1. Assume that you manage a $10.00 million mutual fund that
has a beta of 1.05 and a 12.00% required return. The risk-free rate is 4.75%.
You now receive another $10.00 million, which you invest in stocks with an
average beta of 0.65. What is the required rate of return on the new $20.00
million portfolio?
A. 10.02%
B. 10.54%
C. 10.91%
D. 11.31%
E. 12.62%
2. A mutual fund manager has a $20.0 million portfolio with
a beta of 1.50. The risk-free rate is 4.50%, and the market risk premium is
5.50%. The manager expects to receive an additional $5.0 million which she
plans to invest in a number of stocks. After investing the additional funds, he
wants the fund’s required return to be 13.00%. What must the average beta of
the new stocks added to the portfolio be to achieve the desired required rate
of return?
A. 1.12
B. 1.26
C. 1.37
D. 1.59
E. 1.73
3. Stock X has a beta of 0.7 and Stock Y has a beta of 1.3.
The standard deviation of each stock’s returns is 20%. The stocks’ returns are
independent of each other, i.e., the correlation coefficient, r, between them
is zero. Portfolio P consists of 50% Stock X and 50% Stock Y. Given this
information, which of the following statements is CORRECT?
A. Portfolio P has a standard deviation of 20%.
B. The required return on Portfolio P is the same as the
required return on the market.
C. The required return on Portfolio P is equal to the market
risk premium.
D. Portfolio P has a beta of 0.7.
E. Portfolio P has a beta of 1.0 and a required return that
is equal to the riskless rate.
4. Stocks A and B each have an expected return of 15%, a
standard deviation of 20%, and a beta of 1.2. The returns on the two stocks are
positively correlated, but the correlation coefficient is only 0.6. You have a
portfolio that consists of 50% Stock A and 50% Stock B. Which of the following
statements is CORRECT?
A. The portfolio’s expected return is 15%.
B. The portfolio’s beta is less than 1.2.
C. The portfolio’s beta is greater than 1.2%.
D. The portfolio’s standard deviation is 20%.
E. The portfolio’s standard deviation is greater than 20%.
5. Which of the following statements is CORRECT?
A. Beta is measured by the slope of the security market.
B. The slope of the security market line is equal to the
market risk premium.
C. If a company’s beta doubles, then its required return
will also double.
D. If a company’s beta is halved, then its required return
will also be halved.
E. If the risk-free rate rises, then the market risk premium
will also rise.
6. Assume that the risk-free rate remains constant, but that
the market risk premium declines. Which of the following is likely to occur?
A. The required return on a stock with a beta = 1.0 will
remain the same.
B. The required return on a stock with a beta < 1.0 will
decline.
C. The required return on a stock with a beta > 1.0 will
increase.
D. The return on “the market” will remain
constant.
E. The return on “the market” will increase.
7. In a portfolio of 40 randomly selected stocks, which of
the following is most likely to be true?
A. The riskiness of the portfolio is greater than the
riskiness of each of the stocks if each
were held in isolation.
B. The riskiness of the portfolio is the same as the
riskiness of each of the stocks if it were
held in isolation.
C. The beta of the portfolio is the same as the average of
the betas of the individual stocks.
D. The beta of the portfolio is greater than the average of
the betas of the individual stocks.
E. The beta of the portfolio is less than the average of the
betas of the individual stocks.
8. Other things held constant, if the expected inflation
rate decreases and investors also become more risk averse, the Security Market
Line would shift
A. Down and have a less steep slope.
B. Up and have a less steep slope.
C. Up and keep the same slope.
D. Down and keep the same slope.
E. Down and have a steeper slope.
9. The risk-free rate is 6% and the market risk premium is
5%. Your $1 million portfolio consists of $700,000 invested in a stock that has
a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. Which of
the following statements is CORRECT?
A. If the risk-free rate remains unchanged but the market
risk premium increases by 2%, your portfolio’s required return will increase by more than
2%.
B. The portfolio’s required return is less than 11%.
C. If the market risk premium remains unchanged but expected
inflation increases by 2%, your portfolio’s required return will increase by more than
2%.
D. If the stock market is efficient, your portfolio’s expected
return should equal the expected return on the market, which is 11%.
E. The required return on the market is 10%.
10. The risk-free rate is 5%. Stock A has a beta = 1.0 and
Stock B has a beta = 1.4. Stock A has a required return of 11%. What is Stock
B’s required return?
A. 12.4%
B. 13.4%
C. 14.4%
D. 15.4%
E. 16.4%
