# FIN 534 -Week 5 Quiz 4

• Question 1

0 out of 2 points

Which of the following statements is CORRECT?

• Question 2

2 out of 2 points

During the coming 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?

• Question 3

0 out of 2 points

Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

• Question 4

2 out of 2 points

Which of the following statements is CORRECT?

• Question 5

2 out of 2 points

Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%. The returns of the two stocks are independent, so the correlation coefficient between them, rXY, is zero. Which of the following statements best describes the characteristics of your 2-stock portfolio?

• Question 6

2 out of 2 points

Which of the following statements is

CORRECT?

• Question 7

2 out of 2 points

A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A’s standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?

• Question 8

2 out of 2 points

Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?

• Question 9

2 out of 2 points

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be true, according to the CAPM?

• Question 10

2 out of 2 points

Bob has a $50,000 stock portfolio with a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%. Becky also has a $50,000 portfolio, but it has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%. The correlation coefficient, r, between Bob’s and Becky’s portfolios is zero. If Bob and Becky marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?

• Question 11

2 out of 2 points

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.

• Question 12

2 out of 2 points

Which of the following statements is CORRECT?

• Question 13

0 out of 2 points

Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%. Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%. Portfolio AB has $900,000 invested in Stock A and $300,000 invested in Stock B. The correlation between the two stocks’ returns is zero (that is, rA,B = 0). Which of the following statements is CORRECT?

• Question 14

2 out of 2 points

Which of the following statements is CORRECT?

• Question 15

2 out of 2 points

Assume that the risk-free rate is 5%. Which of the following statements is CORRECT?

• Question 16

2 out of 2 points

An increase in a firm’s expected growth rate would cause its required rate of return to

• Question 17

2 out of 2 points

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

• Question 18

0 out of 2 points

A stock is expected to pay a year-end dividend

of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

• Question 19

2 out of 2 points

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A B

Price $25 $40

Expected growth 7% 9%

Expected return 10% 12%

• Question 20

2 out of 2 points

The preemptive right is important to shareholders

because it

• Question 21

0 out of 2 points

Which of the following statements is CORRECT?

• Question 22

2 out of 2 points

For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, then

• Question 23

2 out of 2 points

Which of the following statements is CORRECT?

• Question 24

2 out of 2 points

If markets are in equilibrium, which of the following conditions will exist?

• Question 25

2 out of 2 points

If a stock’s dividend is expected

to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

• Question 26

2 out of 2 points

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

• Question 27

2 out of 2 points

Stocks A and B have the following data. Assuming

the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A B

Required return 10% 12%

Market price $25 $40

Expected growth 7% 9%

• Question 28

2 out of 2 points

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

• Question 29

2 out of 2 points

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of

the following statements is CORRECT?

X Y

Price $30 $30

Expected growth (constant) 6% 4%

Required return 12% 10%

• Question 30

2 out of 2 points

Which of the following statements is CORRECT?