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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
71) In the capital asset pricing model, the general risk preferences of investors in the marketplace are
reflected by ________.
A) the risk-free rate
B) the level of the security market line
C) the slope of the security market line
D) the difference between the beta and the risk-free rate
72) An increase in the beta of a corporation, all else being the same, indicates ________.
A) a decrease in risk, a higher required rate of return, and hence a lower share price
B) an increase in risk, a higher required rate of return, and hence a lower share price
C) a decrease in risk, a lower required rate of return, and hence a higher share price
D) an increase in risk, a lower required rate of return, and hence a higher share price
73) Two central components of the CAPM are the ________.
A) risk-free rate and the market risk premium
B) risk premium and the inflation rate
C) inflation rate and the market rate
D) market rate and the inflation premium
74) What is the risk-free rate of return if Asset X, with a beta of 1.5, has an expected return of 20 percent,
and the expected market return is 15 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 22.5%
75) What is the expected return for Asset X if it has a beta of 1.5, the expected market return is 15 percent,
and the risk-free rate is 5 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 20.0%
76) Adam wants to determine the required return on a stock portfolio with a beta coefficient of 0.5.
Assuming the risk-free rate of 6 percent and the market return of 12 percent, compute the required rate of
return.
77) Assuming a risk-free rate of 8 percent and a market return of 12 percent, would a wise investor
acquire a security with a beta of 1.5 if its expected return were 14 percent?
78) Suppose the CAPM is true. Asset X has a standard deviation of 25%. The risk-free asset, by
definition, has a standard deviation of 0%. Therefore, the expected return on asset X must exceed the
risk-free rate.
79) Suppose the CAPM is true. Asset X has a standard deviation of 20%, and Asset Y has a standard
deviation of 30%. Asset Y's expected return must exceed that of Asset X.
80) Dr. Dan is considering investing in a project with beta coefficient of 1.75. What would you
recommend him to do if this investment has an 11.5 percent rate of return, the risk-free rate is 5.5 percent,
and the rate of return on the market portfolio of assets is 8.5 percent?
81) The security market line (SML) reflects the required return in the marketplace for each level of
nondiversifiable risk (beta).
82) The capital asset pricing model (CAPM) links together unsystematic risk and return for all assets.
83) 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.
84) The security market line is not stable over time and shifts over time in response to changing
inflationary expectations.
85) The steeper the slope of the security market line, the greater the degree of risk aversion.
86) 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.
87) 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.
88) 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.
89) The CAPM uses standard deviation to relate an asset's risk relative to the market to the asset's
required return.
90) 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.
91) The widely shared expectations of hard times ahead tend to cause investors to become less risk-
averse.
92) 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
93) 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.
94) 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
95) 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
96) 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
97) 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
98) 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
99) 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
100) In the capital asset pricing model, the general risk preferences of investors in the marketplace are
reflected by ________.
A) the risk-free rate
B) the level of the security market line
C) the slope of the security market line
D) the difference between the beta and the risk-free rate
101) An increase in the beta of a corporation, all else being the same, indicates ________.
A) a decrease in risk, a higher required rate of return, and hence a lower share price
B) an increase in risk, a higher required rate of return, and hence a lower share price
C) a decrease in risk, a lower required rate of return, and hence a higher share price
D) an increase in risk, a lower required rate of return, and hence a higher share price
102) Two central components of the CAPM are the ________.
A) risk-free rate and the market risk premium
B) risk premium and the inflation rate
C) inflation rate and the market rate
D) market rate and the inflation premium
103) What is the risk-free rate of return if Asset X, with a beta of 1.5, has an expected return of 20 percent,
and the expected market return is 15 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 22.5%
104) What is the expected return for Asset X if it has a beta of 1.5, the expected market return is 15
percent, and the risk-free rate is 5 percent?
A) 5.0%
B) 7.5%
C) 15.0%
D) 20.0%
105) Adam wants to determine the required return on a stock portfolio with a beta coefficient of 0.5.
Assuming the risk-free rate of 6 percent and the market return of 12 percent, compute the required rate of
return.
106) Assuming a risk-free rate of 8 percent and a market return of 12 percent, would a wise investor
acquire a security with a beta of 1.5 if its expected return were 14 percent?
107) Suppose the CAPM is true. Asset X has a standard deviation of 25%. The risk-free asset, by
definition, has a standard deviation of 0%. Therefore, the expected return on asset X must exceed the
risk-free rate.
108) Suppose the CAPM is true. Asset X has a standard deviation of 20%, and Asset Y has a standard
deviation of 30%. Asset Y's expected return must exceed that of Asset X.
109) Dr. Dan is considering investing in a project with beta coefficient of 1.75. What would you
recommend him to do if this investment has an 11.5 percent rate of return, the risk-free rate is 5.5 percent,
and the rate of return on the market portfolio of assets is 8.5 percent?
