The higher an asset’s beta, (a) the more responsive it is to changing market returns. (b) the less responsive it is to changing market returns. (c) the higher the expected return will be in a down market. (d) the lower the expected return will be in an up market.

51. The higher an asset’s beta,

(a) the more responsive it is to changing market returns.
(b) the less responsive it is to changing market returns.
(c) the higher the expected return will be in a down market.
(d) the lower the expected return will be in an up market.
Answer: A
Level of Difficulty: 3
Learning Goal: 5
Topic: Beta and Systematic Risk

52. An increase in nondiversifiable risk

(a) would cause an increase in the beta and would lower the required return.
(b) would have no effect on the beta and would, therefore, cause no change in the
required return.
(c) would cause an increase in the beta and would increase the required return.
(d) would cause a decrease in the beta and would, therefore, lower the required rate of
return.
Answer: C
Level of Difficulty: 3
Learning Goal: 5
Topic: Beta and Systematic Risk

53. An increase in the Treasury Bill rate _________ the required rate of return of a

common stock.
(a) has no effect on
(b) increases
(c) decreases
(d) cannot be determined by
Answer: B
Level of Difficulty: 3
Learning Goal: 5
Topic: Capital Asset Pricing Model (CAPM)
54. An example of an external factor that affects a corporation’s risk or beta, and hence
required rate of return would be
(a) financing mix.
(b) toxic spills.
(c) asset mix.
(d) change in top management.
Answer: B
Level of Difficulty: 3
Learning Goal: 5
Topic: Beta and Systematic Risk
55. The beta of a portfolio is
(a) the sum of the betas of all assets in the portfolio.
(b) irrelevant, only the betas of the individual assets are important.
(c) does not change over time.
(d) is the weighted average of the betas of the individual assets in the portfolio.
Answer: D
Level of Difficulty: 3
Learning Goal: 5
Topic: Portfolio Beta
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as
follows:
Table 5.2
Asset
Annual
Return Probability Beta Proportion
X 10% 0.50 1.2 0.333
Y 8% 0.25 1.6 0.333
Z 16% 0.25 2.0 0.333
56. Given the information in Table 5.2, what is the expected annual return of this portfolio?
(a) 11.4%
(b) 10.0%
(c) 11.0%
(d) 11.7%
Answer: C
Level of Difficulty: 4
Learning Goal: 5
Topic: Portfolio Beta (Equation 5.7)
57. The beta of the portfolio in Table 5.2, containing assets X, Y, and Z, is
(a) 1.5.
(b) 2.4.
(c) 1.6.
(d) 2.0.
Answer: C
Level of Difficulty: 4
Learning Goal: 5
Topic: Portfolio Beta (Equation 5.7)
58. The beta of the portfolio in Table 5.2 indicates this portfolio
(a) has more risk than the market.
(b) has less risk than the market.
(c) has an undetermined amount of risk compared to the market.
(d) has the same risk as the market.
Answer: A
Level of Difficulty: 4
Learning Goal: 5
Topic: Portfolio Beta (Equation 5.7)
59. As randomly selected securities are combined to create a portfolio, the _________ risk
of the portfolio decreases until 10 to 20 securities are included. The portion of the risk
eliminated
is _________ risk, while that remaining is _________ risk.
(a) diversifiable; nondiversifiable; total
(b) relevant; irrelevant; total
(c) total; diversifiable; nondiversifiable
(d) total; nondiversifiable; diversifiable
Answer: C
Level of Difficulty: 4
Learning Goal: 5
Topic: Diversifiable and Nondiversifiable Risk
60. The _________ describes the relationship between nondiversifiable risk and return for
all assets.
(a) EBIT-EPS approach to capital structure
(b) supply-demand function for assets
(c) capital asset pricing model
(d) Gordon model
Answer: C
Level of Difficulty: 1
Learning Goal: 6
Topic: Capital Asset Pricing Model (CAPM)