Question

15. How the beta of a stock can be calculated?

1. By monitoring price of the stock
2. By monitoring rate of return of the stock
3. By comparing the changes in the stock market price to the changes in the stock market index
4. All of the given options

16. Which of the following formula relates beta of the stock to the standard deviation?

A. Covariance of stock with market * variance of the market

B. Covariance of stock with market / variance of the market

C. Variance of the market / Covariance of stock with market

D. Slope of the regression line

17. A beta greater than 1 for a stock shows:

A. Stock is relatively more risky than the market

B. If the market moves up by 10% the stock will move up by 12%

C. As the market moves the stock will move in the same direction

D. All of the given options

18. If stock is a part of totally diversified portfolio then its company risk must be equal to:

A. 0
B. 0.5
C. 1
D. -1

19. If risk and return combination of any stock is above the SML, what does it mean?

1. It is offering lower rate of return as compared to the efficient stock
2. It is offering higher rate of return as compared to the efficient stock
3. Its rate of return is zero as compared to the efficient stock
4. It is offering rate of return equal to the efficient stock
   

20. An arbitrage opportunity exists if an investor can construct a __________investment portfolio that will yield a sure profit.

A. Positive
B. Negative
C. Zero
D. All of the given options

Answer 1

Answer to Q#15 (First question in the list): Option-(d): All of the given options Reason: Beta of a stock measures the level of financial risks, such as maturity repayment risk and periodic interest payment risk, etc., The more the beta coefficient associated with a stock, the more the risks involved thereon. Numerically, beta of 1.0 tells that there is no risk; beta of greater than 1.0 implies that more risks are involved thereon with the stock; beta of less than 1.0 implies that less risks are involved thereon. For analyzing the risks associated with any stock, investors must monitor price of the stock and rate of return of the stock continuously and compare the changes in the stock market price to the changes in the stock market index so that beta of the stock with respect to risks involved thereon can be calculated appropriately, to the extent possible. So, all the given options are correct answers.