Finance 534 Week 5 Quiz 4
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 occurred 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 her portfolio, or does the choice not matter?
Correct Answer:
Stock B.
Question 5
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 occurred 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 her portfolio, or does the choice not matter?
Correct Answer:
Stock B.
Question 5
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Document Details
University
Strayer University
Subject
Finance