Question

PVIDED BEO0 PART B: MULTIPLE CHOICE. USE THE ANSWER SHEET 1. Consider an investor who welcomes above-average portfolio risk. Which of the following statements (a) The investor is likely to be comfortable investing in a portfolio that consists of few stocks (b) The investor does not seek a high level of portfolio diversification. (c) The investor actively seeks to reduce the potential volatility of a portfolio. (d) The investor does not seek to add a negative-beta stock to a portfolio. is false? 2. You are convinced that the market price of Stock X will increase by no more than $2 in the near future. In contrast, many investors believe that the price of Stock X will rise by at least S15 in the same time period, causing the price of a call option to be $22. Assuming you are correct, which of the following statements is correct? (a) You should buy a call option. (b) You should buy a put option with an exercise price that is below today's stock price. (c) The time value of the call option is close to zero. (d) You should write a call option with an exercise price that is several dollars above the stock price. 3. Which of the following statements is correct? (a) Beta coefficients computed in different time periods are typically very similar values. (b) Few beta coefficients for equity investments are negative. (c) A portfolio that has a beta coefficient equal to 0.25 will likely outperform a broad market benchmark. (d) Treasury bills typically have beta coefficients equal to 1. 4. Recession, inflation, and high interest rates are economic events that are best characterized as being: a. Company-specific risk factors that can be diversified away. b. Factors that are responsible for market risk. c. Risks that beyond the control of investors and thus should not be considered by security analysts and portfolio managers d. Systematic risk factors that can be diversified away 5. Modern portfolio theory recommends that long-term investors should: (a) Invest exclusively in Treasury securities. (b) Invest exclusively in speculative, aggressive common stocks. (c) Invest exclusively in conservative common stocks (d) Invest in a broad market portfolio of risky investments combined with risk-free investments 6. Stock A has a beta of 0.8, while Stock B has a beta of 1.6. Which of the following statements is correct? a. If the marginal investor becomes more risk averse, the required return on Stock B will increase by more than the required return on Stock A. b. An equally weighted portfolio of Stock A and Stock B will have a beta lower than 1.0.

Answer 1

Qus 1

Option C is the ans because our investors wants above average risk and this the only option that provides for this allthe others talk about reducing or diversifying away the risk by increasing the nom of stocks or otherwise.

Qus 2

Option d us right .Since we are expecting that movement in stock price would be very low i.e. volatility is low then we should sell the call at higher strike price why? Because we earned the premium by selling or writing the call and since movement in in stock very little, we will still end up in profit as the payoff will be much lower.

Qus 3

Option b is correct because few beta coefficients can be negative

Treasury bills have 0 beta

Only stock that have beta >1 can outperform the market.

Qus 4

These are not company specific risk these are market specific risk factor which cannot be diversified and these are beyond the control of investors and companies. But that doesn't mean that these should not be taken into account while investing infact for long term investments these factors can provide very good information about the future performance of the economy and market. Hence option b is correct.

Qus5

Option d is right because MPT says that to diversify the unsystematic risk we should invest in a large no. Of risky assets together with risk free assets.

Qus 6

Wieghted average beta = .8× .5 +1.6 ×.5 = 1.2 i.e. >1 which means option 2 is wrong

Option 1 as per CAPM required return Re = rf + market risk premium × beta

Which means higher the beta , higher the required return hence option 1 is wrong.