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FIN 534 Week 5 Quiz 4

Finance
Strayer University
14 pages
Shared May 2025

A finance quiz assessing knowledge of concepts covered in Week 5 of FIN 534.

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FIN 534 WEEK 5 QUIZ 4 Question 1 For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true? The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation. The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation. The beta of the portfolio is less than the average of the betas of the individual stocks. The beta of the portfolio is equal to the average of the betas of the individual stocks. The beta of the portfolio is larger than the average of the betas of the individual stocks. Question 2 Which of the following statements is CORRECT? The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks. If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio. The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future. The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks. It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk - free (default - free) rate of return, rRF. Question 3 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.) When held in isolation, Stock A has more risk than Stock B. Stock B must be a more desirable addition to a portfolio than A.
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Stock A must be a more desirable addition to a portfolio than B. The expected return on Stock A should be greater than that on B. The expected return on Stock B should be greater than that on A. Question 4 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? The required return of all stocks will remain unchanged since there was no change in their betas. 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 the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will increase while the returns of safer stocks (such as Stock A) will decrease. The required returns on all three stocks will increase by the amount of the increase in the market risk premium. The required return on the average stock will remain unchanged, but the returns on riskier stocks (such as Stock C) will decrease while the returns on safer stocks (such as Stock A) will increase. Question 5 Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is CORRECT? 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. An equally weighted portfolio of Stocks A and B will have a beta lower than 1.2. If the marginal investor becomes more risk averse, the required return on Stock A will increase by more than the required return on Stock B.
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If the risk - free rate increases but the market risk premium remains constant, the required return on Stock A will increase by more than that on Stock B. Question 6 You have the following data on three stocks: Stock Standard Deviation Beta A 20% 0.59 B 10% 0.61 C 12% 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. A; A. A; B. B; A. C; A. C; B. Question 7 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? If expected inflation remains constant but the market risk premium (rM ? rRF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase. 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 returns of both stocks will increase by the same amount. Since the market is in equilibrium, the required returns of the two stocks should be the same. If expected inflation remains constant but the market risk premium (rM? rRF) declines, the required return of Stock HB will decline but the required return of Stock LB will increase. Question 8
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Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio? Adding more such stocks will reduce the portfolio’s unsystematic, or diversifiable, risk. Adding more such stocks will increase the portfolio’s expected rate of return. Adding more such stocks will reduce the portfolio’s beta coefficient and thus its systematic risk. Adding more such stocks will have no effect on the portfolio’s risk. Adding more such stocks will reduce the portfolio’s market risk but not its unsystematic risk. Question 9 Which of the following statements is CORRECT? If a company with a high beta merges with a low - beta company, the best estimate of the new merged company’s beta is 1.0. Logically, it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks, especially if the projects are closely associated with research and development activities. The beta of an “average stock,” which is also “the market beta,” can change over time, sometimes drastically. If a newly issued stock does not have a past history that can be used for calculating beta, then we should always estimate that its beta will turn out to be 1.0. This is especially true if the company finances with more debt than the average firm. During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects, the calculated historical beta may be drastically different from the beta that will exist in the future. Question 10 Which of the following statements is CORRECT? A stock’s 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. 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.