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Finance 534 Week 5 Quiz 4

Finance
Strayer University
8 pages
Shared May 2025

A quiz covering investment principles and risk management.

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Finance 534 week 5 quiz 4 Question 1 Assume 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 following would be most likely to have occ urred as a result of these changes? Answer Correct Answer: The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas. Question 2 Assume that the risk - free rate is 5%. Which of the following statements is CORRECT? Correct Answer: If a stock has a negative beta, its required return under the CAPM would be less than 5%. Question 3 Which of the following statements is CORRECT? Correct Answer: Diversifiable risk can be reduced by forming a large portfolio, but normally even highly - diversified portfolios are subject to market (or systematic) risk. 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 h er portfolio, or does the choice not matter? Correct Answer: Stock B. Question 5
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Which of the following statements is CORRECT? (Assume that the risk - free rate is a constant.) Correct Answer: If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0. Question 6 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? Correct Answer: The required return will fall for all stocks, but it will fall more for stocks with higher betas. 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. Correct Answer: In equilibrium, the expected return on Stock A will be greater than that on B. Question 8 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? Correct 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%. Question 9 Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true