You are thinking about purchasing 1,000 shares of stock in the following firms:
Number of Shares Firm's Beta
Firm A 100 0.75
Firm B 200 1.47
Firm C 200 0.82
Firm D 600 1.60
If you purchase the number of shares specified, then the beta of your portfolio will be:
A) 1.16.
B) 1.35.
C) 1.00.
D) Cannot be determined without knowing the stock prices.
Use the following information to answer the following question(s).
Beta
Market 1
Firm A 1.25
Firm B 0.6
Market Return 10% Risk Free Rate 2%
The market risk premium is
A) 2%.
B) 4%.
C) 6%.
D) 8%.
Firm A's risk premium is
A) 4%.
B) 6%.
C) 8%.
D) 10%.
Firm B's risk premium is
A) 2.66%.
B) 4.8%.
C) 6.3%.
D) 8.1%.
The required rate of return for Firm A is
A) 8%.
B) 12%.
C) 16%.
D) Cannot be determined with information given.
U. S. Treasury bills can be used to approximate the risk-free rate.
Answer: TRUE
Long-term bonds issued by large, established corporations are commonly used to estimate the risk-free rate.
Answer: FALSE
The market beta changes frequently with economic conditions.
Answer: FALSE
The S&P 500 Index is commonly used to estimate the market rate of return.
Answer: TRUE
The security market line (SML) intercepts the Y axis at the risk-free rate.
Answer: FALSE
The security market line can drawn by connecting the risk-free rate and the expected return on the market portfolio.
Answer: TRUE
If investors expected inflation to increase in the future, the SML would shift up, but the slope would remain the same.
Answer: TRUE
If investors became more risk averse The SML would shift downward and the slope of the SML would fall.
Answer: FALSE
A security with a beta of zero has a required rate of return equal to the overall market rate of return.
Answer: FALSE
