A) If you add enough randomly selected stocks to a portfolio,you can completely eliminate all of the market risk from the portfolio.
B) If you were restricted to investing in publicly traded common stocks,yet you wanted to minimize the riskiness of your portfolio as measured by its beta,then according to the CAPM theory you should invest an equal amount of money in each stock in the market.That is,if there were 10,000 traded stocks in the world,the least risky possible portfolio would include some shares of each one.
C) If you formed a portfolio that consisted of all stocks with betas less than 1.0,which is about half of all stocks,the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio,and that portfolio would have less risk than a portfolio that consisted of all stocks in the market.
D) Market risk can be eliminated by forming a large portfolio,and if some Treasury bonds are held in the portfolio,the portfolio can be made to be completely riskless.
E) A portfolio that consists of all stocks in the market would have a required return that is equal to the riskless rate.
G) C) and D)
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A) Your portfolio has a standard deviation of 30%,and its expected return is 15%.
B) Your portfolio has a standard deviation less than 30%,and its beta is greater than 1.6.
C) Your portfolio has a beta equal to 1.6,and its expected return is 15%.
D) Your portfolio has a beta greater than 1.6,and its expected return is greater than 15%.
E) Your portfolio has a standard deviation greater than 30% and a beta equal to 1.6.
G) B) and D)
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A) If the risk-free rate increases but the market risk premium remains unchanged,the required return will increase for both stocks but the increase will be larger for Nile since it has a higher beta.
B) If the market risk premium increases but the risk-free rate remains unchanged,Nile's required return will increase because it has a beta greater than 1.0 but Elba's required return will decline because it has a beta less than 1.0.
C) Since Nile's beta is twice that of Elba's,its required rate of return will also be twice that of Elba's.
D) If the risk-free rate increases while the market risk premium remains constant,then the required return on an average stock will increase.
E) If the market risk premium decreases but the risk-free rate remains unchanged,Nile's required return will decrease because it has a beta greater than 1.0 and Elba's will also decrease,but by more than Nile's because it has a beta less than 1.0.
G) None of the above
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A) Small-company stocks,long-term corporate bonds,large-company stocks,long-term government bonds,U.S.Treasury bills.
B) Large-company stocks,small-company stocks,long-term corporate bonds,U.S.Treasury bills,long-term government bonds.
C) Small-company stocks,large-company stocks,long-term corporate bonds,long-term government bonds,U.S.Treasury bills.
D) U.S.Treasury bills,long-term government bonds,long-term corporate bonds,small-company stocks,large-company stocks.
E) Large-company stocks,small-company stocks,long-term corporate bonds,long-term government bonds,U.S.Treasury bills.
G) B) and E)
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A) If Mutual Fund A held equal amounts of 100 stocks,each of which had a beta of 1.0,and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0,then the two mutual funds would both have betas of 1.0.Thus,they would be equally risky from an investor's standpoint,assuming the investor's only asset is one or the other of the mutual funds.
B) If investors become more risk averse but rRF does not change,then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline,but the required return on an average-risk stock will not change.
C) An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks,assuming the stocks are all equally risky.Since the holder of the 1-stock portfolio is exposed to more risk,he or she can expect to earn a higher rate of return to compensate for the greater risk.
D) There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML.
E) Assume that the required rate of return on the market,rM,is given and fixed at 10%.If the yield curve were upward sloping,then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.
G) A) and B)
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A) 1.04
B) 1.10
C) 1.09
D) 1.06
E) 1.05
G) A) and D)
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B) False
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B) False
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B) False
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B) False
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A) 0.22
B) 0.27
C) 0.20
D) 0.26
E) 0.23
G) B) and E)
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B) False
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A) 1.08
B) 1.40
C) 1.03
D) 1.25
E) 0.99
G) A) and D)
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A) The slope of the security market line is equal to the market risk premium.
B) Lower beta stocks have higher required returns.
C) A stock's beta indicates its diversifiable risk.
D) Diversifiable risk cannot be completely diversified away.
E) Two securities with the same stand-alone risk must have the same betas.
G) C) and D)
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A) When diversifiable risk has been diversified away,the inherent risk that remains is market risk,which is constant for all stocks in the market.
B) Portfolio diversification reduces the variability of returns on an individual stock.
C) Risk refers to the chance that some unfavorable event will occur,and a probability distribution is completely described by a listing of the likelihoods of unfavorable events.
D) The SML relates a stock's required return to its market risk.The slope and intercept of this line cannot be controlled by the firms' managers,but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs.
E) A stock with a beta of -1.0 has zero market risk if held in a 1-stock portfolio.
G) C) and D)
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B) False
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A) If expected inflation remains constant but the market risk premium (rM - rRF) declines,the required return of Stock LB will decline but the required return of Stock HB will increase.
B) If both expected inflation and the market risk premium (rM - rRF) increase,the required return on Stock HB will increase by more than that on Stock LB.
C) If both expected inflation and the market risk premium (rM - rRF) increase,the required returns of both stocks will increase by the same amount.
D) Since the market is in equilibrium,the required returns of the two stocks should be the same.
E) If expected inflation remains constant but the market risk premium (rM - rRF) declines,the required return of Stock HB will decline but the required return of Stock LB will increase.
G) C) and D)
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A) The fact that a security or project may not have a past history that can be used as the basis for calculating beta.
B) Sometimes,during a period when the company is undergoing a change such as toward more leverage or riskier assets,the calculated beta will be drastically different from the "true" or "expected future" beta.
C) The beta of an "average stock," or "the market," can change over time,sometimes drastically.
D) Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
E) The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns.This calculated historical beta may differ from the beta that exists in the future.
G) A) and B)
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A) 12.80%
B) 15.87%
C) 16.00%
D) 9.98%
E) 11.90%
G) A) and B)
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A) Either A or B,i.e. ,the investor should be indifferent between the two.
B) Stock A.
C) Stock B.
D) Neither A nor B,as neither has a return sufficient to compensate for risk.
E) Add A,since its beta must be lower.
G) C) and D)
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