Question 1

The CAPM shows that the expected return for a particular asset depends on the pure time value of money.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following does NOT correctly complete this sentence: In general, the link between an information announcement and the stock price is that ____________________.

Accepted Answer

A)  The expected stock return will change if the announcement contains a surprise component. 
B)  The stock price will not change if the announcement provided only anticipated information. 
C)  Only announcements that have already been discounted will affect the stock price. 
D)  In order for the price of the stock to change, the announcement must be relevant to that particular stock and must be unanticipated. 
E)  If markets are efficient in the semi-strong form, then the market will react rapidly to the new information. 
A)  The expected stock return will change if the announcement contains a surprise component. 
B)  The stock price will not change if the announcement provided only anticipated information. 
C)  Only announcements that have already been discounted will affect the stock price. 
D)  In order for the price of the stock to change, the announcement must be relevant to that particular stock and must be unanticipated. 
E)  If markets are efficient in the semi-strong form, then the market will react rapidly to the new information.

Question 3

Asset A has an expected return of 22% and a beta of 1.8. The expected market return is 14%. What is the risk-free rate?

Accepted Answer

A)  0.6% 
B)  1.2% 
C)  3.0% 
D)  4.0% 
E)  6.0% 
A)  0.6% 
B)  1.2% 
C)  3.0% 
D)  4.0% 
E)  6.0%

Question 4

Which of the following would have the lowest amount of systematic risk?

Accepted Answer

A)  A portfolio of the common stocks of 100 different companies. 
B)  The market portfolio. 
C)  A portfolio half invested in the market portfolio and half invested in Treasury bills. 
D)  A portfolio half invested in the market portfolio and half invested in stocks with betas = 1. 50. 
E)  A portfolio made up entirely of Treasury bills. 
A)  A portfolio of the common stocks of 100 different companies. 
B)  The market portfolio. 
C)  A portfolio half invested in the market portfolio and half invested in Treasury bills. 
D)  A portfolio half invested in the market portfolio and half invested in stocks with betas = 1. 50. 
E)  A portfolio made up entirely of Treasury bills.

Question 5

What is the variance of a portfolio consisting of $5,500 in stock G and $4,500 in stock H?

Accepted Answer

A)  .000387 
B)  .000778 
C)  .001482 
D)  .019677 
E)  .038496 
A)  .000387 
B)  .000778 
C)  .001482 
D)  .019677 
E)  .038496

Question 6

If the economy booms, R&F, Inc. stock is expected to return 16%. If the economy goes into a recessionary period, then R&F is expected to only return 3%. The probability of a boom is 80% while the probability of a recession is 20%. What is the variance of the returns on R&F stock?

Accepted Answer

A)  .002704 
B)  .006183 
C)  .011492 
D)  .030081 
E)  .052000 
A)  .002704 
B)  .006183 
C)  .011492 
D)  .030081 
E)  .052000

Question 7

What is the portfolio variance if 60% is invested in stock K and 40% is invested in stock L?

Accepted Answer

A)  .00000 
B)  .00091 
C)  .00108 
D)  .00172 
E)  .00249 
A)  .00000 
B)  .00091 
C)  .00108 
D)  .00172 
E)  .00249

Question 8

Risk premium = Expected return - Risk-free rate

Accepted Answer

A) True 
 B)False

Question 9

The news that influences the unanticipated rate of return on a stock is called the:

Accepted Answer

A)  Surprise. 
B)  Expected rate of return. 
C)  Beta. 
D)  Systematic risk. 
E)  Asset-specific risk. 
A)  Surprise. 
B)  Expected rate of return. 
C)  Beta. 
D)  Systematic risk. 
E)  Asset-specific risk.

Question 10

A portfolio of Treasury bills will have a beta equal to minus one.

Accepted Answer

A) True 
 B)False

Question 11

The common stock of Cross Country Homes has an expected return of 15.18%. The return on the market is 11.6% and the risk-free rate of return is 4.3%. What is the beta of Cross Country Homes stock?

Accepted Answer

A)  1.37 
B)  1.42 
C)  1.49 
D)  1.51 
E)  1.56 
A)  1.37 
B)  1.42 
C)  1.49 
D)  1.51 
E)  1.56

Question 12

You would like to combine a risky stock with a beta of 1.68 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills?

Accepted Answer

A)  .32 
B)  .40 
C)  .50 
D)  .60 
E)  .68 
A)  .32 
B)  .40 
C)  .50 
D)  .60 
E)  .68

Question 13

Which security has the greatest expected return?

