09 May Question[i]. Certain firms and industries are characterized by
Question
[i]. Certain firms and industries are characterized by consistently low or high betas, depending on the particular situation. On the basis of that notion, which of the following companies seems out of place with its stated beta? (That is, one of the following companies definitely could not have the indicated beta, while the other companies seem well matched with their stated betas.)
a. Sun Microsystems, Beta = 1.59.
b. Amazon.com, Beta = 1.70.
c. Ford Motor Company, Beta = 0.92.
d. Florida Power & Light, Beta = 1.52.
e. Wal-Mart, Beta = 1.15.
[ii]. Which of the following statements is most correct?
a. The SML relates required returns to firms’ market risk. The slope and intercept of this line cannot be controlled by the financial manager.
b. The slope of the SML is determined by the value of beta.
c. If 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 that the observed relationship is expected to continue on into the future.
d. If investors become less risk averse, the slope of the Security Market Line will increase.
e. Statements a and c are correct.
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