uestion 19. Which of the following statemen

29 Jun uestion 19. Which of the following statemen

uestion
19. Which of the following statements is CORRECT?(Assume that the risk-free rateis a constant.)

a. If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.

b. If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.

c.If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.

d. The effect of a change in the market risk premium depends on the level of the risk-free rate.

e. The effect of a change in the market risk premium depends on the slope of the yield curve.

20. In the next year, the market risk premium, (rM – rRF), is expected to fall, while the risk-free rate, rRF, is expected to remain the same. Given this forecast, which of the following statements is CORRECT?

a. The required return for all stocks will fall by the same amount.

b The required return will fall for all stocks, but it will fall more for stocks with higher betas.

c. The required return will fall for all stocks, but it will fall less for stocks with higher betas.

d. The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.

e. The required return on all stocks will remain unchanged.

21. You have thefollowingdata on three stocks:

Stock Standard Deviation Beta

A 20% 0.59

B 10% 0.61

C 12% 1.29

If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

a. A; A.

b. A; B.

c. B; A.

d. C; A.

e. C; B.

22.Stock A’s beta is 1.5 and Stock B’s beta is 0.5.Whichof the following statements must be true about these securities? (Assume market equilibrium.)

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

b. Stock B must be a more desirable addition to a portfolio than A.

c. Stock A must be a more desirable addition to a portfolio than B.

d The expected return on Stock A should be greater than that on B.

e The expected return on Stock B should be greater than that on A.

.
23. Cooley Company’s stock has a beta of 1.40, the risk-free rate is4.25%, and the market risk premium is5.50%.What is the firm’srequiredrate of return?

a. 11.36%

b. 11.65%

c 11.95%

d. 12.25%

e. 12.55%

24.Company A has a beta of 0.70, while Company B’s beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A’s and B’s required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)

a..2.75%

b. 2.89%

c. 3.05%

d. 3.21%

e.3.38%

25.Mulherin’s stock has a beta of 1.23, its requiredreturnis 11.75%, and the risk-free rate is4.30%.What is the required rate of return on the market?(Hint:First find the market risk premium.)

a 10.36%

b. 10.62%

c. 10.88%

d. 11.15%

e. 11.43%