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

An investor has a portfolio comprised of stock A, which has a beta of 1.4 and an expected return of 10%, and Treasury bills, which have an expected return of 4%. The portfolio has an expected return of 7.30%. What is the portfolio weight of stock A?

Provide a definition for market risk premium.

Based upon the capital asset pricing model, an asset which has more systematic risk than the market:

Non-diversifiable risks are those risks you cannot avoid if you are invested in the financial markets.

Which one of the following stocks is correctly priced if the risk-free rate of return is 4.2% and the market rate of return is 13.6%?

Diversification works because unsystematic risk exists.

The security market line can be defined as:

Explain what we mean when we say all assets have the same reward to risk ratio. What does this mean for investors?

Adding some Treasury bills to a risky portfolio helps reduce unsystematic risk in a portfolio.

Lower quarterly sales for Chapters than expected is considered an example of systematic risk.

An investor has a portfolio with 30% invested in gold stocks, and 70% in industrial stocks. It is expected that gold stocks will provide a 4% return in a good economy and 18% in a poor economy. Industrial stocks are expected to provide 9% return in a good economy and -9% in a poor economy. The probability of a good economy is 40% and 60% in a poor economy. Given this information, calculate the expected return on the portfolio.

An asset that has an expected rate of return above the security market line:

Which of the following stocks has the greatest expected return and by how much?

Theoretically, a risk-free portfolio could be created by combining risky securities in a manner that caused the:

Given the following information: The risk-free rate is 7%, the beta of stock A is 1.2, the beta of stock B is 0.8, the expected return on stock A is 13.5%, and the expected return on stock B is 11.0%. Further, we know that stock A is fairly priced and that the betas of stocks A and B are correct. Which of the following regarding stock B must be true?

If a stock portfolio is well diversified, then the portfolio variance:

Provide a definition for arbitrage pricing theory (APT).

The market risk premium is computed by:

The expected return on an individual asset depends only on that asset's ____ risk.