Fin 534 week 5 quiz

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FIN 534 Week 5 Quiz 1. Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

2. 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?

3. 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.

4. 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?

5. Inflation, recession, and high interest rates are economic events that are best characterized as being 6. Which of the following statements is CORRECT? 7. 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?

8. Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

9. Which of the following statements is CORRECT? 10. Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%. Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%. Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B. The correlation between the two stocks' returns is zero (that is, rA,B = 0). Which of the following statements is CORRECT? 11. The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM ? rRF, is positive. Which of the following statements is CORRECT? 12. Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has equal amounts invested in each of the three stocks. Each of the stocks has a standard deviation of 25%. The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero). Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged. Which of the following statements is CORRECT? 13. Which of the following statements is CORRECT? 14. Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)

15. Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is CORRECT? 16. If a stock’s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

17. If in the opinion of a given investor a stock’s expected return exceeds its required return, this suggests that the investor thinks 18. Which of the following statements is CORRECT, assuming stocks are in equilibrium?

19. For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then 20. An increase in a firm’s expected growth rate would cause its required rate of return to 21. Which of the following statements is CORRECT? 22. Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT?Expected dividend, D1 $3.00 Current Price, P0 $50 Expected constant growth rate 6.0% 23. Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT? 24. Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT? 25. The preemptive right is important to shareholders because it

26. The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT? 27. Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT? 28. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Required return 10% 12% Market price $25 $40 Expected growth 7% 9% 29. The expected return on Natter Corporation’s stock is 14%. The stock’s dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT? 30. Which of the following statements is CORRECT?