EOC5353 - EOL3 True/False Indicate whether the statement is...

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EOL3 True/False Indicate whether the statement is true or false. __true__1. 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. __false__2. A stock with a beta equal to - 1.0 has zero systematic (or market) risk. ___true_3. 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. __true__4. 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. __false__5. We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security. Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 6. You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B? Years Market Stock A Stock B 1 0.03 0.16 0.05 2 - 0.05 0.20 0.05 3 0.01 0.18 0.05 4 - 0.10 0.25 0.05 5 0.06 0.14 0.05 a. b A > 0; b B = 1. b. b A > +1; b B = 0. c. b A = 0; b B = - 1. d.the correct answer b A < 0; b B = 0. e. b A < - 1; b B = 1. ____ 7. Which of the following statements is CORRECT? a. "Characteristic line" is another name for the Security Market Line.
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b. The characteristic line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a different industry. c. The slope of the characteristic line is the stock's standard deviation. d. The distance of the plot points from the characteristic line is a measure of the stock's market risk. e. The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk. ____ 8. Which of the following statements is CORRECT? a. Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time. b. Richard Roll has argued that it is possible to test the CAPM to see if it is correct. c. Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM. d.
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This note was uploaded on 03/20/2012 for the course EGMT 571 taught by Professor Williams during the Spring '11 term at Drexel.

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EOC5353 - EOL3 True/False Indicate whether the statement is...

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