Chapter 2: Q8-16I (page 159)
“If the business cycle is predictable, and a stock has a positive beta, the stock’s returns also must be predictable.” Respond.
In the above scenario these should not show abnormal returns.
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In an efficient market, professional portfolio management can offer all of the following benefits except which of the following?
a. Low-cost diversification.
b. A targeted risk level
c. Low-cost record keeping.
d. A superior risk-return trade-off.
Consider the statement: “If we can identify a portfolio that beats the S&P 500 Index portfolio, then we should reject the single-index CAPM.” Do you agree or disagree? Explain.
You are a consultant to a large manufacturing corporation considering a project with the following net after-tax cash flows (in millions of dollars):
| YEARS FROM NOW | After-Tax CF |
| 0 1-9 10 | -20 10 20 |
The project’s beta is 1.7. Assuming r f = 9% and E ( r M ) = 19%, what is the net present value of the project? What is the highest possible beta estimate for the project before its NPV becomes negative?
The security market line depicts:
a. A security’s expected return as a function of its systematic risk.
b. The market portfolio as the optimal portfolio of risky securities.
c. The relationship between a security’s return and the return on an index.
d. The complete portfolio as a combination of the market portfolio and the risk-free asset.
Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of .6. Which of the following statements is most accurate?
a. The expected rate of return will be higher for the stock of Kaskin, Inc., than that of
Quinn, Inc.
b. The stock of Kaskin, Inc., has more total risk than Quinn, Inc.
c. The stock of Quinn, Inc., has more systematic risk than that of Kaskin, Inc.
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