problem1. Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements should be true supposing the CAPM is correct.
a. In equilibrium, the expected return on Stock B will be greater than that on the Stock A.
b. Stock A would be a more desirable addition to a portfolio then Stock B.
c. In equilibrium, the expected return on Stock A will be greater than that on the B.
d. Stock B would be a more desirable addition to a portfolio than A.
e. When held in isolation, Stock A has more risk than Stock B.
problem2. Suppose that you manage a $10.00 million mutual fund that has a beta of 1.05 and a 9.50% required return. The risk-free rate is 4.20%. You now receive another $5.00 million, which you invest in stocks with an average beta of 0.65. What is the required rate of the return on the new portfolio? (Hint: You must first find the market risk premium and then find the new portfolio beta.)
a. 9.05%
b. 8.83%
c. 9.74%
d. 9.27%
e. 9.51%
problem3. Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is CORRECT?
a. Dick's portfolio will have more diversifiable risk, the same market risk, and hence more total risk than Jane's portfolio however the required (and expected) returns will be the same on both portfolios.
b. The expected return on Jane's portfolio should be lower than the expected return on Dick's portfolio since Jane is more diversified.
c. The required return on Jane's portfolio will be lower than that on Dick's portfolio since Jane's portfolio will have less total risk.
d. Jane's portfolio will have less diversifiable risk and as well less market risk than Dick's portfolio.
e. If the two portfolios have the same beta, their required returns will be the same however Jane's portfolio will have less market risk than Dick's.
problem4. Suppose that in recent years both expected inflation and the market risk premium (rM - rRF) have declined. Suppose also that all stocks have positive betas. Which of the following would be most likely to have taken place as a result of these changes?
a. The required returns on all stocks have fallen by the same amount.
b. The required returns on all stocks have fallen however the fall has been greater for stocks with higher betas.
c. The required returns on all stocks have fallen however the decline has been greater for stocks with lower betas.
d. The average required return on the market, rM, has remained stable, but the required returns have fallen for stocks that have betas greater than 1.0.
e. Required returns have risen for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.
problem5. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM - rRF) were to rise but the risk-free rate (rRF) remained stable, which of the following would take place?
a. The required return would rise for both stocks but the increase would be greater for Stock B than for Stock A.
b. The required return on Portfolio P would remain unaffected.
c. The required return would rise for Stock B but reduce for Stock A.
d. The required return would reduce by the same amount for both Stock A and Stock B.
e. The required return would rise for Stock A but reduce for Stock B.