Which of the Following Statements Is CORRECT

question 71

Multiple Choice

Which of the following statements is CORRECT?

• A) Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of -0.6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that 5-year period.
• B) 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 expected market move.
• C) You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should re-balance your portfolio to include more high-beta stocks.
• D) If the market risk premium remains constant, but the risk-free rate declines, then the required returns on low-beta stocks will rise while those on high-beta stocks will decline.
• E) Paid-in-Full Inc. is in the business of collecting past-due accounts for other companies, i.e., it is a collection agency. Paid-in-Full's revenues, profits, and stock price tend to rise during recessions.

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Definitions:

Correlation Coefficient

A statistical measure that calculates the strength of the relationship between the relative movements of two variables.

Independent Variable

The variable in an experiment or observational study that is manipulated or changed to observe its effect on a dependent variable.

Dependent Variable

A dependent variable is the outcome or response that researchers measure to determine the effect of varying the independent variable.

Correlation Coefficient

A numerical measure that quantifies the degree and direction of relationship between two variables, ranging from -1 to 1.