Fundamentals of Business Finance Chapter 6

The appropriate measure for risk according to the capital asset pricing model is: beta.
Which of the following types of risk is diversifiable? Unsystematic, or company-unique risk.
Of the following different types of securities, which is typically considered most risky? Common stocks of small companies
SeeBreeze Incorporated has a beta of 1.0. If the expected return on the market is 15%, what is the expected return on SeeBreeze Incorporated’s stock? 15%
Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________. beta; standard deviation
The capital asset pricing model: provides a risk-return trade off in which risk is measured in terms of beta.
What is diversifying among different kinds of assets known as? Asset allocation
Investment A has an expected return of 15% per year, while investment B has an expected return of 12% per year. A rational investor will choose investment A if A and B are of equal risk.
Stock A has a beta of 1.2 and a standard deviation of returns of 18%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the market risk premium increases, then the required return on stock B will increase more than the required return on stock A.
Billings, Inc. common stock has a beta of 1.2. If the expected risk free return is 4% and the expected market risk premium is 9%, what is the expected return on Billing’s stock? 14.8%
The risk-free rate of interest is 4% and the market risk premium is 9%. Howard Corporation has a beta of 2.0, and last year generated a return of 16% with a standard deviation of returns of 27%. The required return on Howard Corporation stock is: 22%.
Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $10,500 return. What is the expected amount of return this investment will produce? $7,640
Your stock portfolio has two stocks with the following proportions:Stock A – 20% of the investment; Beta for stock A = 1.4Stock B – 80% of the investment; Beta for stokc B = 0.9What is the beta of the portfolio? 1.00
Which of the following is the slope of the security market line? the market risk premium
Beginning with an investment in one company’s securities, as we add securities of other companies to our portfolio, which type of risk declines? Unsystematic risk
Which of the following measures the average relationship between a stock’s returns and the market’s returns? Beta coefficient
The beta of ABC Co. stock is the slope of: The characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period.
Collectibles Corp. has a beta of 2.5 and a standard deviation of returns of 20%. The return on the market portfolio is 15% and the risk free rate is 4%. What is the risk premium on the market? 11%
You purchased 1,000 shares of K.C Inc. common stock one year ago for $50 per share. You received a dividend of $2 per share today and decide to take your profits by selling at $54.50 per share. What is your holding period return? 13.0%
Assume that an investment is forecasted to produce the following returns: a 20% probability of a 12% return; a 50% probability of a 16% return; and a 30% probability of a 19% return. What is the standard deviation of return for this investment? 2.43%
You have a portfolio of two stocks with the following investment proportions and betas:Stock A = 30% of the portfolio investment; Beta of stock A = 1.8Stock B = 70% of the portfolio investment; Beta of stock B = 1.1What is the portfolio beta? 1.31

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