Question

T/F

If you formed a portfolio that consisted of all stocks with betas less than 1.0, the portfolio would have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio.

The beta of an "average stock," or "the market," does not change over time.

The slope of the SML is determined by the value of beta.

The CAPM is built on historic conditions, although in most cases we use expected future data in applying it.

"Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

If you plotted the returns of a company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.

A firm can have a positive beta, even if the correlation between its returns and those of another firm is negative.

One stock has a beta of 1.2 and another has a beta of -0.6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks

A stock with a beta equal to -1.0 has zero systematic (or market) risk.

Answer 1

1.If you formed a portfolio that consisted of all stocks with betas less than 1.0, the portfolio would have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio.

TRUE

beta of portfolio = weighted average beta of stocks

2.The beta of an "average stock," or "the market," does not change over time.

FALSE

Beta value chnages over time

3. The slope of the SML is determined by the value of beta.

FALSE

SML = rf + Beta * market risk premium

the slope of SML is market risk premium

beta is X axis in the SML graph

4. The CAPM is built on historic conditions, although in most cases we use expected future data in applying it.

FALSE

The reason is that the betas are calculated using the past data which means that the Capital asset pricing model solely rely on the past data which is not the strength of the CAPM. It is basically a weakness of the model so the statement is incorrect.

5. "Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

TRUE

Risk aversion means the investor chooses to avoid risks.

6. If you plotted the returns of a company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.

TRUE

SML = rf + Beta * market risk premium

market risk premium = slope = negative

so, required rate of return will be less than risk free rate

7. A firm can have a positive beta, even if the correlation between its returns and those of another firm is negative.

TRUE

8. One stock has a beta of 1.2 and another has a beta of -0.6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks

TRUE

9. A stock with a beta equal to -1.0 has zero systematic (or market) risk.

FALSE

for beta = negative, the stock's price moves in the opposite direction from the market index.