15. Which of the following statements is CORRECT? Collections Inc. is in the business of collecting past-due accounts for other companies, ie, it is a collection agency. Collections revenues, profits, and stock price tend to rise during recessions. This suggests that Collections Inc beta should be quite highway 2.0, because it Hoes so much better than most other companies when the economy is weak Suppose the returns on two stocks are negatively correlated one has a beta of 1.2 as Hetermined in a regression analysis using data for the last 5 years, while the other has a beta of 10.6. The returns on the stock with the negative beta must have been negatively corelated with returns on most other stocks during that 5-year period Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be very strong in the immediate future. That is you are convinced that the market is about to rise sharply. You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the cd market move You think that investor sentiment is about to change and investors are about to become more fisk averse. This suggests that you should rebalance your portfolio to include more high-beta the market is premium remains constant but the free rate declings, then the required returns on low-beta stocks will rise while those on high heta stocks will decline 116. Which of the following statements is CORRECTY ra company with a high beta merges with a low-beta company, the best estimate of the new norged company's hea is 10 Logically, it is casier to estimate the betas associated with capital budgeting projects than the petas associated with stocks, especially if the projects are closely associated with research and Hevelopment activities The beta of an average stock." which is also the market beta" can change over time, Sometimes drastically, a newly issued stock does not have a past history that can be used for calculating beta, then we should always estimate that its beta will turn out to be 1.0. This is especially true if the company finances with more debt than the average firm Puring a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects, the calculated historical beta may be drastically different from the beta that will exist in the future 17. Stock A's beta is 1.5 and Stock B's beta is 05. Which of the following statements must be true, Assuming the CAPM is correct. Stock A would be a more desirable addition to a portfolio then Stock In equilibrium, the expected return on Stock B will be greater than that on Stock when held in isolation, Stock A has more risk than Stock B Stock B would be a more desirable addition to a portfoliathan A In equilibrium, the expected return on Stock A will be greater than that on B 18. Stock X has a beta of OS and Stock Y has a bete of 1.5. Which of the following statements must be according to the CAPM f you invest $50,000 in Stock X and S50,000 in Stock Y your 2-stock portfolio would have a eta significantly lower than 1.. provided the retums on the two stocks are not perfectly correlated Stock Y's realized return during the coming year will be higher than Stock X's return. f the expected rate of inflation increases but the market risk premium is unchanged, the Fequired returns on the two stocks should increase by the same amount Stock Y's return has a higher standard deviation than Stock X of the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a Jarger decline in its required return than will Stock Y