Filters
Question type
Study Flashcards

A stock with a beta equal to -1.0 has zero systematic (or market) risk.

A) True
B) False

Correct Answer

verifed

verified

The slope of the SML is determined by the value of beta.

A) True
B) False

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) The Capital Market Line (CML) is a curved line that connects the risk-free rate and the market portfolio.
B) The slope of the CML is (M - rRF) /bM.
C) All portfolios that lie on the CML to the right of M are inefficient.
D) All portfolios that lie on the CML to the left of M are inefficient.
E) The slope of the CML is (M - rRF) /M..

F) B) and C)
G) A) and D)

Correct Answer

verifed

verified

Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?


A) Variance; correlation coefficient.
B) Standard deviation; correlation coefficient.
C) Beta; variance.
D) Coefficient of variation; beta.
E) Beta; beta.

F) A) and E)
G) B) and D)

Correct Answer

verifed

verified

It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative.

A) True
B) False

Correct Answer

verifed

verified

True

Calculate the required rate of return for Mercury, Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Mercury has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.


A) 10.29%
B) 10.83%
C) 11.40%
D) 12.00%
E) 12.60%

F) B) and C)
G) None of the above

Correct Answer

verifed

verified

D

We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

A) True
B) False

Correct Answer

verifed

verified

Which of the following are the factors for the Fama-French model?


A) The excess market return, a size factor, and a book-to-market factor.
B) The excess market return, a debt factor, and a book-to-market factor.
C) The excess market return, a size factor, and a debt.
D) A debt factor, a size factor, and a book-to-market factor.
E) The excess market return, an industrial production factor, and a book-to-market factor.

F) C) and D)
G) A) and B)

Correct Answer

verifed

verified

The returns on the market, the returns on United Fund (UF) , the risk-free rate, and the required return on the United Fund are shown below. Assuming the market is in equilibrium and that beta can be estimated with historical data, what is the required return on the market, rM?rRF: 7.00%; rUnited: 15.00%


A) 10.57%
B) 11.13%
C) 11.72%
D) 12.33%
E) 12.95%

F) C) and D)
G) A) and D)

Correct Answer

verifed

verified

In a portfolio of three different stocks, which of the following could NOT be true?


A) The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.
B) The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
C) The beta of the portfolio is less than the betas of each of the individual stocks.
D) The beta of the portfolio is greater than the beta of one or two of the individual stocks' betas.
E) The beta of the portfolio can not be equal to 1.

F) B) and E)
G) C) and D)

Correct Answer

verifed

verified

You have the following data on three stocks:As a risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.


A) A; A.
B) A; B.
C) B; C.
D) C; A.
E) C; B.

F) C) and E)
G) D) and E)

Correct Answer

verifed

verified

Arbitrage pricing theory is based on the premise that more than one factor affects stock returns, and the factors are specified to be (1) market returns, (2) dividend yields, and (3) changes in inflation.

A) True
B) False

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) The typical R2 for a stock is about 0.3 and the typical R2 for a portfolio is also about 0.3.
B) The typical R2 for a stock is about 0.94 and the typical R2 for a portfolio is about 0.6.
C) The typical R2 for a stock is about 0.3 and the typical R2 for a large portfolio is about 0.94.
D) The typical R2 for a stock is about 0.94 and the typical R2 for a portfolio is also about 0.94.
E) The typical R2 for a stock is about 0.6 and the typical R2 for a portfolio is also about 0.6.

F) A) and C)
G) A) and B)

Correct Answer

verifed

verified

In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data.

A) True
B) False

Correct Answer

verifed

verified

You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B?


A) bA > 0; bB = 1.
B) bA > +1; bB = 0.
C) bA = 0; bB = -1.
D) bA < 0; bB = 0.
E) bA < -1; bB = 1.

F) None of the above
G) A) and C)

Correct Answer

verifed

verified

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)


A) When held in isolation, Stock A has greater risk than Stock B.
B) Stock B must be a more desirable addition to a portfolio than Stock A.
C) Stock A must be a more desirable addition to a portfolio than Stock B.
D) The expected return on Stock A should be greater than that on Stock B.
E) The expected return on Stock B should be greater than that on Stock A.

F) None of the above
G) C) and D)

Correct Answer

verifed

verified

Assume that you hold a well-diversified portfolio that has an expected return of 12.0% and a beta of 1.20. You are in the process of buying 100 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 15.0% and a beta of 2.00. The total value of your current portfolio is $9,000. What will the expected return and beta on the portfolio be after the purchase of the Alpha stock? rp bp


A) 11.69%; 1.22
B) 12.30%; 1.28
C) 12.92%; 1.34
D) 13.56%; 1.41
E) 14.24%; 1.48

F) B) and C)
G) A) and B)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time.
B) Richard Roll has argued that it is possible to test the CAPM to see if it is correct.
C) Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM.
D) Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable.
E) The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller.

F) D) and E)
G) B) and C)

Correct Answer

verifed

verified

Which of the following statements is CORRECT?


A) "Characteristic line" is another name for the Security Market Line.
B) The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry.
C) The slope of the characteristic line is the stock's standard deviation.
D) The distance of the plot points from the characteristic line is a measure of the stock's market risk.
E) The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk.

F) None of the above
G) C) and E)

Correct Answer

verifed

verified

E

If you plotted the returns of Selleck & Company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on Selleck's stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.

A) True
B) False

Correct Answer

verifed

verified

Showing 1 - 20 of 33

Related Exams

Exam 1

An Overview of Financial Management and the Financial Environment

46 Questions

Exam 2

Financial Statements, Cash Flow, and Taxes

68 Questions

Exam 3

Analysis of Financial Statements Part 2 Fixed Income Securities

104 Questions

Exam 4

Time Value of Money

168 Questions

Exam 5

Bonds, Bond Valuation, and Interest Rates

98 Questions

Exam 6

Risk, Return, and the Capital Asset Pricing Model

147 Questions

Exam 7

Stocks, Stock Valuation, and Stock Market Equilibrium

71 Questions

Exam 8

Financial Options and Applications in Corporate Finance

28 Questions

Exam 9

The Cost of Capital

92 Questions

Exam 10

The Basics of Capital Budgeting: Evaluating Cash Flows

107 Questions

Exam 11

Cash Flow Estimation and Risk Analysis

73 Questions

Exam 12

Financial Planning and Forecasting Financial Statements

48 Questions

Exam 13

Corporate Valuation, Value-Based Management and Corporate Governance

24 Questions

Exam 14

Distributions to Shareholders: Dividends and Repurchases

55 Questions

Exam 15

Capital Structure Decisions

70 Questions

Exam 16

Working Capital Management

138 Questions

Exam 17

Multinational Financial Management

49 Questions

Exam 18

Lease Financing

23 Questions

Exam 19

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

30 Questions

Exam 20

Initial Public Offerings, Investment Banking, and Financial Restructuring

26 Questions

Exam 21

Mergers, Lbos, Divestitures, and Holding Companies

52 Questions

Exam 22

Bankruptcy, Reorganization, and Liquidation

12 Questions

Exam 23

Derivatives and Risk Management

14 Questions

Exam 25

Real Options

19 Questions

Exam 26

Analysis of Capital Structure Theory

31 Questions

Show Answer