Chapter 08: Risk and Rates of Return
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93. Which of the following statements is CORRECT?
a. Beta is measured by the slope of the security market line.
b. If the risk-free rate rises, then the market risk premium must also rise.
c. If a company’s beta is halved, then its required return will also be halved.
d. If a company’s beta doubles, then its required return will also double.
e. The slope of the security market line is equal to the market risk premium, (rM – rRF).
94. Stock A has a beta of 1.2 and a standard deviation of 20%. Stock B has a beta of 0.8 and a standard deviation of 25%.
Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B. Which of the following
statements is CORRECT? (Assume that the stocks are in equilibrium.)
a. Stock A’s returns are less highly correlated with the returns on most other stocks than are B’s returns.
b. Stock B has a higher required rate of return than Stock A.
c. Portfolio P has a standard deviation of 22.5%.
d. More information is needed to determine the portfolio’s beta.
e. Portfolio P has a beta of 1.0.
Chapter 08: Risk and Rates of Return
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e. Assume that the required rate of return on the market, rM, 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 rRF.
115. Taggart Inc.’s stock has a 50% chance of producing a 46% return, a 30% chance of producing a 10% return, and a
20% chance of producing a –28% return. What is the firm’s expected rate of return? Do not round your intermediate
calculations.
a. 20.60%
b. 21.83%
c. 20.40%
d. 18.16%
e. 22.24%
Chapter 08: Risk and Rates of Return
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116. Dothan Inc.’s stock has a 25% chance of producing a 36% return, a 50% chance of producing a 12% return, and a
25% chance of producing a –18% return. What is the firm’s expected rate of return? Do not round your intermediate
calculations.
a. 9.35%
b. 10.50%
c. 10.40%
d. 9.14%
e. 11.76%
1.00 10.50% = Expected return
117. Cheng Inc. is considering a capital budgeting project that has an expected return of 23% and a standard deviation of
30%. What is the project’s coefficient of variation? Do not round your intermediate calculations. Round the final answer
to 2 decimal places.
a. 1.60
b. 1.41
c. 1.33
d. 1.30
e. 1.00
Chapter 08: Risk and Rates of Return
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d. 12.15%; 1.20
e. 13.97%; 0.97
122. Calculate the required rate of return for Climax Inc., assuming that (1) investors expect a 4.0% rate of inflation in the
future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the firm has a beta of 2.50, and (5) its
realized rate of return has averaged 15.0% over the last 5 years. Do not round your intermediate calculations.
a. 16.77%
b. 20.09%
c. 21.65%
d. 15.80%
e. 19.50%
