An investor has a 2-stock portfolio with $50,000 invested ...



1. An investor has a 2-stock portfolio with $50,000 invested in Palmer Manufacturing and $50,000 in Nickles Corporation. Palmer’s beta is 1.20 and Nickles’ beta is 1.00. What is the portfolio's beta?

  (Points : 4)

      [pic]0.94

      [pic]1.02

      [pic]1.10

      [pic]1.18

      [pic]1.26

[pic]

3. In the next year, the market risk premium, (rM - rRF), is expected to fall, while the risk-free rate, rRF, is expected to remain the same. Given this forecast, which of the following statements is CORRECT?

  (Points : 4)

      [pic]The required return for all stocks will fall by the same amount.

      [pic]The required return will fall for all stocks, but it will fall more for stocks with higher betas.

      [pic]The required return will fall for all stocks, but it will fall less for stocks with higher betas.

      [pic]The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.

      [pic]The required return on all stocks will remain unchanged.

Which of the following statements is CORRECT?

  (Points : 5)

      [pic]If you formed a portfolio that included a large number of low-beta stocks (stocks with betas less than 1.0 but greater than -1.0), the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio, so the portfolio would have less risk than a portfolio that consisted of all stocks in the market.

      [pic]If you add enough randomly selected stocks to a portfolio, you can completely eliminate all the market risk from the portfolio.

      [pic]If you were restricted to investing in publicly traded common stocks, yet you wanted to minimize the riskiness of your portfolio as measured by its beta, then according to the CAPM theory you should invest an equal amount of money in each stock in the market. That is, if there were 10,000 traded stocks in the world, the least risky portfolio would include some shares in each of them.

      [pic]Market risk can be eliminated by forming a large portfolio, and if some bonds are held in the portfolio, the portfolio can be made to be completely riskless.

      [pic]A portfolio that consists of all stocks in the market would have a required return that is equal to the riskless rate.

10. The real risk-free rate is 2.50%, investors expect a 3.50% future inflation rate, the market risk premium is 5.50%, and Krogh Enterprises has a beta of 1.40. What is the required rate of return on Krogh's stock? (Hint: First find the market risk premium.)

  (Points : 5)

      [pic]13.70%

      [pic]14.50%

      [pic]15.30%

      [pic]16.10%

      [pic]16.90%

[pic]

12. If D1 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock's expected total return for the coming year?

  (Points : 5)

      [pic]10.8%

      [pic]11.0%

      [pic]11.2%

      [pic]11.4%

      [pic]11.6%

= ($2/$40) + 0.06

= 11%

|22. For the stock market to be in equilibrium, that is, for there to be no strong pressure for prices to depart from their |

|current levels, |

| |

|  (Points : 5) |

|      [pic]Expected future returns must be equal to required returns ( = r). |

|      [pic]The past realized return must be equal to the expected future return ( = ). |

|      [pic]The required return must equal the realized return (r = ). |

|      [pic]The expected return must be equal to both the required future return and the past realized return (= r = ). |

|      [pic]If the expected future return is less than the most recent past realized return, then stocks are most likely to |

|decline. |

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