Question 1

2 out of 2 points

Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock. A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock.

Question 2
2 out of 2 points

You have the following data on three stocks: Stock A B C Standard Deviation 20% 10% 12% Beta 0.59 0.61 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 Selected Answer: B; A. Correct Answer: B; A.

Question 3
0 out of 2 points

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

Selected Answer: Correct Answer:

Stock B's required return is double that of Stock A's. 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.

Question 4
2 out of 2 points

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? Answer Selected Answer: 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. 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.

Correct Answer:

Question 5
2 out of 2 points

Which of the following statements is CORRECT? Answer Selected Answer: Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of -0.6. The returns on the stock with the

negative beta must have been negatively correlated with returns on most other stocks during that 5-year period. Correct Answer: Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of -0.6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that 5-year period.

Question 6
2 out of 2 points

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. Answer Selected Answer: Correct Answer: In equilibrium, the expected return on Stock A will be greater than that on B. In equilibrium, the expected return on Stock A will be greater than that on B.

Question 7
0 out of 2 points

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM? Answer Selected Answer: If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y. If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount.

Correct Answer:

Question 8
2 out of 2 points

Which of the following statements is CORRECT? Answer Selected Answer: Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk. Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk.

Correct Answer:

Question 9
2 out of 2 points

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? Answer Selected Answer: The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%. The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.

Correct Answer:

Question 10

2 out of 2 points

Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE? Answer Selected Answer: Correct Answer: The beta of an "average stock," or "the market," can change over time, sometimes drastically. The beta of an "average stock," or "the market," can change over time, sometimes drastically.

Question 11
2 out of 2 points

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? Answer Selected Answer: Correct Answer: The required return will fall for all stocks, but it will fall more for stocks with higher betas. The required return will fall for all stocks, but it will fall more for stocks with higher betas.

Question 12
2 out of 2 points

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.) Answer Selected Answer: The expected return on Stock A should be greater than that on B. Correct Answer: The expected return on Stock A should be greater than that on B.

Question 13
2 out of 2 points

Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%. The returns of the two stocks are independent, so the correlation coefficient between them, rXY, is zero. Which of the following statements best describes the characteristics of your 2-stock portfolio? Answer Selected Answer: Your portfolio has a beta equal to 1.6, and its expected return is 15%. Correct Answer: Your portfolio has a beta equal to 1.6, and its expected return is 15%.

Question 14
2 out of 2 points

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 Selected Answer: Coefficient of variation; beta. Correct Answer: Coefficient of variation; beta.

Question 15
2 out of 2 points

Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT? Answer

Selected Answer:

If both expected inflation and the market risk premium (rM rRF) increase, the required return on Stock HB will increase by more than that on Stock LB. If both expected inflation and the market risk premium (rM rRF) increase, the required return on Stock HB will increase by more than that on Stock LB.

Correct Answer:

Question 16
2 out of 2 points

The preemptive right is important to shareholders because it Answer Selected Answer: Correct Answer: protects the current shareholders against a dilution of their ownership interests. protects the current shareholders against a dilution of their ownership interests.

Question 17
0 out of 2 points

If markets are in equilibrium, which of the following conditions will exist? Answer Selected Answer: Correct Answer: All stocks should have the same realized return during the coming year. Each stocks expected return should equal its required return as seen by the marginal investor.

Question 18
2 out of 2 points

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 Answer Selected Answer: the expected future returns must be equal to the required return. Correct Answer: the expected future returns must be equal to the required return.

Question 19
0 out of 2 points

The expected return on Natter Corporations stock is 14%. The stocks dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT? Answer Selected Answer: The current dividend per share is $4.00. Correct Answer: The stock price is expected to be $54 a share one year from now.

Question 20
0 out of 2 points

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 10% $25 7% B 12% $40 9%

Required return Market price Expected growth Answer Selected Answer:

These two stocks should have the same price. Correct Answer: These two stocks must have the same dividend yield.

Question 21
2 out of 2 points

Which of the following statements is CORRECT? Answer Selected Answer: The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock. The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock.

Correct Answer:

Question 22
0 out of 2 points

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 Selected Answer: Correct Answer: If one stock has a higher dividend yield, it must also have a higher dividend growth rate. If one stock has a higher dividend yield, it must also have a lower dividend growth rate.

Question 23
0 out of 2 points

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 $30 Y $30

Price

Expected growth (constant) Required return Answer Selected Answer: Correct Answer:

6% 12%

4% 10%

Stock X has a higher dividend yield than Stock Y. One year from now, Stock Xs price is expected to be higher than Stock Ys price.

Question 24
0 out of 2 points

Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation. The preferred stock of a given firm is generally less risky to investors than the same firms common stock.

Question 25
2 out of 2 points

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A 1.10 7.00% B 0.90 7.00%

Beta Constant growth rate Answer Selected Answer:

Stock A must have a higher dividend yield than Stock B. Correct Answer: Stock A must have a higher dividend yield than Stock B.

Question 26
0 out of 2 points

An increase in a firms expected growth rate would cause its required rate of return to Answer Selected Answer: increase. Correct Answer: possibly increase, possibly decrease, or possibly remain constant.

Question 27
0 out of 2 points

Which of the following statements is CORRECT? Answer Selected Answer: If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stocks dividend yield is also 5%. The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.

Correct Answer:

Question 28
0 out of 2 points

Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT? Expected dividend, D1 Current Price, P0 Expected constant growth rate Answer $3.00 $50 6.0%

Selected Answer: The stocks expected price 10 years from now is $100.00. Correct Answer: The stocks expected dividend yield and growth rate are equal.

Question 29
0 out of 2 points

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 $25 7% 10% B $40 9% 12%

Price Expected growth Expected return Answer Selected Answer:

A's expected dividend is $0.50. Correct Answer: A's expected dividend is $0.75 and B's expected dividend is $1.20.

Question 30
0 out of 2 points

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price. If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.

Monday, August 12, 2013 2:14:29 PM EDT