Exam 6: Risk and return

A) The required rate of return will decline for stocks whose betas are less than 1.0.
B) The required rate of return on the market, rM, will not change as a result of these changes.
C) The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market risk
D) The required rate of return on a riskless bond will decline.
E) The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.

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A) Stock B's required rate of return is twice that of Stock A.
B) If Stock A's required return is 11%, then the market risk premium is 5%.
C) If Stock B's required return is 11%, then the market risk premium is 5%.
D) If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.
E) If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.

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

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

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A) The required return on Portfolio P is equal to the market risk premium (rM - rRF) .
B) Portfolio P has a beta of 0.7.
C) Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
D) Portfolio P has the same required return as the market (rM) .
E) Portfolio P has a standard deviation of 20%.

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

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A) Company X has a lower coefficient of variation than Company Y.
B) Company X has less market risk than Company Y.
C) Company X's returns will be negative when Y's returns are positive.
D) Company X's stock is a better buy than Company Y's stock.
E) Company X has more diversifiable risk than Company Y.

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A) 7.72%
B) 8.12%
C) 8.55%
D) 9.00%
E) 9.50%

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A) If a stock has a negative beta, its required return must also be negative.
B) An index fund with beta = 1.0 should have a required return less than 11%.
C) If a stock's beta doubles, its required return must also double.
D) An index fund with beta = 1.0 should have a required return greater than 11%.
E) An index fund with beta = 1.0 should have a required return of 11%.

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A) Lower beta stocks have higher required returns.
B) A stock's beta indicates its diversifiable risk.
C) Diversifiable risk cannot be completely diversified away.
D) Two securities with the same stand-alone risk must have the same betas.
E) The slope of the security market line is equal to the market risk premium.

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A) 9.58%
B) 10.09%
C) 10.62%
D) 11.18%
E) 11.77%

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A) Logically, it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks, especially if the projects are closely associated with research and development activities.
B) The beta of an "average stock, " which is also "the market beta, " can change over time, sometimes drastically.
C) If a newly issued stock does not have a past history that can be used for calculating beta, then we should always estimate that its beta will turn out to be 1.0.This is especially true if the company finances with more debt than the average firm.
D) During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects, the calculated historical beta may be drastically different from the beta that will exist in the future.
E) If a company with a high beta merges with a low-beta company, the best estimate of the new merged company's beta is 1.0.

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A) 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.
B) 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.
C) There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML.
D) 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.
E) 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.

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