31) An increase in nondiversifiable risk would ________.
A) cause an increase in the beta and would lower the required return
B) have no effect on the beta and would, therefore, cause no change in the required return
C) cause an increase in the beta and would increase the required return
D) cause a decrease in the beta and would, therefore, lower the required rate of return
32) An increase in the Treasury Bill rate ________.
A) has no effect on the required rate of return of a common stock
B) increases the required rate of return of a common stock
C) doubles the required rate of return of a common stock
D) increases the beta of a common stock
33) The beta of a portfolio ________.
A) is the sum of the betas of all assets in the portfolio
B) is the product of the betas of the individual assets in the portfolio
C) is the median of the range of beta of the portfolio
D) is the weighted average of the betas of the individual assets in the portfolio
Table 8.2
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows:
34) Given the information in Table 8.2, what is the expected return of this portfolio?
A) 11.40%
B) 10.00%
C) 11.33%
D) 11.70%
35) The beta of the portfolio in Table 8.2, containing assets X, Y, and Z is ________.
A) 1.5
B) 2.4
C) 1.6
D) 2.0
36) The beta of the portfolio in Table 8.2 indicates this portfolio ________.
A) has more risk than the market
B) has less risk than the market
C) has an unrelated amount of risk compared to the market
D) has the same risk as the market
37) As randomly selected securities are combined to create a portfolio, the ________ risk of the
portfolio decreases. The portion of the risk eliminated is ________ risk, while that remaining is
________ risk.
A) diversifiable; nondiversifiable; total
B) relevant; irrelevant; total
C) total; diversifiable; nondiversifiable
D) total; nondiversifiable; diversifiable
38) Nicole holds three stocks in her portfolio: A, B, and C. The portfolio beta is 1.40. Stock A
comprises 15 percent of the dollar value of her holdings and has a beta of 1.0. If Nicole sells all
of her investment in A and invests the proceeds in the risk-free asset, her new portfolio beta will
be ________.
A) 0.60
B) 0.88
C) 1.00
D) 1.25
39) If you expect the market to increase which of the following portfolios should you purchase?
A) a portfolio with a beta of 1.9
B) a portfolio with a beta of 1.0
C) a portfolio with a beta of 0
D) a portfolio with a beta of -0.5
40) Nico owns 100 shares of Stock X which has a price of $12 per share and 200 shares of Stock
Y which has a price of $3 per share. What is the proportion of Nico’s portfolio invested in stock
X?
A) 77%
B) 67%
C) 50%
D) 33%
41) Nico wants to invest all of his money in just two assets: the risk-free asset and the market
portfolio. What is Nico’s portfolio beta if he invests a quarter of his money in the market
portfolio and the rest in the risk free asset?
A) 0.00
B) 0.25
C) 0.75
D) 1.00
42) What is the expected market return if the expected return on Asset X is 20 percent, its beta is
1.5, and the risk free rate is 5 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 22.5%
43) What is Nico’s portfolio beta if he invests an equal amount in Asset X with a beta of 0.60,
Asset Y with a beta of 1.60, and the risk-free asset?
A) 1.24
B) 1.00
C) 0.73
D) 0.66
Table 8.3
Consider the following two securities X and Y.
44) Which security (X or Y) in Table 8.3 has the least total risk? Which has the least systematic
risk?
A) X; X
B) X; Y
C) Y; X
D) Y; Y
45) Using the data from Table 8.3, what is the beta for a portfolio with two-thirds of the funds
invested in X and one-third invested in Y?
A) 0.88
B) 1.17
C) 1.33
D) 1.67
46) Using the data from Table 8.3, what is the portfolio expected return and the portfolio beta if
you invest 35 percent in X, 45 percent in Y, and 20 percent in the risk-free asset?
A) 9.875%, 0.975
B) 10.125, 1.025
C) 8.875%, 0.975
D) 20.5%, 1.250
47) Using the data from Table 8.3, what is the portfolio expected return if you invest 100 percent
of your money in X, borrow an amount equal to half of your own investment at the risk-free rate
and invest your borrowings in asset X?
A) 18.75%
B) 22.50%
C) 12.50%
D) 16.25%
48) A(n) ________ in the beta coefficient normally causes ________ in the required return and
therefore ________ in the price of the stock, everything else remaining the same.
