Finanacial

BUS 530 FINancIAL MANAGEMENT

Final Exam Sample Questions

Multiple-Choice

(C) 1. Which of the following statements is CORRECT?

A. The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.

B. If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio.

C. The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future.

D. The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.

(E) 2. Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct.

A. Stock A would be a more desirable addition to a portfolio then Stock B.

B. In equilibrium, the expected return on Stock B will be greater than that on Stock A.

C. When held in isolation, Stock A has more risk than Stock B. (Not correct: beta is only measure the stock’s systematic risk, not stand-alone risk)

D. Stock B would be a more desirable addition to a portfolio than A.

E. In equilibrium, the expected return on Stock A will be greater than that on B. (CAPM model describes the higher the systematic risk, measured by beta, the higher the required rate of return)

(E) 3. Which of the following statements is CORRECT?

A. An investor can eliminate virtually all market risk if he or she holds a very large and well diversified portfolio of stocks.

B. The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.

C. It is impossible to have a situation where the market risk of a single stock is less than that of a...