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MULT CHOICE

You observe the following information regarding Company X and Company Y:

? Company X has a higher expected mean return than Company Y.
? Company X has a lower standard deviation than Company Y.
? Company X has a higher beta than Company Y.
Given this information, which of the following statements is most correct?

a. Company X has a lower coefficient of variation.
b. Company X has more company-specific risk.
c. Company X is a better stock to buy.
d. Statements a and b are correct.
e. Statements a, b, and c are correct
Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities?
(Assume the market is in equilibrium.)

a. When held in isolation, Stock A has greater risk than Stock B.
b. Stock B would be a more desirable addition to a portfolio than Stock A.
c. Stock A would be a more desirable addition to a portfolio than Stock B.
d. The expected return on Stock A will be greater than that on Stock B.
e. The expected return on Stock B will be greater than that on Stock A.

3. Stock A has a beta of 1.2 and a standard deviation of 20 percent. Stock B has a beta of 0.8 and a standard deviation of 25 percent. Portfolio P is a $200,000 portfolio consisting of $100,000 invested in Stock A and $100,000 invested in Stock B. Which of the following statements is most correct? (Assume that the required return is determined by the Security Market Line.)

a. Stock B has a higher required rate of return than stock A.
b. Portfolio P has a standard deviation of 22.5 percent.
c. Portfolio P has a beta equal to 1.0.
d. Statements a and b are correct.
e. Statements a and c are correct.

You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?

a. The discount rate decreases.
b. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.
c. The discount rate increases.
d. Answers b and c above.
e. Answers a and b above.

Solution Preview

1. coefficient of variation = Stand. Dev. / Mean return
since SD of X is samller than Y, and Mean X > Y,
X has a lower coefficient of variation

2. Beta measures the systematic risk of a stock
By CAPM, we know that
Required return = Risk Free Rate + Beta ...

$2.19