Finance 534 week 5 quiz 4

Assume that in recent years both expected
inflation and the market risk premium (rM
? rRF) have declined. Assume also that all stocks have positive
betas. Which of the following would be most likely to have occurred as
a result of these changes?

Answer

Assume that the risk-free rate is 5%.
Which of the following statements is CORRECT?

Which of the following statements is
CORRECT?

A highly risk-averse investor is considering
adding one additional stock to a 3-stock portfolio, to form a 4-stock
portfolio. The three stocks currently held all have b = 1.0, and they
are perfectly positively correlated with the market. Potential new
Stocks A and B both have expected returns of 15%, are in equilibrium, and are
equally correlated with the market, with r = 0.75. However, Stock A’s
standard deviation of returns is 12% versus 8% for Stock B. Which stock
should this investor add to his or her portfolio, or does the choice not
matter?

Which of the following statements is
CORRECT? (Assume that the risk-free rate is a constant.)

During the coming year, the market risk
premium (rM ? rRF), is expected to fall, while the risk-free rate, rRF, is
expected to remain the same. Given this forecast, which of the
following statements is CORRECT?

Stock A’s beta is 1.5 and Stock B’s beta is
0.5. Which of the following statements must be true, assuming the CAPM
is correct.

Bob has a $50,000 stock portfolio with a
beta of 1.2, an expected return of 10.8%, and a standard deviation of
25%. Becky also has a $50,000 portfolio, but it has a beta of 0.8, an
expected return of 9.2%, and a standard deviation that is also 25%. The
correlation coefficient, r, between Bob’s and Becky’s portfolios is
zero. If Bob and Becky marry and combine their portfolios, which of the
following best describes their combined $100,000 portfolio?

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.)

For a portfolio of 40 randomly selected
stocks, which of the following is most likely to be true?

Which of the following statements is
CORRECT?

You have the following data on three stocks:

Stock
Standard
Deviation
Beta
A
20%
0.59
B
10%
0.61
C
12%
1.29

If you are a strict 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.

Answer

Stock A has a beta of 0.8, Stock B has a
beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has equal
amounts invested in each of the three stocks. Each of the stocks has a
standard deviation of 25%. The returns on the three stocks are
independent of one another (i.e., the correlation coefficients all equal
zero). Assume that there is an increase in the market risk premium, but
the risk-free rate remains unchanged. Which of the following statements
is CORRECT?

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

Answer

Which of the following statements is
CORRECT?

If in the opinion of a given investor a
stock’s expected return exceeds
its required return, this suggests that the investor thinks

Answer

The preemptive right is important to
shareholders
because it

Stocks X and Y have the following
data. Assuming the stock market is efficient and the stocks are in
equilibrium, which of the following statements is CORRECT?

X
Y
Price
$25
$25
Expected dividend
yield
5%
3%
Required
return
12%
10%

Companies can issue different classes of
common stock. Which of the following statements concerning stock
classes is CORRECT?

The required returns of Stocks X and Y are
rX = 10% and rY
= 12%. Which of the following statements is CORRECT?

Stocks A and B have the following
data. Assuming the stock market is efficient and the stocks are in
equilibrium, which of the following statements is CORRECT?

A
B
Price
$25
$40
Expected growth
7%
9%
Expected
return
10%
12%

Stocks X and Y have the following
data. Assuming the stock market is efficient and the stocks are in
equilibrium, which of
the following statements is CORRECT?

X
Y
Price
$30
$30
Expected growth
(constant)
6%
4%
Required
return
12%
10%

Answer

Which of the following statements is
CORRECT?

Stocks A and B have the same price and are
in equilibrium, but Stock A has the higher required rate of return.
Which of the following statements is CORRECT?

Answer

Stocks A and B have the following
data. Assuming
the stock market is efficient and the stocks are in equilibrium, which of the
following statements is CORRECT?

A
B
Required
return
10%
12%
Market
price
$25
$40
Expected
growth
7%
9%

An increase in a firm’s expected growth rate
would cause its required rate of return to

If markets are in equilibrium, which of the
following conditions will exist?

Answer

Two constant growth stocks are in
equilibrium, have the same price, and have the same required rate of
return. Which of the following statements is CORRECT?

Answer

For a stock to be in equilibrium, that is,
for there to be no long-term pressure for its price to depart from its
current level, then

Which of the following statements is
CORRECT, assuming stocks are in equilibrium?