A) increase; an increase; an increase
B) increase; a decrease; an increase
C) increase; an increase; a decrease
D) decrease; a decrease; a decrease
49) Tangshan Antiques has a beta of 1.40, the annual risk-free rate of interest is currently 10
percent, and the required return on the market portfolio is 16 percent. The firm estimates that its
future dividends will continue to increase at an annual compound rate consistent with that
experienced over the 2016-2019 period.
(a) Estimate the value of Tangshan Antiques stock.
(b) A lawsuit has been filed against the company by a competitor in 2019, and the potential loss
has increased risk, which is reflected in the company’s beta, increasing it to 1.6. What is the
estimated price of the stock following the filing of the lawsuit in 2019?
50) Tangshan China’s stock is currently selling for $160.00 per share and the firm’s dividends are
expected to grow at 5 percent indefinitely. In addition, Tangshan China’s most recent dividend
was $5.50. The expected risk free rate of return is 3 percent, the expected market return is 8
percent, and Tangshan has a beta of 1.20.
(a) Based on the dividend valuation model, what return do investors expect to earn in the future?
(b) What is the expected return based on the CAPM?
(c) Would Tangshan China be a good investment at this time? Explain
51) The difference between the return on the market portfolio of assets and the risk-free rate of
return represents the premium the investor must receive for taking the average amount of risk
associated with holding the market portfolio of assets.
52) The security market line (SML) reflects the required return in the marketplace for each level
of nondiversifiable risk (beta).
53) The capital asset pricing model (CAPM) links together unsystematic risk and return for all
assets.
54) The correlation coefficient is an index of the degree of movement of an asset’s return in
response to a change in the risk-free asset return.
55) The security market line is not stable over time and shifts over time in response to changing
inflationary expectations.
56) The steeper the slope of the security market line, the greater the degree of risk aversion.
57) A change in inflationary expectations resulting from events such as international trade
embargoes or major changes in Federal Reserve policy will result in a shift in the SML.
58) Greater risk aversion results in lower required returns for each level of risk, whereas a
reduction in risk aversion would cause the required return for each level of risk to increase as
depicted by SML.
59) A given change in inflationary expectations will be fully reflected in a corresponding change
in the returns of all assets and will be reflected graphically in a parallel shift of the SML.
60) The CAPM uses standard deviation to relate an asset’s risk relative to the market to the
asset’s required return.
61) Changes in risk aversion, and therefore shifts in the SML, result from changing tastes and
preferences of investors, which generally result from various economic, political, and social
events.
62) The widely shared expectations of hard times ahead tend to cause investors to become less
risk-averse.
63) The ________ describes the relationship between nondiversifiable risk and the required rate
of return.
A) EBIT-EPS approach to capital structure
B) supply-demand function for assets
C) capital asset pricing model
D) Gordon model
64) Which of the following is TRUE of risk aversion?
A) Greater risk aversion results in lower required returns for each level of risk.
B) A reduction in risk aversion causes the required return for each level of risk to increase.
C) In general, widely shared expectations of hard times ahead tend to cause investors to become
less risk averse.
D) Changes in risk aversion, and therefore shifts in the SML, result from changing preferences of
investors.
65) In the capital asset pricing model, the beta coefficient is a measure of ________.
A) unsystematic risk
B) non-aggregate risk
C) business-specific risk
D) nondiversifiable risk
66) Asset Y has a beta of 1.2. The risk-free rate of return is 6 percent, while the return on the
market portfolio of assets is 12 percent. The market risk premium is ________.
A) 7.2 percent
B) 6.0 percent
C) 13.2 percent
D) 10 percent
67) In the capital asset pricing model, the beta coefficient is a measure of ________.
A) business-specific risk
B) maturity risk
C) market risk
D) unsystematic risk
68) Asset P has a beta of 0.9. The risk-free rate of return is 8 percent, while the return on the
market portfolio of assets is 14 percent. The asset’s required rate of return is ________.
A) 13.4 percent
B) 22.0 percent
C) 15.4 percent
D) 6.0 percent
69) As risk aversion increases ________.
A) a firm’s beta will remain neutral
B) investors’ required rate of return will increase
C) a firm’s beta will decrease
D) investors’ required rate of return will remain unchanged
70) In the capital asset pricing model, an increase in inflationary expectations will be reflected by
________.
A) no effect on security market line
B) a decrease in the slope of the security market line
C) a parallel shift downward in the security market line
D) a parallel shift upward in the security market line