Question 1

If investors became more risk averse The SML would shift downward and the slope of the SML would fall.

Accepted Answer

If investors became more risk averse, the slope of the Security Market Line (SML) would increase because investors would require a higher return for taking on additional risk, not decrease.

Question 2

If investors expected inflation to increase in the future,the SML would shift up,but the slope would remain the same.

Accepted Answer

When investors expect inflation to increase in the future, they will require a higher return to compensate for the expected loss of the purchasing power of their investments. This will shift the SML (Security Market Line) upwards. However, the slope of the SML would remain the same as it is determined by the risk tolerance of investors and the overall market risk.

Question 3

The security market line (SML)intercepts the Y axis at the risk-free rate.

Accepted Answer

The security market line (SML) represents the relationship between expected return and systematic risk, and it intercepts the Y axis at the risk-free rate. Therefore, the statement is true.

Question 4

The S&P 500 Index is commonly used to estimate the market rate of return.

Accepted Answer

The S&P 500 Index is a widely recognized benchmark for measuring the performance of the overall U.S. stock market and is commonly used to estimate the market rate of return.

Question 5

U.S.Treasury bills can be used to approximate the risk-free rate.

Accepted Answer

U.S. Treasury bills are considered to be virtually risk-free because they are backed by the full faith and credit of the U.S. government. Therefore, their yield can be used as a benchmark for the risk-free rate in finance.

Question 6

Use the following information to answer the following question(s).
Beta
Market 1
Firm A 1.25
Firm B 0.6
Market Return 10% Risk Free Rate 2%
-The required rate of return for Firm A is
A)8%.
B)12%.
C)16%.
D)Cannot be determined with information given.

Accepted Answer

The required rate of return for Firm A can be calculated using the CAPM formula: R = Rf + β(Rm-Rf), where Rf is the risk free rate, β is the beta of the firm, and (Rm-Rf) is the market risk premium. Plugging in the numbers, we get:
R = 2% + 1.25(10% - 2%) = 2% + 1.25(8%) = 12%
Therefore, the best choice is B, which is the required rate of return for Firm A is 12%.

Question 7

A security with a beta of zero has a required rate of return equal to the overall market rate of return.

Accepted Answer

A security with a beta of zero is considered to have no systematic risk compared to the market, and its required rate of return would be equal to the risk-free rate, not the overall market rate of return.

Question 8

Use the following information to answer the following question(s).
Beta
Market 1
Firm A 1.25
Firm B 0.6
Market Return 10% Risk Free Rate 2%
-The market risk premium is
A)2%.
B)4%.
C)6%.
D)8%.

Accepted Answer

The answer of Use the following information to answer the...

Question 9

The return for the market during the next period is expected to be 11.5%;the risk-free rate is 2.5%.Calculate the required rate of return for a stock with a beta of 1.5.

Accepted Answer

The answer of The return for the market during the...

Question 10

The market risk premium is measured by
A)beta.
B)market return less risk-free rate.
C)T-bill rate.
D)standard deviation.

Accepted Answer

The market risk premium is the excess return that investors demand for holding a risky asset compared to a risk-free asset, such as Treasury bills. It is measured by subtracting the risk-free rate (such as the T-bill rate) from the market return. Therefore, the correct choice is B. Beta measures the volatility of an individual security compared to the overall market, but it is not a measure of the risk premium. Standard deviation is a measure of the volatility of returns, but it does not account for the risk premium.

Question 11

You are going to invest all of your funds in one of three projects with the following distribution of possible returns:
Project 1 Project 2
Standard Deviation 12% Standard Deviation 19.5%
Probability Return Probability Return
50% Chance 20% 30% Chance 30%
50% Chance -4% 40% Chance 10%
30% Chance -20%
Project 3
Standard Deviation 12%
Probability Return
10% Chance 30%
40% Chance 15%
40% Chance 10%
10% Chance -21%
If you are a risk-averse investor,which one should you choose?
A)Project 1
B)Project 2
C)Project 3

Accepted Answer

As a risk-averse investor, the best option would be to choose the project with the lowest standard deviation of returns. Among the three projects, Project 3 has the lowest standard deviation of 12% and also offers a positive expected return, thus making it the best choice. Project 1 has the same standard deviation but has a negative expected return, while Project 2 has a higher standard deviation of 19.5%, which makes it a riskier choice.

Question 12

Use the following information to answer the following question(s).
Beta
Market 1
Firm A 1.25
Firm B 0.6
Market Return 10% Risk Free Rate 2%
-Firm B's risk premium is
A)2.66%.
B)4.8%.
C)6.3%.
D)8.1%.

Accepted Answer

To calculate the risk premium for Firm B, we need to use the following formula: 
Risk Premium = Beta * (Market Return - Risk Free Rate) 
Risk Premium for Firm B = 0.6 * (10% - 2%) = 4.8%
Therefore, the correct answer is B.

Question 13

You are thinking about purchasing 1,000 shares of stock in the following firms:
Number of Shares Firm's Beta
Firm A 100 0.75
Firm B 200 1.47
Firm C 200 0.82
Firm D 600 1.60
If you purchase the number of shares specified,then the beta of your portfolio will be:
A)1.16.
B)1.35.
C)1.00.
D)Cannot be determined without knowing the stock prices.