Accepted Answer

A)  Y because it has the largest standard deviation. 
B)  X because it has the largest beta coefficient. 
C)  Z because it has the highest ratio of standard deviation to beta. 
D)  Y because it has the lowest beta coefficient, and therefore the lowest risk. 
E)  It is not possible to tell given the information above. 
A)  Y because it has the largest standard deviation. 
B)  X because it has the largest beta coefficient. 
C)  Z because it has the highest ratio of standard deviation to beta. 
D)  Y because it has the lowest beta coefficient, and therefore the lowest risk. 
E)  It is not possible to tell given the information above.

Question 14

What matters to a diversified investor?

Accepted Answer

A)  Systematic risk. 
B)  Unsystematic risk. 
C)  Diversifiable risk. 
D)  Global risk. 
E)  Foreign exchange risk. 
A)  Systematic risk. 
B)  Unsystematic risk. 
C)  Diversifiable risk. 
D)  Global risk. 
E)  Foreign exchange risk.

Question 15

Give some examples to explain how diversification actually works to reduce portfolio risk.

Accepted Answer

Student answers will vary. All stocks po

Question 16

An investor has purchased a mining stock. It is expected that during a good economy, the stock will provide an 8% return, while in a poor economy the stock will provide a 20% return. The probability of a poor economy is expected to be 30%. Given this information, calculate the standard deviation for this stock.

Accepted Answer

A)  9.1% 
B)  8.2% 
C)  7.3% 
D)  6.4% 
E)  5.5% 
A)  9.1% 
B)  8.2% 
C)  7.3% 
D)  6.4% 
E)  5.5%

Question 17

A portfolio beta can be defined as the:

Accepted Answer

A)  Weighted average of the betas of the individual securities within the portfolio. 
B)  Total of the betas of the individual securities within the portfolio. 
C)  Amount of unsystematic risk remaining after the portfolio is diversified. 
D)  Measure of the unsystematic risk of the portfolio relative to the level of market risk. 
E)  Measure of the total risk of the portfolio in excess of the level of market risk. 
A)  Weighted average of the betas of the individual securities within the portfolio. 
B)  Total of the betas of the individual securities within the portfolio. 
C)  Amount of unsystematic risk remaining after the portfolio is diversified. 
D)  Measure of the unsystematic risk of the portfolio relative to the level of market risk. 
E)  Measure of the total risk of the portfolio in excess of the level of market risk.

Question 18

You own a portfolio that is invested 50% in a risk-free asset and 50% in a stock that is equally as risky as the market. The risk-free asset has an expected return of 5%. Your portfolio has an expected return of 8.80%. What is the expected return on the market?

Accepted Answer

A)  11.60% 
B)  11.75% 
C)  12.30% 
D)  12.35% 
E)  12.60% 
A)  11.60% 
B)  11.75% 
C)  12.30% 
D)  12.35% 
E)  12.60%

Question 19

An increase in the productivity of ABC Co. workers is an example of systematic risk.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following stocks is (are) incorrectly priced if the risk-free rate is 4% and the market risk premium is 6%?

Accepted Answer

A)  A only 
B)  B only 
C)  C only 
D)  A and C only 
E)  A, B, and C 
A)  A only 
B)  B only 
C)  C only 
D)  A and C only 
E)  A, B, and C

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

The CAPM shows that the expected return for a particular asset depends on the pure time value of money.

Which of the following does NOT correctly complete this sentence: In general, the link between an information announcement and the stock price is that ____________________.

Asset A has an expected return of 22% and a beta of 1.8. The expected market return is 14%. What is the risk-free rate?

Which of the following would have the lowest amount of systematic risk?

What is the variance of a portfolio consisting of $5,500 in stock G and $4,500 in stock H?

If the economy booms, R&F, Inc. stock is expected to return 16%. If the economy goes into a recessionary period, then R&F is expected to only return 3%. The probability of a boom is 80% while the probability of a recession is 20%. What is the variance of the returns on R&F stock?

What is the portfolio variance if 60% is invested in stock K and 40% is invested in stock L?

Risk premium = Expected return - Risk-free rate

The news that influences the unanticipated rate of return on a stock is called the:

A portfolio of Treasury bills will have a beta equal to minus one.

The common stock of Cross Country Homes has an expected return of 15.18%. The return on the market is 11.6% and the risk-free rate of return is 4.3%. What is the beta of Cross Country Homes stock?

You would like to combine a risky stock with a beta of 1.68 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills?

Which security has the greatest expected return?

What matters to a diversified investor?

Give some examples to explain how diversification actually works to reduce portfolio risk.

A portfolio beta can be defined as the:

You own a portfolio that is invested 50% in a risk-free asset and 50% in a stock that is equally as risky as the market. The risk-free asset has an expected return of 5%. Your portfolio has an expected return of 8.80%. What is the expected return on the market?

An increase in the productivity of ABC Co. workers is an example of systematic risk.

Which of the following stocks is (are) incorrectly priced if the risk-free rate is 4% and the market risk premium is 6%?

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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