Which of the following is INCORRECT? A. Anticipated returns on any given stock are always greater than 0. B. A negative beta stock has an expected return less than the risk-free rate. C. Two assets with a correlation of -1 could be combined to create a portfolio with a standard deviation of zero (no risk). D. All a stock’s risk could be unsystematic.

Which of the following is INCORRECT? A. Anticipated returns on any given stock are always greater than 0. B. A negative beta stock has an expected return less than the risk-free rate. C. Two assets with a correlation of -1 could be combined to create a portfolio with a standard deviation of zero (no risk). D. All a stock’s risk could be unsystematic.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 3MC: You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand...

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You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: Suppose a risk-free asset has an expected return of 5%. By definition, its standard deviation is zero, and its correlation with any other asset is also zero. Using only Asset A and the risk-free asset, plot the attainable portfolios.
You have been hired at the investment firm of Bowers Noon. One of its clients doesnt understand the value of diversification or why stocks with the biggest standard deviations dont always have the highest expected returns. Your assignment is to address the clients concerns by showing the client how to answer the following questions: d. Construct a plausible graph that shows risk (as measured by portfolio standard deviation) on the x-axis and expected rate of return on the y-axis. Now add an illustrative feasible (or attainable) set of portfolios and show what portion of the feasible set is efficient. What makes a particular portfolio efficient? Dont worry about specific values when constructing the graphmerely illustrate how things look with reasonable data.
Calculate the correlation coefficient between Blandy and the market. Use this and the previously calculated (or given) standard deviations of Blandy and the market to estimate Blandy’s beta. Does Blandy contribute more or less risk to a well-diversified portfolio than does the average stock? Use the SML to estimate Blandy’s required return.
You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: Plot the attainable portfolios for a correlation of 0.35. Now plot the attainable portfolios for correlations of +1.0 and −1.0.
Based on the CAPM model, a stock with a negative beta has which of the following characteristics? A. An expected return less than zero. B. An expected return equal to the risk-free rate. C. Since these are so rare, the CAPM model does not account for negative beta stocks. D. An expected return less than the risk-free rate.
Which of the following statements is INCORRECT? A stock's beta is calculated as the covariance between the stock's price and the market portfolio return, divided by the variance of the market portfolio return. If we assume that the market portfolio (or the S&P 500) is efficient, then changes in the value of the market portfolio represent systematic shocks to the economy. The risk premium investors can earn by holding the market portfolio is the difference between the market portfolio's expected return and the risk-free interest rate. A stock’s standard deviation is a measure of the total risk.
Which of the following statements is CORRECT? a. The slope of the Security Market Line is beta. b. Any stock with a negative beta must in theory have a negative required rate of return, provided rRF is positive. c. If a stock's beta doubles, its required rate of return must also double. d. If a stock's returns are negatively correlated with returns on most other stocks, the stock's beta will be negative. e. If a stock has a beta of to 1.0, its required rate of return will be unaffected by changes in the market risk premium.
Which of the following(s) would be ways to reject the CAPM? a showing that there exist a stock with zero beta with the market earns an expected return higher than the risk free rate b showing that there exist a stock that earns higher expected return than the market c Showing that a portfolio consistently generates a negative alpha d Showing that a certain factor predicts expected return even after controlling for market beta
The expected returns for stocks A, B, C, D, and E are 7 %, 10%, 12%, 25%, and 18% respectively. The corresponding standard deviations for these stocks are 12%, 18%, 15%, 23%, and 15% respectively. Based on their coefficients of variation, which of the securities is least risky for an investor? Assume all investors are risk-averse and the investments will be in isolation.Choices:a. Ab. Bc. Cd. De. E
1.Why will the standard deviation not be a good measure of risk when returns are negatively skewed? 2. What are the risk implications for an investor for a returns series that exhibits fat tails? 3. A price weighted index places more weight on stocks with a higher price, whilst a value weighted index places more weight on stocks with a higher market capitalization. Discuss.
Which of the following statements is false? A. The lower the correlation coefficient, the greater the potential benefits from diversification. B. To make the covariance of two random variables easier to interpret, it may be divided by the product of the random variables’ standard deviation. The resulting value is called the correlation coefficient, or simply, correlation. C. The risk that remains cannot be diversified away and is called the systematic risk. D. In the event of bankruptcy, preferred stock ranks below common stock but above debt.
Which of the following statements is CORRECT? 1. a. Tests have shown that the betas of individual stocks are unstable over time, but that the betas of large portfolios are reasonably stable over time. 2. d. Tests have shown that the betas of individual stocks are stable over time, but that the betas of large portfolios are much less stable. 3. c. Tests have shown that the risk/return relationship appears to be linear, but the slope of the relationship is greater than that predicted by the CAPM. 4. e. The most widely cited study of the validity of the CAPM is one performed by Modigliani and Miller. 5. b. Richard Roll has argued that it is possible to test the CAPM to see if it is correct