Chapter 11 Return and Risk The Capital Asset Pricing Model

1、chapter 11 return and risk: the capital asset pricing model (capm) 1.the intercept point of the security market line is the rate of return that corresponds to:a.the market rate of return.*b.the risk-free rate of return.c.a value of 1.0.d.a value of zero.e.the beta of the market.difficulty level: med

2、iumtopic: security market line2.a stock with an actual return that lies above the security market line:a.has less systematic risk than the overall market.b.has more risk than warranted based on the realized rate of return.c.has yielded a return equivalent to the level of risk assumed.d.has more syst

3、ematic risk than the overall market.*e.has yielded a higher return than expected for the level of risk assumed.difficulty level: mediumtopic: security market line3.the efficient set of portfoliosa.contains the portfolio combinations with the highest return for a given level of risk.b.contains the po

4、rtfolio combinations with the lowest risk for a given level of return.c.is the lowest overall risk portfolio.*d.both a and be.both a and c.difficulty level: mediumtopic: efficient set4.the capital market line is the pricing relationship between:a.efficient portfolios and beta.b.the risk-free asset a

5、nd standard deviation of the portfolio return.*c.the optimal portfolio and the standard deviation of portfolio return.d.beta and the standard deviation of portfolio return.e.none of the above.difficulty level: mediumtopic: capital market line5.beta measures:a.the ability to diversify risk.*b.how an

6、asset covaries with the market.c.the actual return on an asset.d.the standard deviation of the assets returns.e.all of the above.6.the separation principle states that an investor will:a.choose any efficient portfolio and invest some amount in the riskless asset to generate the expected return.*b.in

7、vest only in the riskless asset and tangency portfolio choosing the weights based on individual risk tolerance.c.never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time.d.choose an efficient portfolio based on individual risk tolerance or uti

8、lity.e.all of the above.difficulty level: mediumtopic: portfolio variance7.you want your portfolio beta to be 1.30. currently, your portfolio consists of $100 invested in stock a with a beta of 1.4 and $300 in stock b with a beta of .6. you have another $400 to invest and want to divide it between a

9、n asset with a beta of 1.8 and a risk-free asset. how much should you invest in the risk-free asset?*a.$0b.$50c.$200d.$320e.$400betaportfolio = 1.30 = ($100 $800 1.4) + ($300 $800 .6) + (x $800 1.8) + ($400 - x) $800 0) = .175 + .225 + .00225x + 0; .9 = .00225x; x = $3400; risk-free asset = $400 - $

10、400 = $0difficulty level: mediumtopic: analyzing a portfolio8.you are comparing stock a to stock b. given the following information, which one of these two stocks should you prefer and why?a.stock a; because it has an expected return of 7% and appears to be more risky.b.stock a; because it has a sli

11、ghtly lower expected return but appears to be significantly less risky than stock b.*c.stock a; because it has a higher expected return and appears to be less risky than stock b.d.stock b; because it has a higher expected return and appears to be just slightly more risky than stock a.e.stock b; beca

12、use it has a higher expected return and appears to be less risky than stock a.e(r)a = (.60 .09) + (.40 .04) = .054 + .016 = .07 = 7%e(r)b = (.60 .15) + (.40 -.06) = .09 - .024 = .066 = 6.6%you should select stock a because it has a higher expected return and also appears to be less risky.difficulty

13、level: mediumtopic: expected return9.the rate of return on the common stock of flowers by flo is expected to be 14% in a boom economy, 8% in a normal economy, and only 2% in a recessionary economy. the probabilities of these economic states are 20% for a boom, 70% for a normal economy, and 10% for a

14、 recession. what is the variance of the returns on the common stock of flowers by flo?*a.001044b.001280c.001863d.002001e.002471e(r) = (.20 .14) + (.70 .08) + (.10 .02) = .028 + .056 + .002 = .086var = .20 (.14 - .086)2 + .70 (.08 - .086)2 + .10 (.02 - .086)2 = .0005832 + .0000252 + .0004356 = .00104

15、4difficulty level: mediumtopic: variance10.kurts adventures, inc. stock is quite cyclical. in a boom economy, the stock is expected to return 30% in comparison to 12% in a normal economy and a negative 20% in a recessionary period. the probability of a recession is 15%. there is a 30% chance of a bo

