1. You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.12. You have decided to sell a lead mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a steel company stock (b = 2.00). What is the new beta of the portfolio?

• 1.1139
• 1.1700
• 1.2311
• 1.2927

2. Calculate the required rate of return for Mercury, Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) Mercury has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.

• 10.29%
• 10.83%
• 11.40%
• 12.00%

3. In a portfolio of three different stocks, which of the following could NOT be true?

• The riskiness of the portfolio is less than the riskiness of each of the stocks if they were held in isolation.
• The riskiness of the portfolio is greater than the riskiness of one or two of the stocks.
• The beta of the portfolio is less than the betas of each of the individual stocks.
• The beta of the portfolio is greater than the beta of one or two of the individual stocks' betas.

4. We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

• True
• False

5. Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)

• When held in isolation, Stock A has greater risk than Stock B.
• Stock B must be a more desirable addition to a portfolio than Stock A.
• Stock A must be a more desirable addition to a portfolio than Stock B.
• The expected return on Stock A should be greater than that on Stock B

6. Which of the following statements is CORRECT?

• Characteristic line" is another name for the Security Market Line.
• 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.
• The slope of the characteristic line is the stock's standard deviation.
• The distance of the plot points from the characteristic line is a measure of the stock's diversifiable risk

7. Which of the following is NOT a potential problem with beta and its estimation?

• Sometimes a security or project does not have a past history which can be used as a basis for calculating beta.
• Sometimes, during a period when the company is undergoing a change such as toward more leverage, or riskier assets, the calculated beta will be drastically different than the "true" or "expected future" beta.
• The beta of "the market," can change over time, sometimes drastically.
• Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed

8. If the returns of two firms are negatively correlated, then one of them must have a negative beta.

• True
• False

9. 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.

• True
• False

10. Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

• Variance; correlation coefficient.
• Standard deviation; correlation coefficient.
• Beta; variance.
• Coefficient of variation; beta.