Submitted by: Submitted by rillc
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Pages: 7
Category: Business and Industry
Date Submitted: 04/08/2012 04:22 PM
1. 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 portfolio that includes the stock.
d. Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount.
e. An investor can eliminate virtually all diversifiable risk if he or she holds a very large, well diversified portfolio of stocks.
Answer: ____________________________
In a portfolio the diversifiable risk is reduced
2. Currently, the risk-free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT?
a. An index fund with beta = 1.0 should have a required return of 11%.
b. If a stock has a negative beta, its required return must also be negative.
c. An index fund with beta = 1.0 should have a required return less than 11%.
d. If a stock’s beta doubles, its required return must also double.
e. An index fund with beta = 1.0 should have a required return greater than 11%.
Answer: ____________________________
Using CAPM
Required return = Rf + (Rm-Rf) beta
= 5% + 6% X 1 = 11%
3. Rick Kish has a $100,000 stock portfolio. $32,000 is invested in a stock with a beta of 0.75 and the remainder is invested in a stock with a beta of 1.38. These are the only two investments in his portfolio. What is his portfolio’s beta?
a. 1.18
b. 1.24
c. 1.30
d. 1.36
e. 1.43
Answer: ____________________________
Portfolio beta is the weighted average beta
Portfolio beta = 32,000/100,000 X0.75 + 68,000/100,000 X 1.38 = 1.18
4. Rodriguez Roofing's stock has a beta of 1.23, its required return is 11.25%, and the risk-free rate is 4.30%. What is...