Question

1. Asset 1 has a beta of 1.2 and Asset 2 has a beta of 0.6. Which of the following statements is correct?

A. Asset 1 is more volatile than Asset 2.

B. Asset 1 has a higher expected return than Asset 2.

C. In a regression with individual asset’s return as the dependent variable and the market’s return as the independent variable, the R-squared value is higher for Asset 1 than it is for Asset 2.

D. All of the above statements are correct.

2. An underpriced stock provides an expected return which is ________ the required return based on the capital asset pricing model (CAPM).

A. less than

B. equal to

C. greater than

D. greater than or equal to

3. Adding a security that has a low correlation to an existing portfolio will:

A. lower the overall variability of the portfolio

B. increase the overall variability of the portfolio

C. make the portfolio more risky

D. ensure the portfolio achieves a good rate of return

4. The market portfolio is:

A. a completely diversified portfolio, which means that most of the risk unique to individual assets in the portfolio is diversified away

B. a portfolio in which both systematic and unsystematic risk has been diversified away

C. the portfolio that all investors invest their funds in

D. a completely diversified portfolio, which means that all the risk unique to individual assets in the portfolio is diversified away

Answer #1

Ans:

1.D

Reason : all the given options are right. As more the volatile the asset , more will be the return.

2.C

Reason: Underpriced stocks are above the SML line so it will have greater expected rate of return than required rate of return.

3.A

Reason: adding a security that has a low correlation to an existing portfolio will lower the variability of the portfolio. this will increase the diversification in portfolio.

Variability increase when highly correlated security added in portfolio. This makes portfolio more risky.

4.D

Reason: Market portfolio is a fully diversified portfolio which means that all the risk attached to individual assets in the portfolio is diversified away. Other options - in portfolio systematic risk can be diversified but unsystematic risk can not be diversified.

Which of the following is true about diversification?
a. The expected return on a risky asset depends on that asset’s
unsystematic risk
b. Portfolio diversification is the investment in several but
same asset classes or sectors/industry
c. Beta is a measure of systematic risk
d. There is a large portion of unsystematic risk in a well
diversified portfolio

2. Which of the following statements concerning beta is
correct?
a. A stock with a beta of 0 is expected to provide a rate of
return equal to the market portfolio
b. A stock with a beta equal to 1 has no risk
c. Stocks with negative betas have the least amount of risk
FALSE
d. A stock with a beta greater than 1 is expected to be more
volatile than the market portfolio

Stock A has a beta of 1.2 and an expected return of 10%. The
risk-free asset currently earns 4%. If a portfolio of the two
assets has an expected return of 6%, what is the beta of the
portfolio? A) 0.3 B) 0.4 C) 0.5 D) 0.6 E) 0.7

A particular asset has a beta of 1.2 and an expected return of
10%. The expected return on the market portfolio is 13% and the
risk-free rate is 5%. The asset is:
Select one:
a. under-priced
b. appropriately priced
c. overpriced
d. There is not enough information to answer the question

A portfolio consists of four assets in equal weights. Asset 1
has a beta of 1.00. Asset 2 has a beta of 1.00. Asset 3 has a beta
of 1.50. Asset 4 has a beta of 1.20. If the portfolio's required
return is 8.00% and the risk-free rate is 3.80%, what is Asset 2's
required return?
a) 6.82%
B) 7.01%
C) 7.19%
D) 7.37%
E)7.56%

A particular asset has
a beta of 1.2 and an expected return of 10%. The expected return on
the market portfolio is 13% and the risk-free rate is 5%.
The share is:
--
Hint:
Compare Expected Return to Required Return
A. overpriced
B. underpriced
C. appropriately priced
D. There is not enough information to answer the question.
Previous

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