# Quiz Chapter 8 Answer Key_1 - Quiz CHAPTER 8 RISK AND RATES...

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Expected returns Answer: a EASY 1 . T. Martell Inc.'s stock has a 50% chance of producing a 30% return, a 35% chance of producing a 9% return, and a 15% chance of producing a -25% return. What is Martell's expected return? a. 14.4% b. 15.2% c. 16.0% d. 16.8% e. 17.6% Portfolio beta Answer: c EASY 2 . An investor has a 2-stock portfolio with \$50,000 invested in Palmer Manufacturing and \$50,000 in Nickles Corporation. Palmer’s beta is 1.20 and Nickles’ beta is 1.00. What is the portfolio's beta? a. 0.94 b. 1.02 c. 1.10 d. 1.18 e. 1.26 CAPM Answer: b EASY 3 . Magee Company's stock has a beta of 1.20, the risk-free rate is 4.50%, and the market risk premium is 5.00%. What is Magee's required return? a. 10.25% b. 10.50% c. 10.75% d. 11.00% e. 11.25% CAPM Answer: c MEDIUM 4 . Niendorf Corporation's stock has a required return of 13.00%, the risk- free rate is 7.00%, and the market risk premium is 4.00%. Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2.00%. What is Niendorf's new required return? a. 14.00% b. 15.00% c. 16.00% d. 17.00% e. 18.00% Chapter 8: Risk and Rates of Return Page 1 Quiz CHAPTER 8 RISK AND RATES OF RETURN

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Risk concepts Answer: e MEDIUM 5 . Which of the following statements is CORRECT? a. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events. b. Portfolio diversification reduces the variability of returns on an individual stock. c. When company-specific risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market. d. A stock with a beta of -1.0 has zero market risk if held in a 1- stock portfolio. e. The SML relates its required return to a firm’s market risk. The slope and intercept of this line cannot be controlled by the financial manager. Market risk premium Answer: c MEDIUM 6 . Which of the following statements is CORRECT? (Assume that the risk- free rate is a constant.) a. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%. b. If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0. c. If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0. d. The effect of a change in the market risk premium depends on the level of the risk-free rate. e. The effect of a change in the market risk premium depends on the slope of the yield curve. Page 2 Chapter 8: Risk and Rates of Return
Beta coefficient Answer: d MEDIUM 7 . Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.) a. When held in isolation, Stock A has more risk than Stock B. b. Stock B would be a more desirable addition to a portfolio than Stock A.

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Quiz Chapter 8 Answer Key_1 - Quiz CHAPTER 8 RISK AND RATES...

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