CoB (NBS) LOOMBA RISHABH 1

Institution Page Courses NTU Tools Help

AB1201-FINANCIAL MANAGEMENT 2019/2020 Semester 2 Main Content

Lecture 5 - Risk and Rates of Return Review Test Submission: Lecture 5: Online Assignment

Review Test Submission: Lecture 5: Online Assignment

User CoB (NBS) LOOMBA RISHABH

Course AB1201-FINANCIAL MANAGEMENT 2019/2020 Semester 2 Main
Test Lecture 5: Online Assignment
Started 2/18/20 8:12 PM
Submitted 2/18/20 8:15 PM
Due Date 3/9/20 11:59 PM
Status Completed
Attempt Score 100 out of 100 points  
Time Elapsed 2 minutes
Instructions Answer the questions below to check your understanding of the concepts covered
in Lecture 5.

Results All Answers, Submitted Answers, Correct Answers, Feedback, Incorrectly Answered
Displayed Questions

Question 1 10 out of 10 points

Which is the best measure of risk for a single asset held in isolation, and which is the
best measure for an asset held in a diversi ed portfolio?

Selected Answer: E. Coe cient of variation; beta

Answers: A. Variance; correlation coe cient

B. Beta; variance

C. Beta; beta

D. Standard deviation; correlation coe cient

E. Coe cient of variation; beta

Question 2 10 out of 10 points

You have the following data on (1) the average annual returns of the market for the
past 5 years and (2) similar information on Stocks A and B.
Which of the possible answers best describes the historical betas for A and B?

Years Market Stock A Stock B

1 0.03 0.16 0.05
 2 - 0.05 0.20 0.05
3 0.01 0.18 0.05
4 - 0.10 0.25 0.05
5 0.06 0.14 0.05

Selected Answer: b < 0; bB = 0

D. A

Answers: b > 0; bB = 1
A. A

b > +1; bB = 0
B. A

b = 0; bB = -1
C. A

b < 0; bB = 0
D. A

b < -1; bB = 1
E. A

Response First, note that B's beta must be zero, so either b or d must be correct.
Feedback: Second, note that A's returns are highest when the market's returns are
negative and lowest when the market's returns are positive. This
indicates that A's beta is negative. Thus, d must be correct.

Question 3 10 out of 10 points

When adding a randomly chosen new stock to an existing portfolio, the higher (or
more positive) the degree of correlation between the new stock and stocks already in
the portfolio, the less the additional stock will reduce the portfolio's risk.

Selected Answer: True

Answers: True
False

Question 4 10 out of 10 points

Stock A has a beta of 1.2 and a standard deviation of 20%.

Stock B has a beta of 0.8 and a standard deviation of 25%.
Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in
Stock B.
Which of the following statements is CORRECT?
(Assume that the stocks are in equilibrium.)

Selected C. Portfolio P has a beta of 1.0.

Answer:

Answers: A. Portfolio P has a standard deviation of 22.5%.

B.
Stock A's returns are less highly correlated with the returns on most
other stocks than are B's returns.

C. Portfolio P has a beta of 1.0.

D. Stock B has a higher required rate of return than Stock A.

E. More information is needed to determine the portfolio's beta.

Question 5 10 out of 10 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?

Selected E.
Answer: In equilibrium, the expected return on Stock A will be greater than
that on B.

Answers: A.
Stock A would be a more desirable addition to a portfolio than Stock
B.

B.
In equilibrium, the expected return on Stock B will be greater than
that on Stock A.

C. When held in isolation, Stock A has more risk than Stock B.

D.
Stock B would be a more desirable addition to a portfolio than A.

E.
In equilibrium, the expected return on Stock A will be greater than
that on B.

Response In equilibrium, expected return is equal to required return. In

Feedback: equilibrium, due to higher beta, required return on stock A is greater
than that on B.

The best measure of risk and risk per unit of return for an asset held in
isolation are the standard deviation and coe cient of variation,
respectively. Therefore, given the only information of betas, choice c is
not correct. Choice a and d are incorrect. The beta is used to calculate the
required rate of return. Higher beta leads to higher investors’ required
rate of return. The value of beta is not the criteria for choosing stock to
add into the portfolio.

Question 6 10 out of 10 points

Consider the following information for three stocks, A, B, and C.

The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the
correlations are all between 0 and 1.

Stock Expected Return Standard Deviation Beta

A 10% 20% 1.0
B 10% 10% 1.0
C 12% 12% 1,4
Portfolio AB has half of its funds invested in Stock A and half in Stock B.
Portfolio ABC has one third of its funds invested in each of the three stocks.
The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected
returns.
Which of the following statements is CORRECT?

Selected D. Portfolio ABC's expected return is 10.66667%.

 Answer:

Answers: A. Portfolio AB has a standard deviation of 20%.

B. Portfolio AB's coe cient of variation is greater than 2.0.

C.
Portfolio AB's required return is greater than the required return on Stock A.

D. Portfolio ABC's expected return is 10.66667%.

E. Portfolio ABC has a standard deviation of 20%.

Question 7 10 out of 10 points

For markets to be in equilibrium, that is, for there to be no strong pressure for prices
to depart from their current levels,

Selected A.
Answer: The expected rate of return must be equal to the required rate of
return; that is, = r.

Answers: A.
The expected rate of return must be equal to the required rate of
return; that is, = r.

B.
The past realised rate of return must be equal to the expected future
rate of return; that is, = .

C.
The required rate of return must equal the past realised rate of return;
that is, r = .

D.
All three of the above statements must hold for equilibrium to exist;
that is = r = .

E. None of the above statements is correct.

Question 8 10 out of 10 points

Portfolio A has but one security, while Portfolio B has 100 securities. Because of
diversi cation e ects, we would expect Portfolio B to have the lower risk. However, it
is possible for Portfolio A to be less risky.

Selected Answer: True

Answers: True
False

Question 9 10 out of 10 points

Managers should under no conditions take actions that increase their rm's risk
relative to the market, regardless of how much those actions would increase the rm's
expected rate of return.
 Selected Answer: False
Answers: True
False

Question 10 10 out of 10 points

Which of the following is FALSE concerning diversi cation?

Assume that the securities being considered for selection into a portfolio are not
perfectly correlated.

Selected C.
Answer: As more securities are added to the portfolio, the market risk of the
portfolio declines.

Answers: A.
As more securities are added to the portfolio, the diversi able risk of the
portfolio declines.

B.
As more securities are added to the portfolio, the total (stand-alone) risk
of the portfolio declines.

C.
As more securities are added to the portfolio, the market risk of the
portfolio declines.

D.
As more securities are added to the portfolio, the total (stand-alone) risk
eventually approaches the level of risk in the market portfolio.

E. None of the above is false.

Tuesday, February 18, 2020 8:15:15 PM SGT

← OK