Finance 534 Week 5 Quiz 4

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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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Which of the following statements is CORRECT?(Assume that the risk-free rate is a constant.)CorrectAnswer:If the market risk premium increases by 1%, then the required return willincrease by 1% for a stockthat has a beta of 1.0.Question 6During 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 followingstatements is CORRECT?CorrectAnswer:The required return will fall for all stocks, but it will fall more for stocks withhigher betas.Question 72 out of 2 pointsStock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statementsmust 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 8Bob has a $50,000 stock portfolio with a beta of 1.2, an expected return of 10.8%, and a standarddeviation of 25%.Becky also has a $50,000 portfolio, but it has a beta of 0.8, an expected returnof 9.2%, and a standard deviation that is also 25%.The correlation coefficient, r, between Bob'sand Becky's portfolios is zero.If Bob and Becky marry and combine their portfolios, which ofthe following best describes their combined $100,000 portfolio?CorrectAnswer:The combined portfolio's beta will be equal to a simple weighted average of thebetas of the two individual portfolios, 1.0; its expected return will be equal to asimple 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 twoportfolios' standard deviations, 25%.Question 9Stock A's beta is 1.5 and Stock B's beta is 0.5.Which of the following statements must be true

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