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

You sell some of your Chapters common stock (which tends to move up and down with the economy as a whole) and replace it with the common stock of El Dorado Gold Mining, Inc. (whose shares tend to rise when the economy falls, and vice versa). Your portfolio's beta should _______________.

Combining stocks with bonds in a portfolio helps reduce unsystematic risk in a portfolio.

The stock price of a gold-mining firm drops when it is discovered the firm's chairman has overstated minable gold reserves. This is an example of a (n) ______________ risk factor.

The performance of the common stock of Creekside Stores is highly dependent upon the state of the economy. In a boom economy, the stock is expected to return 24% in comparison to 11% in a normal economy and a negative 18% in a recessionary period. The probability of a recession is 10%. There is a 20% chance of a boom economy. The remainder of the time the economy will be at normal levels. What is the standard deviation of the returns on Creekside stock?

What concept does the following graph illustrate?

What is the standard deviation of a portfolio that is invested 68% in stock Q and 32% in stock R?

Which of the following is the best definition of systematic risk?

Which of the following statements is/are true about the variance of the possible future returns on a financial asset?

Lower trade deficit than expected is considered an example of systematic risk.

The returns on the common stock of Cycles, Inc. are quite cyclical. In a boom economy, the stock is expected to return 27% in comparison to 13% in a normal economy and a negative 20% in a recessionary period. The probability of a recession is 30% while the probability of a boom is 5%. The remainder of the time the economy will be at normal levels. What is the standard deviation of the returns on this stock?

What is the expected return on a portfolio which is invested 30% in stock A, 40% in stock B, and 30% in stock C?

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 variance.

The systematic risk of the market is represented by:

What is the standard deviation of a portfolio that is invested 40% in stock A and 60% in stock B, given the following information?

The reward-to-risk ratio can be defined as the:

Individual investors:

What is the expected return for the following stock?

The __________________ tells us that the expected return on a risky asset depends only on that asset's systematic risk.

Which one of the following statements is correct concerning a portfolio which consists of a risk-free asset and four stocks with individual betas of 1.1, 1.4, 1.5, and 1.8?

What is the expected return for the following portfolio?