h06 p11 stock a has an expected return of 12 a beta of 1 2 and a stand
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H06-P11
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 $300,000 invested in Stock A and $100,000 invested
in Stock B. The correlation between the two stocks' returns is zero (that is, TAB = 0). Which of the following statements is
CORRECT?
a. The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued.
b. The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued.
c. Portfolio AB's expected return is 11.0%. x
d. Portfolio AB's beta is less than 1.2.
e.
Portfolio AB's standard deviation is 17.5%.
H06-P13
Stock X has a beta of 0.7 and Stock Y has a beta of 1.7. Which of the following statements must be true, according to the
CAPM?
a. Stock Y's realized return during the coming year will be higher than Stock X's return.
○ b. If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two
stocks should increase by the same amount.
C.
Stock Y's return has a higher standard deviation than Stock X. X
d. If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its
required return than will Stock Y.
e. If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower
than 1.0, provided the returns on the two stocks are not perfectly correlated.
H06-P16
The $10.00 million mutual fund Henry manages has a beta of 1.05 and a 9.50% required return. The risk-free rate is 4.20%.
Henry now receives another $5.00 million, which he invests in stocks with an average beta of 0.65. What is the required rate of
return on the new portfolio? (Hint: You must first find the market risk premium, then find the new portfolio beta.)
a. 8.83%
Ob. 9.05% x
c. 9.27%
○ d. 9.51%
e. 9.74% H06-P19
Which of the following statements is CORRECT?
a. If investors become more risk averse but TRF does not change, then the required rate of return on high-beta stocks will
rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not
change.
Ob. An investor who holds just one stock will generally 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.
c.
There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML.
○ d. Assume that the required rate of return on the market, IM, is given and fixed at 10%. 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 TRF-
e. 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, assuming the investor's only asset is one or the other of the
mutual funds.
H06-P22
Which of the following statements is CORRECT?
a.
Other things held constant, if investors suddenly become convinced that there will be deflation in the economy, then the
required returns on all stocks should increase.
b. If a company's beta were cut in half, then its required rate of return would also be halved.
c. If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required
rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will
increase.
×
Od. If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rate of
return on an average stock will remain unchanged, but required returns on stocks with betas less than 1.0 will rise.
e. If a company's beta doubles, then its required rate of return will also double.
H06-P24
Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)
a. The effect of a change in the market risk premium depends on the slope of the yield curve.
b. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.
C.
If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of
1.0.
d. The effect of a change in the market risk premium depends on the level of the risk-free rate. *
e. If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater
than 1.0, but it will decrease for stocks that have a beta less than 1.0.