09 May a. If a stock has a negative beta, its required return must also be negative.
Question
[i]. Currently, the risk-free rate is 6 percent and the market risk premium is 5 percent. On the basis of this information, which of the following statements is most correct?
a. If a stock has a negative beta, its required return must also be negative.
b. If a stock’s beta doubles, its required return must also double.
c. An index fund with beta = 1.0 has a required return of 11 percent.
d. Statements a and c are correct.
e. Statements b and c are correct.
[ii]. Which of the following statements is incorrect?
a. The slope of the security market line is measured by beta.
b. Two securities with the same stand-alone risk can have different betas.
c. Company-specific risk can be diversified away.
d. The market risk premium is affected by attitudes about risk.
e. Higher beta stocks have a higher required return.
[iii]. Which of the following statements is most correct?
a. The slope of the security market line is beta.
b. The slope of the security market line is the market risk premium, (kM – kRF).
c. If you double a company’s beta its required return more than doubles.
d. Statements a and c are correct.
e. Statements b and c are correct.
[iv]. Stock A has a beta of 1.2 and a standard deviation of 20 percent. Stock B has a beta of 0.8 and a standard deviation of 25 percent. Portfolio P is a $200,000 portfolio consisting of $100,000 invested in Stock A and $100,000 invested in Stock B. Which of the following statements is most correct? (Assume that the required return is determined by the Security Market Line.)
a. Stock B has a higher required rate of return than Stock A.
b. Portfolio P has a standard deviation of 22.5 percent.
c. Portfolio P has a beta equal to 1.0.
d. Statements a and b are correct.
e. Statements a and c are correct.
[v]. Nile Foods’ stock has a beta of 1.4 and Elbe Eateries’ stock has a beta of 0.7. Assume that the risk-free rate, kRF, is 5.5 percent and the market risk premium, (kM – kRF), equals 4 percent. Which of the following statements is most correct?
a. Since Nile’s beta is t
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