Question 1

A decrease in the rate of inflation is an example of systematic risk.

Accepted Answer

A) True 
 B)False

Question 2

Consider a day on which the S&P/TSX 60 Index, an index of 60 large stocks, rose 59 points. On that same day, Alcan, which is one of the stocks in the Index, announced some unexpectedly bad news. The price of Alcan declined $10 on that same day. Using this example, discuss systematic risk, portfolio diversification, and asset specific risk.

Accepted Answer

Asset specific risk is obviously the neg

Question 3

A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.

Accepted Answer

A) True 
 B)False

Question 4

Systematic risk is another name for non-diversifiable risk.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is a correct statement about diversification?

Accepted Answer

A)  Most diversification benefits are realized with just 10 stocks. 
B)  Diversification is the process of reducing the riskiness associated with individual assets by spreading an investment across numerous assets. 
C)  Diversifiable risk is the only risk that matters to a rational investor. 
D)  When a stock is combined into a portfolio, the standard deviation of that portfolio remains unchanged. 
E)  There is no limit to the amount of risk that can be eliminated through diversification. 
A)  Most diversification benefits are realized with just 10 stocks. 
B)  Diversification is the process of reducing the riskiness associated with individual assets by spreading an investment across numerous assets. 
C)  Diversifiable risk is the only risk that matters to a rational investor. 
D)  When a stock is combined into a portfolio, the standard deviation of that portfolio remains unchanged. 
E)  There is no limit to the amount of risk that can be eliminated through diversification.

Question 6

The Capital Asset Pricing Model (CAPM) assumes that standard deviation measures systematic risk.

Accepted Answer

A) True 
 B)False

Question 7

What is the portfolio variance if 55% is invested in stock S and 45% is invested in stock T?

Accepted Answer

A)  .001314 
B)  .003148 
C)  .009128 
D)  .036250 
E)  .056106 
A)  .001314 
B)  .003148 
C)  .009128 
D)  .036250 
E)  .056106

Question 8

Suppose the Bank of Canada increased the rate on T-bills. As a result of this action, the security market line of a risky individual security would:

Accepted Answer

A)  Remain constant. 
B)  Have an increased slope. 
C)  Have a decreased slope. 
D)  Increase in a parallel manner. 
E)  Decrease in a parallel manner. 
A)  Remain constant. 
B)  Have an increased slope. 
C)  Have a decreased slope. 
D)  Increase in a parallel manner. 
E)  Decrease in a parallel manner.

Question 9

Nuvo, Inc. stock has a beta of.86 and an expected return of 10.5%. The risk-free rate of return is 3.2% and the market rate of return is 11.2%. Which one of the following statements is true given this information?

Accepted Answer

A)  The return on Nuvo stock will graph below the Security Market Line. 
B)  Nuvo stock is underpriced. 
C)  The expected return on Nuvo stock based on the Capital Asset Pricing Model is 9.88%. 
D)  Nuvo stock has more systematic risk than the overall market. 
E)  Nuvo stock is correctly priced. 
A)  The return on Nuvo stock will graph below the Security Market Line. 
B)  Nuvo stock is underpriced. 
C)  The expected return on Nuvo stock based on the Capital Asset Pricing Model is 9.88%. 
D)  Nuvo stock has more systematic risk than the overall market. 
E)  Nuvo stock is correctly priced.

Question 10

You own the following portfolio of stocks. What is the portfolio weight of stock C?

Accepted Answer

A)  26.89% 
B)  28.06% 
C)  33.39% 
D)  34.18% 
E)  36.10% 
A)  26.89% 
B)  28.06% 
C)  33.39% 
D)  34.18% 
E)  36.10%

Question 11

Using the Capital Asset Pricing Model (CAPM), an increase in the security's beta will increase the expected rate of return on an individual security. Assume that the security's beta, the risk-free rate of return, and the market rate of return are all positive.

Accepted Answer

A) True 
 B)False

Question 12

XYZ Investment Corporation is considering a portfolio with 70% weighting in a cyclical stock and 30% weighting in a countercyclical stock. It is expected that there will be three economic states; Good, Average and Bad, each with equal probabilities of occurrence. The cyclical stock is expected to have returns of 25%, 5% and 1% in Good, Average and Bad economies respectively. The countercyclical stock is expected to have returns of -8%, 2% and 14% in Good, Average and Bad economies respectively. Given this information, calculate portfolio standard deviation.

Accepted Answer

A)  9% 
B)  8% 
C)  7% 
D)  6% 
E)  5% 
A)  9% 
B)  8% 
C)  7% 
D)  6% 
E)  5%

Question 13

If all securities plot on the security market line then:

Accepted Answer

A)  Each security is being paid the same amount of risk premium. 
B)  The reward-to-risk ratio is constant and equal to the market risk premium. 
C)  Every security has a reward-to-risk ratio equal to its beta. 
D)  The slope of the security market line must be greater than the reward-to-risk ratio. 
E)  The reward-to-risk ratio is constant and equal to 1.0. 
A)  Each security is being paid the same amount of risk premium. 
B)  The reward-to-risk ratio is constant and equal to the market risk premium. 
C)  Every security has a reward-to-risk ratio equal to its beta. 
D)  The slope of the security market line must be greater than the reward-to-risk ratio. 
E)  The reward-to-risk ratio is constant and equal to 1.0.

