Which of the following statements regarding beta is false: a. Beta is a measure of systematic risk. b. The beta of a share is calculated as the covariance between the share and the market divided by the variance of the market. c. If the returns of two firms are negatively correlated, then one of them must have a negative beta. d. A share with a beta equal to -1 has zero systematic risk. e. A share’s beta is more relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only one share.

Which of the following statements regarding beta is false: a. Beta is a measure of systematic risk. b. The beta of a share is calculated as the covariance between the share and the market divided by the variance of the market. c. If the returns of two firms are negatively correlated, then one of them must have a negative beta. d. A share with a beta equal to -1 has zero systematic risk. e. A share’s beta is more relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only one share.

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 9MC: What is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write...

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Which of the following statements is CORRECT? a. The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers. b. Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors expect the observed relationship to continue on into the future. c. If investors become less risk averse, the slope of the Security Market Line will increase. d. If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock. e. The slope of the SML is determined by the value of beta.
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.
You observe the following information regarding Company ABC and Company XYZ:· Company ABC has a higher expected mean return than Company XYZ.· Company ABC has a lower standard deviation than Company XYZ.· Company ABC has a higher beta than Company XYZ.Given this information, which of the following statements is most correct? Company ABC has more company-specific risk than Company XYZ. Company ABC has a lower coefficient of variation than Company XYZ. Company ABC is a better stock to buy than Company XYZ. Both companies has equal risk
Which of the following is NOT true with respect to standard deviation as a measure of risk? Group of answer choices Standard deviation of return measures the sum of diversifiable and undiversifiable risk for a share. 2. Standard deviation contains more information about distribution of returns by comparison with the more crude approach of measuring the range of possible extreme values for return. 3. Standard deviation is measured in standard units, unlike variance which is measured in squared units, 4. Unlike Beta, standard deviation of return measures undiversifiable risk.
Which of the following is NOTa potential problem when estimating and using betas, i.e., which statement is FALSE? a. The fact that a security or project may not have a past history that can be used as the basis for calculating beta. b. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta. c. The beta of an "average stock," or "the market," can change over time, sometimes drastically. d. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. e. The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. This calculated historical beta may differ from the beta that exists in the future. Please Explain for full credit
Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE? a. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta. b. The beta of an "average stock," or "the market," can change over time, sometimes drastically. c. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. d. All of the statements above are true. e. The fact that a security or project may not have a past history that can be used as the basis for calculating beta.
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 one of the following statements is TRUE? O a. If the distribution of returns for an asset has a variance of zero, then covariance of returns between that asset and the returns any other asset must equal zero. O b. The covariance allows us to gauge the strength of the relationship between stocks. O c. While the variance and the standard deviation both measure the variability of the returns, the variance is easier to interpret because it is in the same units as the returns themselves. O d. If two assets with return correlation coefficients less than one make up a portfolio, then the portfolio does not take advantage of any diversification benefits.
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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.
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Briefly explain what the Beta of a stock means. What values can it take and what do these imply? Explain how the beta of a stock is different from the variance as a measure of risk.