FIN 534 TEST 4

FIN 534 TEST 4 - FIN 534 TEST 4 Question 1 Which of the...

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FIN 534 TEST 4 Question 1 Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio? Answer Correct Answer: Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk. Question 2 Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has equal amounts invested in each of the three stocks. Each of the stocks has a standard deviation of 25%. The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero).
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Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged. Which of the following statements is CORRECT? Answer Correct Answer: The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium. Question 3 Which of the following statements is CORRECT? Answer Correct Answer: The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. that exists in the future. Question 4 For a portfolio of 40 randomly selected stocks,
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which of the following is most likely to be true? Answer Correct Answer: The beta of the portfolio is equal to the average of the betas of the individual stocks. Question 5 Which of the following statements is CORRECT? Answer Correct Answer: A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations. Question 6 Bob has a $50,000 stock portfolio with a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%. Becky also has a $50,000 portfolio, but it has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%.
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The correlation coefficient, r, between Bob's and Becky's portfolios is zero. If Bob and Becky marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio? Answer
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This note was uploaded on 11/11/2011 for the course FIN 534 taught by Professor Nalla during the Spring '08 term at Strayer.

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FIN 534 TEST 4 - FIN 534 TEST 4 Question 1 Which of the...

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