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Exam 8: Risk and Rates of Return

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Question 81

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You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B.Which of the possible answers best describes the historical betas for A and B?

A) bA > 0;bB = 1.
B) bA > +1;bB = 0.
C) bA = 0;bB = -1.
D) bA < 0;bB = 0.
E) bA < -1;bB = 1.

F) D) and E)
G) C) and E)

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Question 82

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Calculate the required rate of return for Climax Inc. ,assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the firm has a beta of 2.30,and (5) its realized rate of return has averaged 15.0% over the last 5 years.Do not round your intermediate calculations.

A) 20.91%
B) 18.87%
C) 16.28%
D) 17.76%
E) 18.50%

F) A) and D)
G) C) and D)

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Question 83

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Suppose you hold a portfolio consisting of a $10,000 investment in each of 8 different common stocks.The portfolio's beta is 1.25.Now suppose you decided to sell one of your stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.55.What would the portfolio's new beta be? Do not round your intermediate calculations.

Assume that two investors each hold a portfolio,and that portfolio is their only asset.Investor A's portfolio has a beta of minus 2.0,while Investor B's portfolio has a beta of plus 2.0.Assuming that the unsystematic risks of the stocks in the two portfolios are the same,then the two investors face the same amount of risk.However,the holders of either portfolio could lower their risks,and by exactly the same amount,by adding some "normal" stocks with beta = 1.0.

Assume that the risk-free rate remains constant,but the market risk premium declines.Which of the following is most likely to occur?

Variance is a measure of the variability of returns,and since it involves squaring the deviation of each actual return from the expected return,it is always larger than its square root,the standard deviation.

Stock X has a beta of 0.7 and Stock Y has a beta of 1.3.The standard deviation of each stock's returns is 20%.The stocks' returns are independent of each other,i.e. ,the correlation coefficient,r,between them is zero.Portfolio P consists of 50% X and 50% Y.Given this information,which of the following statements is CORRECT?