1.

An investor has a 2-stock portfolio with $50,000 invested in Palmer Manufacturing

and $50,000 in Nickles Corporation. Palmer’s beta is 1.20 and Nickles’ beta is 1.00.
What is the portfolio's beta?

(Points : 4)
0.94
1.02
1.10
1.18
1.26

3. In the next 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?

(Points : 4)
The required return for all stocks will fall by the same amount.
The required return will fall for all stocks, but it will fall more for stocks
with higher betas.
The required return will fall for all stocks, but it will fall less for stocks with
higher betas.
The required return will increase for stocks with a beta less than 1.0 and will
decrease for stocks with a beta greater than 1.0.
The required return on all stocks will remain unchanged.

Which of the following statements is CORRECT?

(Points : 5)
If you formed a portfolio that included a large number of low-beta stocks
(stocks with betas less than 1.0 but greater than -1.0), the portfolio would itself have
a beta coefficient that is equal to the weighted average beta of the stocks in the
portfolio, so the portfolio would have less risk than a portfolio that consisted of all
stocks in the market.
 If you add enough randomly selected stocks to a portfolio, you can completely
eliminate all the market risk from the portfolio.
If you were restricted to investing in publicly traded common stocks, yet you
wanted to minimize the riskiness of your portfolio as measured by its beta, then
according to the CAPM theory you should invest an equal amount of money in each
stock in the market. That is, if there were 10,000 traded stocks in the world, the least
risky portfolio would include some shares in each of them.
Market risk can be eliminated by forming a large portfolio, and if some bonds are
held in the portfolio, the portfolio can be made to be completely riskless.
A portfolio that consists of all stocks in the market would have a required return
that is equal to the riskless rate.

10. The real risk-free rate is 2.50%, investors expect a 3.50% future inflation rate, the
market risk premium is 5.50%, and Krogh Enterprises has a beta of 1.40. What is the
required rate of return on Krogh's stock? (Hint: First find the market risk premium.)

(Points : 5)
13.70%
14.50%
15.30%
16.10%
16.90%

Real risk-free rate 2.50%

Expected inflation 3.50%
Market risk premium 5.50%
Beta 1.40

Risk-free rate 6.00%

Required return on stock 13.70%

12. If D1 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock's expected
total return for the coming year?

(Points : 5)
10.8%
11.0%
11.2%
11.4%
 11.6%

= ($2/$40) + 0.06

= 11%

22. For the stock market to be in equilibrium, that is, for there to be no strong pressure for
prices to depart from their current levels,

(Points : 5)
Expected future returns must be equal to required returns ( = r).
The past realized return must be equal to the expected future return ( = ).
The required return must equal the realized return (r = ).
The expected return must be equal to both the required future return and the past
realized return (= r = ).
If the expected future return is less than the most recent past realized return, then
stocks are most likely to decline.