FIN 534 Week 5 Quiz 4 (Str)

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Question 1 Assume that in recent years both expected inflation and the market risk premium (rM â&#x2C6;&#x2019; rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes? Answer

Question 2

Assume that the risk-free rate is 5%. Which of the following statements is CORRECT?

Question 3

Which of the following statements is CORRECT?

Question 4

A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?

Question 5

Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

During the coming year, the market risk premium (rM â&#x2C6;&#x2019; 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?

Correct Answer: Question 7 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.

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?

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.)

Correct Answer: The expected return on Stock A should be greater than that on B. Question 10

For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true?

Which of the following statements is CORRECT?

Question 12

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 Correct Answer: Question 13 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?

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 Correct Answer: Question 15

Which of the following statements is CORRECT?

If in the opinion of a given investor a stockâ&#x20AC;&#x2122;s expected return exceeds its required return, this suggests that the investor thinks Answer Correct Answer: Question 17

The preemptive right is important to shareholders because it

Correct Answer: Question 18 2 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?

Price

X \$25

Y \$25

Expected dividend yield Required return

5% 12%

3% 10%

Correct Answer: Stock X pays a higher dividend per share than Stock Y. Question 19 2 out of 2 points Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

Question 20

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

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?

Price Expected growth Expected return

A \$25 7% 10%

B \$40 9% 12%

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?

Price

X \$30

Y \$30

Expected growth (constant) Required return Answer

6% 12%

4% 10%

Correct Answer: Question 23 2 out of 2 points Which of the following statements is CORRECT?

Correct Answer: Question 24 2 out of 2 points Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT? Answer Correct Answer: Question 25 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?

Required return Market price Expected growth

A 10% \$25 7%

B 12% \$40 9%

Correct Answer: Question 26 2 out of 2 points An increase in a firmâ&#x20AC;&#x2122;s expected growth rate would cause its required rate of return to

2 out of 2 points If markets are in equilibrium, which of the following conditions will exist? Answer Correct Answer: Question 28 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 Correct Answer: Question 29 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

Correct Answer: Question 30 0 out of 2 points Which of the following statements is CORRECT, assuming stocks are in equilibrium?