Question Details

 Portfolio P has equal amounts invested 


1.	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?
a.	The required return of all stocks will remain unchanged since there was no change in their betas.
b.	The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium.
c.	The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will increase while the returns of safer stocks (such as Stock A) will decrease.
d.	The required returns on all three stocks will increase by the amount of the increase in the market risk premium.
e.	The required return on the average stock will remain unchanged, but the returns on riskier stocks (such as Stock C) will decrease while the returns on safer stocks (such as Stock A) will increase.
	
2.	Which of the following statements is CORRECT?
a.	If a company's beta doubles, then its required rate of return will also double.
b.	Other things held constant, if investors suddenly become convinced that there will be deflation in the economy, then the required returns on all stocks should increase.
c.	If a company's beta were cut in half, then its required rate of return would also be halved.
d.	If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase.
e.	If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rate of return on an average stock will remain unchanged, but required returns on stocks with betas less than 1.0 will rise.
	
3.	Assume that the risk-free rate is 6% and the market risk premium is 5%.  Given this information, which of the following statements is CORRECT?
a.	An index fund with beta = 1.0 should have a required return of 11%.
b.	If a stock has a negative beta, its required return must also be negative.
c.	An index fund with beta = 1.0 should have a required return less than 11%.
d.	If a stock's beta doubles, its required return must also double.
e.	An index fund with beta = 1.0 should have a required return greater than 11%.
	
4.	Which of the following statements is CORRECT?
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.
	
5.	Which of the following statements is CORRECT?
a.	Beta is measured by the slope of the security market line.
b.	If the risk-free rate rises, then the market risk premium must also rise.
c.	If a company's beta is halved, then its required return will also be halved.
d.	If a company's beta doubles, then its required return will also double.
e.	The slope of the security market line is equal to the market risk premium, (rM − rRF).



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