Question 14

The expected return on a stock that is computed using economic probabilities is:

Accepted Answer

A)  Guaranteed to equal the actual average return on the stock for the next five years. 
B)  Guaranteed to be the minimal rate of return on the stock over the next two years. 
C)  Guaranteed to equal the actual return for the immediate twelve month period. 
D)  A mathematical expectation based on a weighted average and not an actual anticipated outcome. 
E)  The actual return you should anticipate as long as the economic forecast remains constant. 
A)  Guaranteed to equal the actual average return on the stock for the next five years. 
B)  Guaranteed to be the minimal rate of return on the stock over the next two years. 
C)  Guaranteed to equal the actual return for the immediate twelve month period. 
D)  A mathematical expectation based on a weighted average and not an actual anticipated outcome. 
E)  The actual return you should anticipate as long as the economic forecast remains constant.

Question 15

Quarterly profit for Imperial Oil equals expectations is considered an example of systematic risk.

Accepted Answer

A) True 
 B)False

Question 16

What is the portfolio beta with 125% of your funds invested in the market portfolio via borrowing 25% of the funds at the risk-free interest rate?

Accepted Answer

A)  0.25 
B)  0.50 
C)  0.75 
D)  1.00 
E)  1.25 
A)  0.25 
B)  0.50 
C)  0.75 
D)  1.00 
E)  1.25

Question 17

What is the expected return on a portfolio that is invested 40% in stock A and 60% in stock B, given the following information?

Accepted Answer

A)  5.40% 
B)  5.70% 
C)  6.40% 
D)  7.80% 
E)  8.10% 
A)  5.40% 
B)  5.70% 
C)  6.40% 
D)  7.80% 
E)  8.10%

Question 18

If investors can freely trade assets in financial markets, then the impact of trading activity on expected returns insures that ________________________.

Accepted Answer

A)  All assets will have the same degree of systematic risk. 
B)  Each firm's reward to risk ratio will be based on a different risk-free rate of return. 
C)  Systematic risk can be diversified away. 
D)  Assets will have the same reward to risk ratio. 
E)  All assets will have the same risk premium. 
A)  All assets will have the same degree of systematic risk. 
B)  Each firm's reward to risk ratio will be based on a different risk-free rate of return. 
C)  Systematic risk can be diversified away. 
D)  Assets will have the same reward to risk ratio. 
E)  All assets will have the same risk premium.

Question 19

No matter how much total risk an asset has, only the unsystematic portion is relevant in determining the expected return on that asset.

Accepted Answer

A) True 
 B)False

Question 20

The weights that are commonly used when computing the expected return of a portfolio given various economic scenarios are based on the systematic risk of each security held in the portfolio.

Accepted Answer

A) True 
 B)False

Exam 13: Return, Risk, and the Security Market Line

A decrease in the rate of inflation is an example of systematic risk.

A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.

Systematic risk is another name for non-diversifiable risk.

Which of the following is a correct statement about diversification?

The Capital Asset Pricing Model (CAPM) assumes that standard deviation measures systematic risk.

What is the portfolio variance if 55% is invested in stock S and 45% is invested in stock T?

Suppose the Bank of Canada increased the rate on T-bills. As a result of this action, the security market line of a risky individual security would:

Nuvo, Inc. stock has a beta of.86 and an expected return of 10.5%. The risk-free rate of return is 3.2% and the market rate of return is 11.2%. Which one of the following statements is true given this information?

You own the following portfolio of stocks. What is the portfolio weight of stock C?

Using the Capital Asset Pricing Model (CAPM), an increase in the security's beta will increase the expected rate of return on an individual security. Assume that the security's beta, the risk-free rate of return, and the market rate of return are all positive.

If all securities plot on the security market line then:

The expected return on a stock that is computed using economic probabilities is:

Quarterly profit for Imperial Oil equals expectations is considered an example of systematic risk.

What is the portfolio beta with 125% of your funds invested in the market portfolio via borrowing 25% of the funds at the risk-free interest rate?

What is the expected return on a portfolio that is invested 40% in stock A and 60% in stock B, given the following information?

If investors can freely trade assets in financial markets, then the impact of trading activity on expected returns insures that ________________________.

No matter how much total risk an asset has, only the unsystematic portion is relevant in determining the expected return on that asset.

The weights that are commonly used when computing the expected return of a portfolio given various economic scenarios are based on the systematic risk of each security held in the portfolio.

Introduction to Corporate Finance

Financial Statements, Cash Flow, and Taxes

Working With Financial Statements

Long-Term Financial Planning and Corporate Growth

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Lessons From Capital Market History

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Dividend Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Enterprise Risk Management

Options and Corporate Securities

Behavioural Finance: Implications for Financial Management

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