general business data bank general business data bank Question . Certain firms and industries are characterized by consistently low or high betas, depending on the particular situation. On the basis of that notion, which of the following companies seems out of place with its stated beta? (That is, one of the following companies definitely could not have the indicated beta, while the other companies seem well matched with their stated betas.) Save your time! Proper editing and formatting Free revision, title page, and bibliography Flexible prices and money-back guarantee ORDER NOW a. Sun Microsystems, Beta = 1.59. b. Amazon.com, Beta = 1.70. c. Ford Motor Company, Beta = 0.92. Make sure you submit a unique essay Our writers will provide you with an essay sample written from scratch: any topic, any deadline, any instructions. 100% ORIGINAL ORDER NOW d. Florida Power & Light, Beta = 1.52. e. Wal-Mart, Beta = 1.15. . Which of the following statements is most correct? a. The SML relates required returns to firms’ market risk. The slope and intercept of this line cannot be controlled by the financial manager. b. The slope of the SML is determined by the value of beta. c. If you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue on into the future. d. If investors become less risk averse, the slope of the Security Market Line will increase. e. Statements a and c are correct. . Other things held constant, (1) if the expected inflation rate decreases, and (2) investors become more risk averse, the Security Market Line would shift a. Down and have a steeper slope. b. Up and have a less steep slope. c. Up and keep the same slope. d. Down and keep the same slope. e. Down and have a less steep slope. . Which of the following statements is most correct about a stock that has a beta = 1.2? a. If the stock’s beta doubles its expected return will double. b. If expected inflation increases 3 percent, the stock’s expected return will increase by 3 percent. c. If the market risk premium increases by 3 percent the stock’s expected return will increase by less than 3 percent. d. All of the statements above are correct. e. Statements b and c are correct. . Assume that the risk-free rate, kRF, increases but the market risk premium, (kM – kRF) declines. The net effect is that the overall expected return on the market, kM, remains constant. Which of the following statements is most correct? a. The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0. b. The required return will increase for stocks that have a beta less than 1.0 but will decline for stocks that have a beta greater than 1.0. c. The required return of all stocks will fall by the amount of the decline in the market risk premium. d. The required return of all stocks will increase by the amount of the increase in the risk-free rate. e. Since the overall return on the market stays constant, the required return on all stocks will remain the same. . Which of the following statements is most correct? a. An increase in expected inflation could be expected to increase the required return on a riskless asset and on an average stock by the same amount, other things held constant. b. A graph of the SML would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis. c. If two “normal” or “typical” stocks were combined to form a 2-stock portfolio, the portfolio’s expected return would be a weighted average of the stocks’ expected returns, but the portfolio’s standard deviation would probably be greater than the average of the stocks’ standard deviations. d. If investors became more risk averse, then (1) the slope of the SML would increase and (2) the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks. e. The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt. . Which of the following statements is most correct? a. If the returns from two stocks are perfectly positively correlated (that is, the correlation coefficient is +1) and the two stocks have equal variance, an equally weighted portfolio of the two stocks will have a variance that is less than that of the individual stocks. b. If a stock has a negative beta, its expected return must be negative. c. According to the CAPM, stocks with higher standard deviations of returns will have higher expected returns. d. A portfolio with a large number of randomly selected stocks will have less market risk than a single stock that has a beta equal to 0.5. e. None of the statements above is correct. . Which of the following statements is most correct? a. We would observe a downward shift in the required returns of all stocks if investors believed that there would be deflation in the economy. b. If investors became more risk averse, then the new security market line would have a steeper slope. c. If the beta of a company doubles, then the required rate of return will also double. d. Statements a and b are correct. e. All of the statements above are correct. . Which of the following statements is most correct? a. If you add enough randomly selected stocks to a portfolio, you can completely eliminate all the market risk from the portfolio. b. If you form a large portfolio of stocks each with a beta greater than 1.0, this portfolio will have more market risk than a single stock with a beta = 0.8. c. Company-specific (or unsystematic) risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk. d. All of the statements above are correct. e. Statements b and c are correct. . Jane holds a large diversified portfolio of 100 randomly selected stocks and the portfolio’s beta = 1.2. Each of the individual stocks in her portfolio has a standard deviation of 20 percent. Jack has the same amount of money invested in a single stock with a beta equal to 1.6 and a standard deviation of 20 percent. Which of the following statements is most correct? a. Jane’s portfolio has a larger amount of company-specific risk since she is holding more stocks in her portfolio. b. Jane has a higher required rate of return, since she is more diversified. c. Jane’s portfolio has less market risk since it has a lower beta. d. Statements b and c are correct. e. None of the statements above is correct. . Which of the following statements is most correct? a. It is possible to have a situation in which the market risk of a single stock is less than the market risk of a portfolio of stocks. b. The market risk premium will increase if, on average, market participants become more risk averse. c. If you selected a group of stocks whose returns are perfectly