Strayer FIN534 Week 4 Homework Assignment Chapter 6

FIN 534 Week 4 Homework
Assignment Chapter 6
1. You are considering
investing in one of the these three stocks
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; B.
b. B; A.
c. C; A.
d. C; B.
e. A; A

2. Your friend is considering
adding one additional stock to a 3 – stock portfolio, to form a 4 – stock portfolio.
She is highly risk averse and has asked for your advice. The three stocks
currently held all have b = 1.0, and they are perfectly positively correlated
with the market. Potential new Stocks A and B both have expected returns of
15%, are in equilibrium, and are equally correlated with the market, with r =
0.75. However, Stock A’s standard deviation of returns is 12% versus 8% for
Stock B. Which stock should this
investor add to his or her portfolio, or does the choice not matter?
a. Stock A.
b. Stock B.
c. Neither A nor B, as neither
has a return sufficient to compensate for risk.
d. Add A, since its beta must be
lower.
e. Either A or B, i.e., the
investor should be indifferent between the two

3. Which of the following is NOT
a potential problem when estimating and using betas, i.e., which statement is
FALSE?
a. Sometimes, during a period
when the company is undergoing a change such as toward more leverage or riskier
assets, the calculated beta will be drastically different from the “true” or
“expected future” beta.
b. The beta of an “average
stock,” or “the market,” can change over time, sometimes drastically.
c. Sometimes the past data used
to calculate beta do not reflect the likely risk of the firm for the future
because conditions have changed.
d. All of the statements above
are true.
e. The fact that a security or
project may not have a past history that can be used as the basis for
calculating beta

4. Stock A’s beta is 1.7 and
Stock B’s beta is 0.7. Which of the following statements must be true about
these securities? (Assume market equilibrium.)
a. Stock B must be a more
desirable addition to a portfolio than A.
b. Stock A must be a more
desirable addition to a portfolio than B.
c. The expected return on Stock A
should be greater than that on B.
d. The expected return on Stock B
should be greater than that on A.
e. When held in isolation, Stock
A has more risk than Stock B

5. Which of the following
statements is CORRECT?
a. If you found a stock with a
zero historical beta and held it as the only stock in your portfolio,
you would by definition have a riskless portfolio.
b. The beta coefficient of a
stock is normally found by regressing past returns on a stock against past market
returns. One could also construct a scatter diagram of returns on the stock
versus those on the market, estimate the slope of the line of best fit, and use
it as beta. However, this historical beta may differ from the beta that exists
in the future.
c. The beta of a portfolio of
stocks is always larger than the betas of any of the individual stocks.
d. It is theoretically possible
for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at
least in theory, its required rate of return would be equal to the risk – free
(default – free) rate of return, rRF.
e. The beta of a portfolio of
stocks is always smaller than the betas of any of the individual stocks