978-0134083308 Chapter 5 Part 2

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6) A beta of 0.5 means that a stock is half as risky the overall market.

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7) The index used to represent market returns is always assigned a beta of 1.0.

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8) The betas of most stocks are constant over time.

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9) A stock with a beta of 1.3 is less risky than a stock with a beta of 0.42.

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10) For stocks with positive betas, higher risk stocks will have higher beta values.

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11) Adding stocks with higher standard deviations to a portfolio will necessarily increase the

portfolio’s risk.

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12) Beta measures diversifiable risk while standard deviation measures systematic risk.

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13) By design, half of all stocks betas are positive betas and half are negative.

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14) Which of the following represent unsystematic risks?

I. the president of a company suddenly resigns

II. the economy goes into a recessionary period

III. a company’s product is recalled for defects

IV. the Federal Reserve unexpectedly changes interest rates

A) I, II and IV only

B) II and IV only

C) I and III only

D) I, II and III only

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15) Which of the following represent systematic risks?

I. the president of a company suddenly resigns

II. the economy goes into a recessionary period

III. a company’s product is recalled for defects

IV. the Federal Reserve unexpectedly changes interest rates

A) I, II and IV only

B) II and IV only

C) I and III only

D) I, II and III only

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16) Estimates of a stock’s beta may vary depending on

I. when the estimate was made.

II. the risk-free rate of interest used.

III. how many months of returns were used to estimate the beta.

IV. the index used to represent market returns.

A) I, II and IV only

B) II and IV only

C) I, III and IV only

D) I, II and III only

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17) Which one of the following conditions can be effectively eliminated through portfolio

diversification?

A) a general price increase nationwide

B) an interest rate reduction by the Federal Reserve

C) increased government regulation of auto emissions

D) change in the political party that controls Congress

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18) Which one of the following types of risk cannot be effectively eliminated through portfolio

diversification?

A) inflation risk

B) labor problems

C) materials shortages

D) product recalls

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19) Which one of the following conditions can be effectively eliminated through portfolio

diversification?

A) a general price increase nationwide

B) an interest rate reduction by the Federal Reserve

C) increased government regulation of auto emissions

D) change in the political party that controls Congress

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20) Systematic risks

A) can be eliminated by investing in a variety of economic sectors.

B) are forces that affect all investment categories.

C) result from random firm-specific events.

D) are unique to certain types of investment.

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21) A measure of systematic risk is

A) standard deviation.

B) correlation coefficient.

C) beta.

D) variance.

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22) Beta can be defined as the slope of the line that explains the relationship between

A) the return on a security and the return on the market.

B) the returns on a security and various points in time.

C) the return on stocks and the returns on bonds.

D) the risk free rate of return versus the market rate of return.

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23) In designing a portfolio, relevant risk is

A) total risk.

B) unsystematic risk.

C) event risk.

D) nondiversifiable risk.

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24) Which of the following best describes the relationship between a stock’s beta and the

standard deviation of the stock’s returns?

A) The higher the standard deviation, the higher the beta.

B) The higher the standard deviation, the lower the beta.

C) The relationship depends on the correlation between the stock’s returns and the market’s

returns.

D) Standard deviation and beta are different ways of measuring the same thing.

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25) A stock’s beta value is a measure of

A) interest rate risk.

B) total risk.

C) systematic risk.

D) diversifiable risk.

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26) The beta of the market is

A) -1.0.

B) 0.0.

C) 1.0.

D) undefined.

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27) When the stock market has bottomed out and is beginning to recover, the best portfolio to

own is the one with a beta of

A) 0.0.

B) +0.5.

C) +1.5.

D) +2.0.

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28) The best stock to own when the stock market is at a peak and is expected to decline in value

is one with a beta of

A) +1.5.

B) +1.0.

C) -1.0.

D) -0.5.

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29) Stock of Gould and Silber Inc. has a beta of -1. If the market declines by 10%, Gould and

Silber would be expected to

A) decline by 10%.

B) rise by 10%.

C) not respond to market fluctuations.

D) decline by 1%.

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30) Beta is the slope of the best fit line for the points with coordinates representing the

________ and the ________ for each one of several years.

A) rate of return; level of risk for an individual security

B) rate of inflation; rate of return for an individual security

C) risk level of a stock; market rate of return

D) market rate of return; security’s rate of return

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31) The stock of ABC, Inc. has a beta of .80. The market rate of return is expected to increase

by by 5%. Beta predicts that ABC stock should

A) increase in value by 6.25%.

B) increase in value by 4.0%.

C) decrease in value by 1.0%.

D) increase in value by .8%.

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32) Analysts commonly use the ________ to measure market return.

A) the Dow Jones Industrial Average

B) the rate of return on 10 year Treasury bonds

C) some large, mainstream company such as General Electric

D) the Standard & Poor’s 500 Index

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33) The market rate of return increased by 8% while the rate of return on XYZ stock increased

by 4%. The beta of XYZ stock is

A) -2.0.

B) -0.40.

C) 0.50.

D) 2.0.

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34) Which of the following statements concerning beta are correct?

I. Stock with high standard deviations of returns will always high betas.

II. The higher the beta, the higher the expected return.

III. A beta can be positive, negative, or equal to zero.

IV. A beta of .35 indicates a lower rate of risk than a beta of -0.50.

A) II and III only

B) I and IV only

C) II, III and IV only

D) I, II, III and IV

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35) Explain what beta measures and how investors can use beta.

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5.4 Learning Goal 4

1) The basic theory linking portfolio risk and return is the Capital Asset Pricing Model.

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2) The CAPM estimates the required rate of return on a stock held as part of a well diversified

portfolio.

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3) The Dow Jones Industrial Average of thirty stocks is customarily used to represent market

returns in the CAPM.

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4) In the Capital Asset Pricing Model, beta measures a stock’s sensitivity to overall market

returns.

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5) According to the CAPM, the required rate of a return on a stock can be estimated using only

beta and the risk-free rate.

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