16、om economy. the remainder of the time the economy will be at normal levels. what is the standard deviation of the returns on kurts adventures, inc. stock?a.10.05%b.12.60%*c.15.83%d.17.46%e.25.04%e(r) = (.30 .30) + (.55 .12) + (.15 -.20) = .09 + .066 - .03 = .126 var = .30 (.30 - .126)2 + .55 (.12 -

17、.126)2 + .15 (-.20 - .126)2 = .0090828 + .0000198 + .0159414 = .025044 std dev = .025044 = .15825 = 15.83%difficulty level: challengetopic: standard deviation11.what is the standard deviation of the returns on a stock given the following information?a.5.80%b.7.34%c.8.38%*d.9.15%e.9.87%e(r) = (.10 .1

18、6) + (.60 .11) + (.30 -.08) = .016 + .066 - .024 = .058 var = .10 (.16 - .058)2 + .60 (.11 - .058)2 + .30 (-.08 - .058)2 = .0010404 + .0016224 + .0057132 = .008376 std dev = .008376 = .09152 = 9.15%difficulty level: challengetopic: standard deviation12.what is the expected return on a portfolio whic

19、h is invested 20% in stock a, 50% in stock b, and 30% in stock c?a.7.40%*b.8.25%c.8.33%d.9.45%e.9.50%e(r)boom = (.20 .18) + (.50 .09) + (.30 .06) = .036 + .045 + .018 = .099e(r)normal = (.20 .11) + (.50 .07) + (.30 .09) = .022 + .035 + .027 = .084e(r)bust = (.20 -.10) + (.50 .04) + (.30 .13) = -.020

20、 + .020 + .039 = .039e(r)portfolio = (.20 .099) + (.70 .084) + (.10 .039) = .02376 + .0588 + .0039 = .0825 = 8.25%difficulty level: challengetopic: portfolio expected return13.what is the expected return on a portfolio comprised of $3,000 in stock k and $5,000 in stock l if the economy is normal?a.3

21、.75%b.5.25%*c.5.63%d.5.88%e.6.80%e(r)normal = $3,000 ($3,000 + $5,000) .05 + $5,000 ($3,000 + $5,000) .06) = .01875 + .0375 = .05625 = 5.63%difficulty level: mediumtopic: portfolio expected return14.what is the expected return on a portfolio comprised of $4,000 in stock m and $6,000 in stock n if th

22、e economy is in a normal period?a.6.4%*b.7.6%c.10.4%d.13.2%e.14.0%e(r)normal = ($4,000 ($4,000 + $6,000) .07 + $6,000 ($4,000 + $6,000) .08 = .028 + .048 = .076 = 7.6%difficulty level: mediumtopic: portfolio expected return15.what is the portfolio variance if 30% is invested in stock s and 70% is in

23、vested in stock t?a.002220*b.004164c.006224d.008080e.098000e(r)boom = (.30 .12) + (.70 .20) = .036 + .14 = .176e(r)normal = (.30 .06) + (.70 .04) = .018 + .028 = .046e(r)portfolio = (.45 .176) + (.55 .046) = .0792 + .0253 = .1045varportfolio = .45 (.176 - .1045)2 + .55 (.046 - .1045)2 = .0023005 + .

24、0018630 = .0041635difficulty level: challengetopic: portfolio variance16.what is the standard deviation of a portfolio which is comprised of $4,500 invested in stock s and $3,000 in stock t?*a.1.4%b.1.9%c.2.6%d.5.7%e.7.2%e(r)boom = $4,500 ($4,500 + $3,000) .12) + $3,000 ($4,500 + $3,000) .04) = .072

25、 + .016= .088e(r)normal = $4,500 ($4,500 + $3,000) .09) + $3,000 ($4,500 + $3,000) .06) = .054 + .024= .078e(r)bust =$4,500 ($4,500 + $3,000) .02) + $3,000 ($4,500 + $3,000) .09) = .012 + .036= .048e(r)portfolio = (.10 .088) + (.65 .078) + (.25 .048) = .0088 + .0507 + .012= .0715varportfolio = .10 (

26、.088 - .0715)2 + .65 (.078 - .0715)2 + .25 (.048 - .0715)2 = .000027225 + .000027463 + .000138063 = .000192751std dev = .000192751 = .01388 = 1.4%difficulty level: challengetopic: portfolio standard deviation17.what is the standard deviation of a portfolio which is invested 20% in stock a, 30% in st

