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GB550 quiz

1. Consider the following information and then
calculate the required rate of return for the Scientific Investment Fund, which
holds 4 stocks. The market’s required rate of return is 15.0%, the risk-free
rate is 7.0%, and the Fund’s assets are as follows: 30

Stock Investment Beta
A $ 200,000 1.50
B 300,000 -0.50
C 500,000 1.25
D 1,000,000 0.75
(Points : 2)
10.67%
11.23%
11.82%
13.10%

Question 2. 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.

(Points : 2)
10.29%
10.83%
11.40%
12.00%

Question 3. 3. The SML relates required returns
to firms’ systematic (or market) risk. The slope and intercept of this line can
be influenced by managerial actions. (Points : 2)
True
False

Question 4. 4. Which of the following is NOT a
potential problem with beta and its estimation? (Points : 2)
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.

Question 5. 5. The slope of the SML is
determined by the value of beta. (Points : 2)
True
False

Question 6. 6. 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. (Points : 2)
True
False

Question 7. 7. 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. (Points : 2)
True
False

Question 8. 8. We will almost always find that
the beta of a diversified portfolio is less stable over time than the beta of a
single security. (Points : 2)
True
False

Question 9. 9. In a portfolio of three different
stocks, which of the following could NOT be true? (Points : 2)
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.

Question 10. 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? (Points : 2)
Variance; correlation coefficient.
Standard deviation; correlation coefficient.
Beta; variance.
Coefficient
of variation; beta.

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