FM11_Ch_05_Test_Bank

FM11_Ch_05_Test_Bank - CHAPTER 5 RISK AND RETURN:...

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(Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: Beta coefficient Answer: a Diff: E 1 . If the returns of two firms are negatively correlated, then one of them must have a negative beta. a. True b. False Beta coefficient Answer: b Diff: E 2 . A stock with a beta equal to -1.0 has zero systematic (or market) risk. a. True b. False Beta coefficient Answer: a Diff: E 3 . It is possible for a firm to have a positive beta, even if the correlation between the returns of it and another firm are negative. a. True b. False Linearity and beta Answer: a Diff: E 4 . In estimating a security's beta coefficient, the rise-over-run calculation results in a ratio. If all the observation points for the security's returns and the market's returns do not fall on a straight line then the ratio is subject to change. a. True b. False SML Answer: a Diff: E 5 . The SML relates required returns to firms’ systematic (or market) risk. The slope and intercept of this line are not controllable by the financial manager. a. True b. False Chapter 5 - Page 1 CHAPTER 5 RISK AND RETURN: EXTENSIONS
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SML Answer: b Diff: E 6 . The slope of the SML is determined by the value of beta. a. True b. False SML Answer: a Diff: E 7 . If you plotted the returns of Selleck and Company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on Selleck should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future. a. True b. False Portfolio risk Answer: a Diff: E 8 . In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are interested in ex ante (future) data. a. True b. False Medium: CAPM Answer: b Diff: M 9 . The Capital Asset Pricing Model (CAPM) is a multi-period model which takes account of differences in securities’ maturities, and it can be used to determine the required rate of return for any given level of systematic risk. a. True b. False Portfolio beta Answer: b Diff: M 10 . We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security. a. True b. False SML Answer: b Diff: M 11 . The Y-axis intercept of the SML indicates the return on the individual asset when the realized return on an average (b = 1) stock is zero. a. True b. False Chapter 5 - Page 2
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Risk aversion Answer: a Diff: M 12 . If investors are risk averse, we can conclude that the required rate of return associated with an asset held in isolation whose standard deviation is 0.21 will be greater than the return required on an asset whose standard deviation is 0.10. However, if assets are held in portfolios, it is possible that the required return could be higher on the low standard deviation stock.
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This test prep was uploaded on 04/19/2008 for the course FIN 332 taught by Professor Dasilva during the Fall '08 term at CSU Fullerton.

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FM11_Ch_05_Test_Bank - CHAPTER 5 RISK AND RETURN:...

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