27、ock b and 50% in stock c?a.0.6%b.0.9%c.1.8%*d.2.2%e.4.9%e(r)boom = (.20 .15) + (.30 .10) + (.50 .05) = .03 + .03 + .025 = .085e(r)normal = (.20 .09) + (.30 .06) + (.50 .07) = .018 + .018 + .035 = .071e(r)bust = (.20 -.14) + (.30 .02) + (.50 .08) = -.028 + .006 + .04 = .018e(r)portfolio = (.10 .085)

28、+ (.70 .071) + (.20 .018) = .0085 + .0497 + .0036 = .0618varportfolio = .10 (.085 - .0618)2 + .70 (.071 - .0618)2 + .20 (.018 - .0618)2 = .000053824 + .000059248 + .000383688 = .00049676std dev = .00049676 = .022288 = 2.2%difficulty level: challengetopic: portfolio standard deviation18.what is the b

29、eta of a portfolio comprised of the following securities?amount securitya.1.008b.1.014*c.1.038d.1.067e.1.127valueportfolio = $2,000 + $3,000 + $5,000 = $10,000betaportfolio = ($2,000 $10,000 1.20) + ($3,000 $10,000 1.46) + ($5,000 $10,000 .72) = .24 + .438 + .36 = 1.038difficulty level: mediumtopic:

30、 beta19.your portfolio has a beta of 1.18. the portfolio consists of 20% u.s. treasury bills, 30% in stock a, and 50% in stock b. stock a has a risk-level equivalent to that of the overall market. what is the beta of stock b?a.55b.1.10c.1.24d.1.60*e.1.76. betaportfolio = 1.18 = (.20 0) + (.30 1.0) +

31、 (.50 bb) = 0 + .3 + .50bb; .88 = .50bb; bb = 1.76the beta of a risk-free asset is zero. the beta of the market is 1.0.difficulty level: mediumtopic: portfolio beta20.you would like to combine a risky stock with a beta of 1.5 with u.s. treasury bills in such a way that the risk level of the portfoli

32、o is equivalent to the risk level of the overall market. what percentage of the portfolio should be invested in treasury bills?a.25%*b.33%c.50%d.67%e.75%betaportfolio = 1.0 = (1-w) 1.5 + w 0 = 1.5 - 1.5w; 1.5w = .5; w = .33difficulty level: mediumtopic: portfolio beta21.nuvo, inc. stock has a beta o

33、f .86 and an expected return of 10.5%. the risk-free rate of return is 3.2% and the market rate of return is 11.2%. which one of the following statements is true given this information?*a.nuvo stock is underpriced.b.the return on nuvo stock will graph below the security market line.c.the expected re

34、turn on nuvo stock based on the capital asset pricing model is 9.88%.d.nuvo stock has more systematic risk than the overall market.e.nuvo stock is correctly priced.e(r) = .032 + .86 (.112 - .032) = .1008 = 10.08%; nuvo stock is underpriced as its actual expected return exceeds the expected return ba

35、sed on capm.difficulty level: mediumtopic: capital asset pricing model (capm)genlabs has been a hot stock the last few years, but is risky. the expected returns for genlabs are highly dependent on the state of the economy as follows:22.the variance of genlabs returns isa.0207*b.0428c.0643d.0733e.non

36、e of the above.05(-.50 - .125)2 + .1(-.15 - .125)2 + .2(.05 - .125)2 + .3(.15 - .125)2 + .2(.25 - .125)2 + .15(.40 - .125)2 = .0428difficulty level: challengetopic: variance23.the standard deviation of genlabs returns isa.0845*b.2069c.3065d.3358e.none of the above.05(-.50 - .125)2 + .1(-.15 - .125)2

37、 + .2(.05 - .125)2 + .3(.15 - .125)2 + .2(.25 - .125)2 + .15(.40 - .125)2 = .0428.0428 = .2069difficulty level: challengetopic: standard deviation24.a portfolio has 50% of its funds invested in security one and 50% of its funds invested in security two. security one has a standard deviation of 6%. s

38、ecurity two has a standard deviation of 12%. the securities have a coefficient of correlation of .5. which of the following values is closest to portfolio variance?a.0027*b.0063c.0095d.0104e.one must have covariance to calculate expected value.varp = .52(.06)2 + .52(.12)2 + 2(.5)(.5)(.5)(.06)(.12) =

39、 .0009 + .0036 + .0018 = .0063difficulty level: mediumtopic: portfolio variance25.a portfolio has 25% of its funds invested in security c and 75% of its funds invested in security d. security c has an expected return of 8% and a standard deviation of 6%. security d has an expected return of 10% and

