IFM10 Ch 03 Test Bank

# IFM10 Ch 03 Test Bank - CHAPTER 3 RISK AND RETURN: PART II...

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CHAPTER 3 RISK AND RETURN: PART II (Difficulty: E = Easy, M = Medium, and T = Tough) True/False Easy: (3.4) SML Answer: b Diff: E 1 . The slope of the SML is determined by the value of beta. a. True b. False (3.4) SML Answer: a Diff: E 2 . If you plotted the returns of Selleck & 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’s stock 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 (3.5) Beta coefficient Answer: a Diff: E 3 . If the returns of two firms are negatively correlated, then one of them must have a negative beta. a. True b. False (3.5) Beta coefficient Answer: b Diff: E 4 . A stock with a beta equal to -1.0 has zero systematic (or market) risk. a. True b. False (3.5) Beta coefficient Answer: a Diff: E 5 . It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative. a. True b. False (3.5) Portfolio risk Answer: a Diff: E 6 . 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. Chapter 3: Risk and Return: Part II Page 1

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a. True b. False Medium: (3.2) Risk aversion Answer: a Diff: M 7 . If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the low standard deviation stock. a. True b. False (3.3) CAPM Answer: b Diff: M 8 . The 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 (3.4) SML Answer: b Diff: M 9 . The SML relates required returns to firms’ systematic (or market) risk. The slope and intercept of this line can be influenced by managerial actions. a. True b. False (3.4) SML Answer: b Diff: M 10 . The Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1) stock is zero. a. True b. False (3.5) Portfolio beta Answer: b Diff: M 11 . 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 (3.7) Arbitrage pricing theory Answer: b Diff: M 12 . Arbitrage pricing theory is based on the premise that more than one factor affects stock returns, and the factors are specified to be (1) market returns, (2) dividend yields, and (3) changes in inflation. Page 2 Chapter 3: Risk and Return: Part II
a. True b. False Chapter 3: Risk and Return: Part II Page 3

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Multiple Choice: Conceptual Easy: (3.5) Risk aversion Answer: b Diff: E 13 . You have the following data on three stocks: Stock Standard Deviation Beta A 0.15 0.79 B 0.25 0.61 C 0.20 1.29 As a risk minimizer, you would choose Stock
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## This note was uploaded on 02/02/2012 for the course FIN 516 taught by Professor None during the Spring '11 term at DeVry Fremont.

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IFM10 Ch 03 Test Bank - CHAPTER 3 RISK AND RETURN: PART II...

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