,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 Billing's stock?
A) 10.0%
B) 12.0%
C) 13.8%
D) 14.8%

Accepted Answer

The expected return on Billing's stock can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * Market Risk Premium = 4% + 1.2 * 9% = 14.8%.

Question 11

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

Accepted Answer

SeeBreeze Incorporated's beta is 1.0, which means that the expected return on its stock is the same as the expected return on the market, in this case, 15%. Therefore, the correct answer is A) 15%. The risk-free rate is not needed in this calculation as beta already accounts for the riskiness of SeeBreeze's stock relative to the market.

Question 12

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 suggests that higher returns come with higher risk. Since Robo-Tech has a higher required return and a higher standard deviation of returns, it is riskier than Friendly Insurance Company. Therefore, for a well-diversified investor, Friendly is less risky than Robo-Tech. However, we cannot infer from this information alone whether all rational investors will prefer Friendly over Robo-Tech, and we cannot determine the betas of the two stocks based on the given information.

Question 13

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 measures the sensitivity of a stock's returns to market changes. The characteristic line for a plot of a stock's returns against the returns of the market portfolio for the same period is used to calculate beta. Therefore, choice D is the correct answer.

Question 14

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 15

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 equal to the market risk premium, which is the extra return expected by investors for taking on the risk of investing in the market portfolio. The other choices listed (A, B, and C) do not accurately describe the slope of the security market line.

Question 16

Emery 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 Emery Inc.has a beta equal to 1.8...

Question 17

Collectibles 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 formula, 
Required rate of return = Risk-free rate + Beta*(Market return - Risk-free rate)
= 4% + 2.5*(15% - 4%)
= 31.5%
Therefore, the required rate of return on Collectible's stock is 31.5%. The correct answer is option B.

Question 18

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

The answer of The return on the market portfolio is...

Question 19

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

According to the Capital Asset Pricing Model, the required return on a security is equal to the risk-free rate plus beta times the market risk premium. Therefore, we can set up the following two equations:

23% = Rf + 2(Market Risk Premium)
14% = Rf + 1(Market Risk Premium)

Solving for the market risk premium, we get:

Market Risk Premium = 4.5%

Now, we can use this market risk premium to solve for the risk-free rate for either company. Let's solve for White Company's risk-free rate:

23% = Rf + 2(4.5%)
Rf = 14%

Therefore, the risk-free rate according to the CAPM is 5% (14% - 2(4.5%)) for Black Company.

Question 20

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...

Quiz 6: The Meaning and Measurement of Risk and Return

You determine that XYZ common stock has an expected return of 24%.XYZ 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 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?

Emery 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

Stanley 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?

Joe purchased 800 shares of Robotics Stock at $3 per share on 1/1/09.Bill sold the shares on 12/31/09 for $3.45.Robotics stock has a beta of 1.9,the risk-free rate of return is 4%,and the market risk premium is 9%.The required return on Robotics Stock is

Collectibles 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?

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.

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

Billings,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 Billing's stock?

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

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

The beta of ABC Co.stock is the slope of

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

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

Emery 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

Collectibles 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?

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?