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Finance 534 Week 5 Quiz 4

A quiz covering investment principles and risk management.

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Finance 534 week 5 quiz 4Question 1Assume that in recent years both expected inflation and the market risk premium (rM−rRF) have declined.Assume also that all stocks have positive betas.Which of the followingwould be most likely to have occurred as a result of these changes?AnswerCorrectAnswer:The required returns on all stocks have fallen, but the fall has been greater forstocks with higher betas.Question 2Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?CorrectAnswer:If a stock has a negative beta, its required return under the CAPM would beless than 5%.Question 3Which of the following statements isCORRECT?CorrectAnswer:Diversifiable risk can be reduced by forming a large portfolio, but normally evenhighly-diversified portfolios are subject to market (or systematic) risk.Question 4A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, toform a 4-stock portfolio.The three stocks currently held all have b = 1.0, and they are perfectlypositively correlated with the market.Potential new Stocks A and B both have expected returnsof 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 thisinvestor add to his or her portfolio, or does the choice not matter?Correct Answer:Stock B.Question 5

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Document Details

University
Strayer University
Course
FIN 534
Subject
Finance

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