C03 - Chapter 3 Risk and Return: Part 2 (Difficulty: E =...

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Chapter 3 Risk and Return: Part 2 (Difficulty: E = Easy, M = Medium, T = Tough) Beta coefficient If the returns of two firms are negatively correlated, then one of them must have a negative beta. a.Trueb.False Beta coefficient A stock's beta is more relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only one stock. a.Trueb.False Beta coefficient A stock with a beta equal to -1.0 has zero systematic (or market) risk. a.Trueb.False Beta coefficient 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.Trueb.False SML 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.Trueb.False SML The slope of the SML is determined by the value of beta. a.Trueb.False Copyright  ©  1996 by The Dryden Press.  All rights reserved.
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SML 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.Trueb.False SML If investors become less risk averse, the slope of the Security Market Line will increase. a.Trueb.False CAPM 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.Trueb.False Portfolio beta 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.Trueb.False SML 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.Trueb.False Risk measures Which is the best measure of risk for an asset held in isolation? Which is the best measure for an asset held in a diversified portfolio? a.Variance; correlation coefficient b.Standard deviation; correlation coefficient c.Beta; variance d.Coefficient of variation; beta e.Beta; beta Copyright  ©  1996 by The Dryden Press.  All rights reserved.
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Beta coefficient Which of the following is not a difficulty concerning beta and its estimation? a.Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.
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This note was uploaded on 11/22/2010 for the course FIN 4582 taught by Professor Ken during the Spring '10 term at Fairleigh Dickinson.

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C03 - Chapter 3 Risk and Return: Part 2 (Difficulty: E =...

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