Question Details

What is the market risk premium 



1.)  Which of the following statements is CORRECT?
a.	Portfolio diversification reduces the variability of returns (as measured by its standard deviation) of each individual stock held in the portfolio.
b.	If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks.  Therefore, if a portfolio contained all publicly traded stocks it would be essentially riskless.
c.	The required return on a firm- common stock is, in theory, determined solely by its market risk.  If the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm- required return.
d.	A security- beta measures its non-diversifiable, or market, risk relative to that of an average stock.
e.	A stock- beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock.
2 .)   A stock has a required return of 12.25%.  The beta of the stock is 1.15 and the risk-free rate is 5%.  What is the market risk premium ?

a.	 1.30%
b.	 6.50%
c.	15.00%
d.	 6.30%
e.	 7.25%
3.)   Assume the risk-free rate is 5% and that the market risk premium is 7%.  If a stock has a required rate of return of 13.75%, what is its beta?
a.	1.25
b.	1.35
c.	1.37
d.	1.60
e.	1.96
4.)   Which of the following statements is true?
a.	Investment risk is related to the probability of earning a low or negative return.
b.	The greater the chance of lower than expected returns, the riskier the investment.
c.	Stand-alone risk matters if we invest in only one thing.
d.	Portfolio risk matters if we invest in well-diversified portfolios.
e.	All of the above.
5.)   Historically (1926 - 2007): 
a.	Stock returns have exceeded bond returns on average.
b.	T-bill returns have exceeded bond returns on average.
c.	Bond returns have exceeded stock returns on average.
d.	All of the above.
e.	None of the above.



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