Question Details

Which of the following answers correctly ranks investments from highest to lowest 



1.	Stock A has a beta = 0.8, while Stock B has a beta = 1.6.  Which of the following statements is CORRECT?

a.	Stock B's required return is double that of Stock A's.
b.	If the marginal investor becomes more risk averse, the required return on Stock B will increase by more than the required return on Stock A.
c.	An equally weighted portfolio of Stocks A and B will have a beta lower than 1.2.
d.	If the marginal investor becomes more risk averse, the required return on Stock A will increase by more than the required return on Stock B.
e.	If the risk-free rate increases but the market risk premium remains constant, the required return on Stock A will increase by more than that on Stock B.
	
2.	Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%.  Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%.  Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B.  The correlation between the two stocks' returns is zero (that is, rA,B = 0).  Which of the following statements is CORRECT?

a.	Portfolio AB's standard deviation is 17.5%.
b.	The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued.
c.	The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued.
d.	Portfolio AB's expected return is 11.0%.
e.	Portfolio AB's beta is less than 1.2.
	
3.	Stock X has a beta of 0.7 and Stock Y has a beta of 1.3.  The standard deviation of each stock's returns is 20%.  The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zero.  Portfolio P consists of 50% X and 50% Y.  Given this information, which of the following statements is CORRECT?

a.	Portfolio P has a standard deviation of 20%.
b.	The required return on Portfolio P is equal to the market risk premium (rM − rRF).
c.	Portfolio P has a beta of 0.7.
d.	Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.
e.	Portfolio P has the same required return as the market (rM).
	
4.	Which of the following statements is CORRECT?  (Assume that the risk-free rate is a constant.)

a.	If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.
b.	The effect of a change in the market risk premium depends on the slope of the yield curve.
c.	If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
d.	If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.
e.	The effect of a change in the market risk premium depends on the level of the risk-free rate.
	
5.	Over the past 75 years, we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns.  This observation supports the notion that there is a positive correlation between risk and return.  Which of the following answers correctly ranks investments from highest to lowest risk (and return), where the security with the highest risk is shown first, the one with the lowest risk last?

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.




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