40、a standard deviation of 10%. the securities have a coefficient of correlation of .6. which of the following values is closest to portfolio return and variance?a.090; .0081b.095; .001675*c.095; .0072d.100; .00849e.cannot calculate without the number of covariance terms.e(r) = .25(.08) + .75(.10) = .0

41、95 = 9.5%variance = .252(.06)2 + .752(.10)2 + 2(.25)(.75)(.06)(.60)(.10) = .0072difficulty level: challengetopic: portfolio return and variancechapter 12 26.the best fit line of a pairwise plot of the returns of the security against the market index returns is called the:a.security market line.b.cap

42、ital market line.*c.characteristic line.d.risk line.e.none of the above.difficulty level: mediumtopic: characteristic line27.the weighted average cost of capital for a firm is the:a.discount rate which the firm should apply to all of the projects it undertakes.*b.overall rate which the firm must ear

43、n on its existing assets to maintain the value of its stock.c.rate the firm should expect to pay on its next bond issue.d.maximum rate which the firm should require on any projects it undertakes.e.rate of return that the firms preferred stockholders should expect to earn over the long term.difficult

44、y level: mediumtopic: weighted average cost of capital28.using the capm to calculate the cost of capital for a risky project assumes that:a.using the firms beta is the same measure of risk as the project.b.the firm is all-equity financed.c.the financial risk is equal to business risk.*d.both a and b

45、.e.both a and c.difficulty level: mediumtopic: capm29.if the risk of an investment project is different than the firms risk then:a.you must adjust the discount rate for the project based on the firms risk.*b.you must adjust the discount rate for the project based on the project risk.c.you must exerc

46、ise risk aversion and use the market rate.d.an average rate across prior projects is acceptable because estimates contain errors.e.one must have the actual data to determine any differences in the calculations.difficulty level: easytopic: discount rate30.companies that have highly cyclical sales wil

47、l have a:a.low beta if sales are highly dependent on the market cycle.*b.high beta if sales are highly dependent on the market cycle.c.high beta if sales are independent of the market cycle.d.all of the above.e.none of the above.31.for a multi-product firm, if a projects beta is different from that

48、of the overall firm, then the:a.capm can no longer be used.b.project should be discounted using the overall firms beta.*c.project should be discounted at a rate commensurate with its own beta.d.project should be discounted at the market rate.e.project should be discounted at the t-bill rate.difficul

49、ty level: mediumtopic: project and firm beta32.the problem of using the overall firms beta in discounting projects of different risk is the:a.firm would accept too many high-risk projects.b.firm would reject too many low risk projects.c.firm would reject too many high-risk projects.d.firm would acce

50、pt too many low risk projects.*e.both a and b.difficulty level: mediumtopic: firms beta33.comparing two otherwise equal firms, the beta of the common stock of a levered firm is _ than the beta of the common stock of an unlevered firm.a.equal tob.significantly lessc.slightly less*d.greatere.none of t

51、he above.difficulty level: mediumtopic: levered vs. unlevered beta34.the beta of a firm is more likely to be high under what two conditions?a.high cyclical business activity and low operating leverage*b.high cyclical business activity and high operating leveragec.low cyclical business activity and l

52、ow financial leveraged.low cyclical business activity and low operating leveragee.none of the above.difficulty level: mediumtopic: factors affecting beta35.a firm with cyclical earnings is characterized by:*a.revenue patterns that vary with the business cycle.b.high levels of debt in its capital str

53、ucture.c.high fixed costs.d.high price per unit.e.low contribution margins.difficulty level: mediumtopic: cyclical earnings36.a firm with high operating leverage has:a.low fixed costs in its production process.b.high variable costs in its production process.*c.high fixed costs in its production proc

54、ess.d.high price per unit.e.low price per unit.difficulty level: mediumtopic: operating leverage37.if a firm has low fixed costs relative to all other firms in the same industry, a large change in sales volume (either up or down) would have:*a.a smaller change in ebit for the firm versus the other f

55、irms.b.no effect in any way on the firms as volume does not effect fixed costs.c.a decreasing effect on the cyclical nature of the business.d.a larger change in ebit for the firm versus the other firms.e.none of the above.difficulty level: mediumtopic: operating leverage38.a firm with high operating

56、 leverage is characterized by _ while one with high financial leverage is characterized by _.a.low fixed cost of production; low fixed financial costsb.high variable cost of production; high variable financial costs*c.high fixed costs of production; high fixed financial costsd.low costs of production;