Question1: Parr Paper's stock has a beta of 1.40, and its required return is 13 percent. Clover Dairy's stock has a beta of .80. If the risk-free rate is 4 percent, calculate the required rate of return on Clover's stock? (Suggestion: First find the market risk premium.)
[A] 8.99%
[B] 9.14%
[C] 8.55%
[D] 8.71%
[E] 9.33%
Question2: Stock A has a beta of 0.8 and Stock B has a beta of 1.2. Fifty percent of Portfolio P is invested in Stock A and fifty percent is invested in Stock B. If the market risk premium (rM rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?
[A] The required return will reduces by the same amount for both Stock A and Stock B.
[B] The required return will increase for both stocks but the increase will be greater for Stock B than for Stock A. 2
[C] The required return will increase for Stock A but will decrease for Stock B.
[D] The required return will increase for Stock B but will decrease for Stock A.
[E] The required return on Portfolio P will remain unchanged.
Question3: Other things held constant, if the expected inflation rate reduces and investors also become more risk averse, the Security Market Line would shift
[A] Up and keep the same slope.
[B] Down and keep the same slope.
[C] Down and have a less steep slope.
[D] Up and have a less steep slope.
[E] Down and have a steeper slope.