978-0133423822 chapter 8 Part 3

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31) Unsystematic risk can be eliminated through diversiication.

Question Status: Previous edition

Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate

portfolio systematic risk (beta).

Keywords: beta

Principles: Principle 2: There Is a Risk-Return Tradeof

32) Increasing a portfolio from 2 stocks to 4 stocks will reduce risk more than increasing a

portfolio from 10 stocks to 12 stocks.

Question Status: New question

Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate

portfolio systematic risk (beta).

Keywords: beta

Principles: Principle 2: There Is a Risk-Return Tradeof

33) The market rewards assuming additional unsystematic risk with additional returns.

Question Status: Previous edition

Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate

portfolio systematic risk (beta).

Keywords: beta

Principles: Principle 2: There Is a Risk-Return Tradeof

34) On average, the market rewards assuming additional systematic risk with additional

returns.

Question Status: Revised

Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate

portfolio systematic risk (beta).

Keywords: beta

Principles: Principle 2: There Is a Risk-Return Tradeof

35) Betas for individual stocks tend to be stable.

Question Status: Previous edition

Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate

portfolio systematic risk (beta).

Keywords: beta

Principles: Principle 2: There Is a Risk-Return Tradeof

36) A stock with a beta greater than 1.0 has lower nondiversiiable risk than a stock with a

beta of 1.0.

Question Status: Previous edition

Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate

portfolio systematic risk (beta).

Keywords: beta

Principles: Principle 2: There Is a Risk-Return Tradeof

37) Briely discuss why there is no reason to believe that the market will reward investors

with additional returns for assuming unsystematic risk.

Question Status: Previous edition

Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate

portfolio systematic risk (beta).

Keywords: beta

Principles: Principle 2: There Is a Risk-Return Tradeof

38) Provide an intuitive discussion of beta and its importance for measuring risk.

Question Status: Previous edition

Objective: 8.2 Understand the concept of systematic risk for an individual investment and calculate

portfolio systematic risk (beta).

Keywords: beta

Principles: Principle 2: There Is a Risk-Return Tradeof

8.3 The Security Market Line and the CAPM

1) The risk-return relationship for each inancial asset is shown on

A) the capital market line.

B) the New York Stock Exchange market line.

C) the security market line.

D) none of the above.

Question Status: Previous edition

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: security market line

Principles: Principle 2: There Is a Risk-Return Tradeof

2) Siebling Manufacturing Company’s common stock has a beta of .8. If the expected risk–

free return is 2% and the market ofers a premium of 8% over the risk-free rate, what is the

expected return on Siebling’s common stock?

A) 7.8%

B) 13.4%

C) 14.4%

D) 8.4%

Question Status: Revised

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: expected return

Principles: Principle 2: There Is a Risk-Return Tradeof

3) Huit Industries’ common stock has an expected return of 11.4% and a beta of 1.2. If the

expected risk-free return is 3%, what is the expected return for the market (round your

answer to the nearest .1%)?

A) 7.7%

B) 9.6%

C) 10.0%

D) 11.4%

Question Status: Revised

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: expected return

Principles: Principle 2: There Is a Risk-Return Tradeof

4) Tanzlin Manufacturing’s common stock has a beta of 1.5. If the expected risk-free return

is 2% and the expected return on the market is 14%, what is the expected return on the

stock?

A) 13.5%

B) 21.0%

C) 16.8%

D) 20.0%

Question Status: Revised

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: expected return

Principles: Principle 2: There Is a Risk-Return Tradeof

5) Given the capital asset pricing model, a security with a beta of 1.5 should return

________, if the risk-free rate is 3% and the market return is 11%.

A) 16.5%

B) 14.0%

C) 14.5%

D) 15.0%

Question Status: Revised

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: CAPM

Principles: Principle 2: There Is a Risk-Return Tradeof

6) The security market line (SML) relates risk to return, for a given set of market

conditions. If expected inlation increases, which of the following would most likely occur?

A) The market risk premium would increase.

B) Beta would increase.

C) The slope of the SML would increase.

D) The SML line would shift up.

Question Status: Previous edition

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: security market line

Principles: Principle 2: There Is a Risk-Return Tradeof

7) The security market line (SML) relates risk to return, for a given set of market

conditions. If risk aversion increases, which of the following would most likely occur?

A) The market risk premium would increase.

B) Beta would increase.

C) The slope of the SML would increase.

D) The SML line would shift up.

Question Status: Previous edition

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: security market line

Principles: Principle 2: There Is a Risk-Return Tradeof

8) The Elvis Alive Corporation, makers of Elvis memorabilia, has a beta of 2.35. The return

on the market portfolio is 12%, and the risk-free rate is 2.5%. According to CAPM, what is

the risk premium on a stock with a beta of 1.0?

A) 12.00%

B) 22.33%

C) 9.5%

D) 14.5%

Question Status: Revised

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: CAPM

Principles: Principle 2: There Is a Risk-Return Tradeof

9) Bell Weather, Inc. has a beta of 1.25. The return on the market portfolio is 12.5%, and

the risk-free rate is 5%. According to CAPM, what is the required return on this stock?

A) 20.62%

B) 9.37%

C) 14.37%

D) 15.62%

Question Status: Previous edition

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: CAPM

Principles: Principle 2: There Is a Risk-Return Tradeof

10) The rate on six-month T-bills is currently 5%. Andvark Company stock has a beta of 1.69

and a required rate of return of 15.4%. According to CAPM, determine the return on the

market portfolio.

A) 11.15%

B) 6.15%

C) 17.07%

D) 14.11%

Question Status: Previous edition

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: CAPM

Principles: Principle 2: There Is a Risk-Return Tradeof

11) You are going to invest all of your funds in one of three projects with the following

distribution of possible returns:

Project 1 Project 2

Standard Deviation 12% Standard Deviation 19.5%

Probability Return Probability Return

50% Chance 20% 30% Chance 30%

50% Chance -4% 40% Chance 10%

30% Chance -20%

Project 3

Standard Deviation 12%

Probability Return

10% Chance 30%

40% Chance 15%

40% Chance 10%

10% Chance -21%

If you are a risk-averse investor, which one should you choose?

A) Project 1

B) Project 2

C) Project 3

Question Status: Previous edition

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: expected return

Principles: Principle 2: There Is a Risk-Return Tradeof

12) The expected return on the market portfolio is currently 11%. Battmobile Corporation

stockholders require a rate of return of 23.0%, and the stock has a beta of 2.5. According to

CAPM, determine the risk-free rate.

A) 17.5%

B) 2.75%

C) 3.0%

D) 9.2%

Question Status: Revised

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: CAPM

Principles: Principle 2: There Is a Risk-Return Tradeof

13) Hefty stock has a beta of 1.2. If the risk-free rate is 7% and the market risk premium is

6.5%, what is the required rate of return on Hefty?

A) 14.8%

B) 14.4%

C) 12.4%

D) 13.5%

Question Status: Previous edition

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: CAPM

Principles: Principle 2: There Is a Risk-Return Tradeof

14) The market risk premium is measured by

A) beta.

B) market return less risk-free rate.

C) T-bill rate.

D) standard deviation.

Question Status: Previous edition

Objective: 8.3 Estimate the investor’s expected rate of return using the Capital Asset Pricing Model.

Keywords: security market line

Principles: Principle 2: There Is a Risk-Return Tradeof