Accepted Answer

The answer of You are thinking about purchasing 1,000 shares...

Question 14

The market beta changes frequently with economic conditions.

Accepted Answer

The answer of The market beta changes frequently with economic...

Question 15

Marjen stock has a required return of 20%.The expected market return is 15%,and the beta of Marjen's stock is 1.5.Calculate the risk-free rate.
A)4%
B)5%
C)6%
D)7%

Accepted Answer

Using the CAPM formula: Required return = Risk-free rate + Beta * (Market return - Risk-free rate). Plugging in the values: 20% = Risk-free rate + 1.5 * (15% - Risk-free rate). Solving for the risk-free rate gives 5%.

Question 16

The security market line can drawn by connecting the risk-free rate and the expected return on the market portfolio.

Accepted Answer

The security market line is a linear relationship between expected return and systematic risk (represented by beta) for individual securities. It is drawn by connecting the risk-free rate and the expected return on the market portfolio, which represents the market risk.

Question 17

Long-term bonds issued by large,established corporations are commonly used to estimate the risk-free rate.

Accepted Answer

Long-term bonds issued by large, established corporations are not risk-free as they carry some degree of default or credit risk. Treasuries or government bonds are commonly used to estimate the risk-free rate.

Question 18

Hefty stock has a beta of 1.2.If the risk-free rate is 7% and the market risk premium is 6.5%,what is the required rate of return on Hefty?
A)14.8%
B)14.4%
C)12.4%
D)13.5%

Accepted Answer

We use the Capital Asset Pricing Model (CAPM) formula to calculate the required rate of return:
Required rate of return = Risk-free rate + Beta*(Market risk premium)
= 7% + 1.2*(6.5%)
= 14.8%

Question 19

The expected return on the market portfolio is currently 11%.Battmobile Corporation stockholders require a rate of return of 23.0%,and the stock has a beta of 2.5.According to CAPM,determine the risk-free rate.
A)17.5%
B)2.75%
C)3.0%
D)9.2%

Accepted Answer

The Capital Asset Pricing Model (CAPM) formula is:

required return = risk-free rate + beta (expected return on the market - risk-free rate)

We know that:
- Expected return on the market (rM) = 11%
- Required return on Battmobile Corporation stock (rB) = 23%
- Beta (β) = 2.5

Plugging these into the CAPM formula and solving for the risk-free rate (rF):

23% = rF + 2.5(11% - rF)
23% = rF + 27.5% - 2.5rF
-4.5% = -1.5rF
rF = 3%

Therefore, the risk-free rate is 3%. The best choice is (C).

Question 20

Use the following information to answer the following question(s).
Beta
Market 1
Firm A 1.25
Firm B 0.6
Market Return 10% Risk Free Rate 2%
-Firm A's risk premium is
A)4%.
B)6%.
C)8%.
D)10%.

Accepted Answer

The answer of Use the following information to answer the...

Quiz 8: Risk and Return-Capital Market Theory

If investors became more risk averse The SML would shift downward and the slope of the SML would fall.

If investors expected inflation to increase in the future,the SML would shift up,but the slope would remain the same.

The security market line (SML)intercepts the Y axis at the risk-free rate.

The S&P 500 Index is commonly used to estimate the market rate of return.

U.S.Treasury bills can be used to approximate the risk-free rate.

Use the following information to answer the following question(s) . Beta Market 1 Firm A 1.25 Firm B 0.6 Market Return 10% Risk Free Rate 2% -The required rate of return for Firm A is

A security with a beta of zero has a required rate of return equal to the overall market rate of return.

Use the following information to answer the following question(s) . Beta Market 1 Firm A 1.25 Firm B 0.6 Market Return 10% Risk Free Rate 2% -The market risk premium is

The return for the market during the next period is expected to be 11.5%;the risk-free rate is 2.5%.Calculate the required rate of return for a stock with a beta of 1.5.

The market risk premium is measured by

Use the following information to answer the following question(s) . Beta Market 1 Firm A 1.25 Firm B 0.6 Market Return 10% Risk Free Rate 2% -Firm B's risk premium is

You are thinking about purchasing 1,000 shares of stock in the following firms: Number of Shares Firm's Beta Firm A 100 0.75 Firm B 200 1.47 Firm C 200 0.82 Firm D 600 1.60 If you purchase the number of shares specified,then the beta of your portfolio will be:

The market beta changes frequently with economic conditions.

Marjen stock has a required return of 20%.The expected market return is 15%,and the beta of Marjen's stock is 1.5.Calculate the risk-free rate.

The security market line can drawn by connecting the risk-free rate and the expected return on the market portfolio.

Long-term bonds issued by large,established corporations are commonly used to estimate the risk-free rate.

Hefty stock has a beta of 1.2.If the risk-free rate is 7% and the market risk premium is 6.5%,what is the required rate of return on Hefty?

The expected return on the market portfolio is currently 11%.Battmobile Corporation stockholders require a rate of return of 23.0%,and the stock has a beta of 2.5.According to CAPM,determine the risk-free rate.

Use the following information to answer the following question(s) . Beta Market 1 Firm A 1.25 Firm B 0.6 Market Return 10% Risk Free Rate 2% -Firm A's risk premium is