Question 1 For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true? The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation. The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation. The beta of the portfolio is less than the average of the betas of the individual stocks. The beta of the portfolio is equal to the average of the betas of the individual stocks. The beta of the portfolio is larger than the average of the betas of the individual stocks. Question 2 Which of the following statements is CORRECT? The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks. If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio. The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future. The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks. It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, rRF. Question 3 Stock As beta is 1.5 and Stock Bs beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.) When held in isolation, Stock A has more risk than Stock B. Stock B must be a more desirable addition to a portfolio than A. Stock A must be a more desirable addition to a portfolio than B. The expected return on Stock A should be greater than that on B. The expected return on Stock B should be greater than that on A. Question 4 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? The required return of all stocks will remain unchanged since there was no change in their betas. The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium. The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will increase while the returns of safer stocks (such as Stock A) will decrease. The required returns on all three stocks will increase by the amount of the increase in the market risk premium. The required return on the average stock will remain unchanged, but the returns on riskier stocks (such as Stock C) will decrease while the returns on safer stocks (such as Stock A) will increase. Question 5 Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is CORRECT? Stock Bs required return is double that of Stock As. If the marginal investor becomes more risk averse, the required return on Stock B will increase by more than the required return on Stock A. An equally weighted portfolio of Stocks A and B will have a beta lower than 1.2. If the marginal investor becomes more risk averse, the required return on Stock A will increase by more than the required return on Stock B. If the risk-free rate increases but the market risk premium remains constant, the required return on St…
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