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Exam 9: Risk and Rates of Return

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Question 81

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A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

A) True
B) False

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Question 82

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Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

A) If a stock has a negative beta,its required return under the CAPM would be less than 5%.
B) If a stock's beta doubled,its required return under the CAPM would also double.
C) If a stock's beta doubled,its required return under the CAPM would more than double.
D) If a stock's beta were 1.0,its required return under the CAPM would be 5%.
E) If a stock's beta were less than 1.0,its required return under the CAPM would be less than 5%.

F) B) and D)
G) None of the above

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Question 83

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The CAPM is built on historic conditions,although in most cases we use expected future data in applying it.Because betas used in the CAPM are calculated using expected future data,they are not subject to changes in future volatility.This is one of the strengths of the CAPM.

If the returns of two firms are negatively correlated,then one of them must have a negative beta.

We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.

A mutual fund manager has a $40.00 million portfolio with a beta of 1.00.The risk-free rate is 4.25%,and the market risk premium is 6.00%.The manager expects to receive an additional $22.00 million which she plans to invest in additional stocks.After investing the additional funds,she wants the fund's required and expected return to be 13.00%.What must the average beta of the new stocks be to achieve the target required rate of return? Do not round your intermediate calculations.

Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year.The T-bill rate is 4.00%,and the T-bond rate is 5.25%.The annual return on the stock market during the past 4 years was 10.25%.Investors expect the average annual future return on the market to be 12.50%.Using the SML,what is the firm's required rate of return? Do not round your intermediate calculations.