Question Details

For markets to be in equilibrium, that is, for there to be no strong pressure 


1.	Which of the following statements is CORRECT?

a.	If a stock has a beta of to 1.0, its required rate of return will be unaffected by changes in the market risk premium.
b.	The slope of the Security Market Line is beta.
c.	Any stock with a negative beta must in theory have a negative required rate of return, provided rRF is positive.
d.	If a stock's beta doubles, its required rate of return must also double.
e.	If a stock's returns are negatively correlated with returns on most other stocks, the stock's beta will be negative.
	
2.	Assume that investors have recently become more risk averse, so the market risk premium has increased.  Also, assume that the risk-free rate and expected inflation have not changed.  Which of the following is most likely to occur?

a.	The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.
b.	The required rate of return will decline for stocks whose betas are less than 1.0.
c.	The required rate of return on the market, rM, will not change as a result of these changes.
d.	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 premium.
e.	The required rate of return on a riskless bond will decline.
	
3.	Which of the following statements is CORRECT?

a.	A graph of the SML as applied to individual stocks would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
b.	The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt.
c.	If two "normal" or "typical" stocks were combined to form a 2-stock portfolio, the portfolio's expected return would be a weighted average of the stocks' expected returns, but the portfolio's standard deviation would probably be greater than the average of the stocks' standard deviations.
d.	If investors become more risk averse, then (1) the slope of the SML would increase and (2) the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.
e.	An increase in expected inflation, combined with a constant real risk-free rate and a constant market risk premium, would lead to identical increases in the required returns on a riskless asset and on an average stock, other things held constant.
	
4.	For markets to be in equilibrium, that is, for there to be no strong pressure for prices to depart from their current levels,

a.	The expected rate of return must be equal to the required rate of return; that is,   = r.
b.	The past realized rate of return must be equal to the expected future rate of return; that is,   =  .
c.	The required rate of return must equal the past realized rate of return; that is, r =  .
d.	All three of the above statements must hold for equilibrium to exist; that is   = r =  .
e.	None of the above statements is correct.
	
5.	Which of the following statements is CORRECT?

a.	When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.
b.	Portfolio diversification reduces the variability of returns on an individual stock.
c.	Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihoods of unfavorable events.
d.	The SML relates a stock's required return to its market risk.  The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs.
e.	A stock with a beta of -1.0 has zero market risk if held in a 1-stock portfolio.



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