week09_TutorialQuestions

week09_TutorialQuestions - SCHOOL OF BANKING AND FINANCE...

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FINS 1613 Tutorial Questions 1 SCHOOL OF BANKING AND FINANCE FINS1613 BUSINESS FINANCE Semester 2, 2010 TUTORIAL QUESTIONS WEEK 9 – Beta and CAPM Multiple-choice Questions 1. 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 greater risk than Stock B. b. Stock B would be a more desirable addition to a portfolio than Stock A. c. Stock A would be a more desirable addition to a portfolio than Stock B. d. The expected return on Stock A will be greater than that on Stock B. e. The expected return on Stock B will be greater than that on Stock A. 2. What is the expected return on asset A if it has a beta of 1.2, the expected return on the market is 10%, and the risk-free rate is 4%? a. 8.8% b. 9.0% c. 10.0% d. 11.2% e. Not enough information 3. Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements is most correct? a. Stock Y's return this year will be higher than Stock X's return. b. Stock Y's return has a higher standard deviation than Stock X. c. If expected inflation increases (but the market risk premium is unchanged), the required returns on the two stocks will increase by the same amount. d. If the market risk premium declines (leaving the risk-free rate unchanged), Stock X will have a larger decline in its required return than will Stock Y. e. If you invest $50,000 in Stock X and $50,000 in Stock Y, your portfolio will have a beta less than 1.0, provided the stock returns on the two stocks are not perfectly correlated.
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FINS 1613 Tutorial Questions 2 4. Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15 percent, a beta of 1.6, and a standard deviation of 30 percent. The returns of the two stocks are independent--the correlation coefficient, r, is zero. Which of the following statements best describes the characteristics of your portfolio? a. Your portfolio has a beta equal to 1.6 and its expected return is 15 percent. b. Your portfolio has a standard deviation of 30 percent and its expected return is 15 percent.
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week09_TutorialQuestions - SCHOOL OF BANKING AND FINANCE...

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