positively correlated, then you could end up with a portfolio for which none of the unsystematic risk is diversified away. d. Statements a and b are correct. e. All of the statements above are correct. Tough: . Which of the following statements is most correct? a. According to CAPM theory, the required rate of return on a given stock can be found by use of the SML equation: ki = kRF + (kM - kRF)bi. Expectations for inflation are not reflected anywhere in this equation, even indirectly, and because of that the text notes that the CAPM may not be strictly correct. b. If the required rate of return is given by the SML equation as set forth in Statement a, there is nothing a financial manager can do to change his or her company’s cost of capital, because each of the elements in the equation is determined exclusively by the market, not by the type of actions a company’s management can take, even in the long run. c. Assume that the required rate of return on the market is currently kM = 15%, and that kM remains fixed at that level. If the yield curve has a steep upward slope, the calculated market risk premium would be larger if the 30-day T-bill rate were used as the risk-free rate than if the 30-year T-bond rate were used as kRF. d. Statements a and b are correct. e. Statements a and c are correct. . Which of the following statements is most correct? a. If investors become more risk averse but kRF remains constant, the required rate of return on high-beta stocks will rise, the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change. b. If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0. Thus, they would be equally risky from an investor’s standpoint. c. An investor who holds just one stock will be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk. d. Assume that the required rate of return on the market, kM, is given and fixed. If the yield curve were upward-sloping, then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for kRF. e. None of the statements above is correct. Multiple Choice: Problems . The risk-free rate of interest, kRF, is 6 percent. The overall stock market has an expected return of 12 percent. Hazlett, Inc. has a beta of 1.2. What is the required return of Hazlett, Inc. stock? a. 12.0% b. 12.2% c. 12.8% d. 13.2% e. 13.5% Answer: b . The risk-free rate is 5 percent. Stock A has a beta = 1.0 and Stock B has a beta = 1.4. Stock A has a required return of 11 percent. What is Stock B’s required return? a. 12.4% b. 13.4% c. 14.4% d. 15.4% e. 16.4% . Calculate the required rate of return for Mercury Inc., assuming that investors expect a 5 percent rate of inflation in the future. The real risk-free rate is equal to 3 percent and the market risk premium is 5 percent. Mercury has a beta of 2.0, and its realized rate of return has averaged 15 percent over the last 5 years. a. 15% b. 16% c. 17% d. 18% e. 20% . Consider the following information for three stocks, Stock A, Stock B, and Stock C. The returns on each of the three stocks are positively correlated, but they are not perfectly correlated. (That is, all of the correlation coefficients are between 0 and 1.) Expected Standard Stock Return Deviation Beta Stock A 10% 20% 1.0 Stock B 10 20 1.0 Stock C 12 20 1.4 Portfolio P has half of its funds invested in Stock A and half invested in Stock B. Portfolio Q has one third of its funds invested in each of the three stocks. The risk-free rate is 5 percent, and the market is in equilibrium. (That is, required returns equal expected returns.) What is the market risk premium (kM - kRF)? a. 4.0% b. 4.5% c. 5.0% d. 5.5% e. 6.0% . A stock has an expected return of 12.25 percent. The beta of the stock is 1.15 and the risk-free rate is 5 percent. What is the market risk premium? a. 1.30% b. 6.50% c. 15.00% d. 6.30% e. 7.25% . Given the following information, determine which beta coefficient for Stock A is consistent with equilibrium: = 11.3%; kRF = 5%; kM = 10% a. 0.86 b. 1.26 c. 1.10 d. 0.80 e. 1.35 . Assume that the risk-free rate is 5 percent and that the market risk premium is 7 percent. If a stock has a required rate of return of 13.75 percent, what is its beta? a. 1.25 b. 1.35 c. 1.37 d. 1.60 e. 1.96 . You hold a diversified portfolio consisting of a $10,000 investment in each of 20 different common stocks (that is, your total investment is $200,000). The portfolio beta is equal to 1.2. You have decided to sell one of your stocks that has a beta equal to 0.7 for $10,000. You plan to use the proceeds to purchase another stock that has a beta equal to 1.4. What will be the beta of the new portfolio? a. 1.165 b. 1.235 c. 1.250 d. 1.284 e. 1.333 . An investor is forming a portfolio by investing $50,000 in stock A that has a beta of 1.50, and $25,000 in stock B that has a beta of 0.90. The return on the market is equal to 6 percent and Treasury bonds have a yield of 4 percent. What is the required rate of return on the investor’s portfolio? a. 6.6% b. 6.8% c. 5.8% d. 7.0% e. 7.5% . You are an investor in common stocks, and you currently hold a well-diversified portfolio that has an expected return of 12 percent, a beta of 1.2, and a total value of $9,000. You plan to increase your portfolio by buying 100 shares of AT&E at $10 a share. AT&E has an expected return of 20 percent with a beta of 2.0. What will be the expected return and the beta of your portfolio after you purchase the new stock? a. = 20.0%; bp = 2.00 b. = 12.8%; bp = 1.28 c. = 12.0%; bp = 1.20 d. = 13.2%; bp = 1.40 e. = 14.0%; bp = 1.32 . Stock A has an expected return of 12 percent, a beta of 1.2, and a standard deviation of 20 percent. Stock B has an expected return of 10 percent, a beta of 1.2, and a standard deviation of 15 percent. Portfolio P has $900,000 invested in Stock A and $300,000 invested in Stock B. The correlation between Stock A’s returns and Stock B’s returns is zero (that is, r = 0). Which of the following statements is most correct? a. Portfolio P’s expected return is 11.5 percent. b. Portfolio P’s standard deviation is 18.75 percent. c. Portfolio P’s beta is less than 1.2. d. Statements a and b are correct. e. Statements a and c are correct. . Below are the stock returns for the past five years for Agnew Industries: Year Stock Return 2002 22% 2001 33 2000 1 1999 -12 1998 10 What was the stock’s coefficient of variation during this 5-year period? (Use the population standard deviation to calculate the coefficient of variation.) a. 10.80 b. 1.46 c. 15.72 d. 0.69 e. 4.22 . . %. %. . . . . : .