Question 1

Announcement = Expected part - Surprise

Accepted Answer

A) True 
 B)False

Question 2

You own two risky assets, both of which plot on the security market line. Asset A has an expected return of 12% and a beta of 0.8. Asset B has an expected return of 18% and a beta of 1.4. If your portfolio beta is the same as the market portfolio, what proportion of your funds are invested in asset A?

Accepted Answer

A)  0.33 
B)  0.50 
C)  0.67 
D)  1.33 
E)  1.67 
A)  0.33 
B)  0.50 
C)  0.67 
D)  1.33 
E)  1.67

Question 3

Explain in words what beta is and why it is important.

Accepted Answer

This is a concept check question that re

Question 4

What is the expected return on a portfolio which is invested 35% in stock A, 45% in stock B, and 20% in stock C?

Accepted Answer

A)  8.98% 
B)  9.01% 
C)  9.42% 
D)  9.80% 
E)  10.53% 
A)  8.98% 
B)  9.01% 
C)  9.42% 
D)  9.80% 
E)  10.53%

Question 5

What is the variance of a portfolio consisting of $2,000 in stock B and $8,000 in stock C?

Accepted Answer

A)  .00000 
B)  .00084 
C)  .00108 
D)  .00132 
E)  .00197 
A)  .00000 
B)  .00084 
C)  .00108 
D)  .00132 
E)  .00197

Question 6

What type of risk is exhibited in section B of the graph?

Accepted Answer

A)  Systematic risk. 
B)  Unsystematic risk. 
C)  Political risk. 
D)  Correlation risk. 
E)  Stock risk. 
A)  Systematic risk. 
B)  Unsystematic risk. 
C)  Political risk. 
D)  Correlation risk. 
E)  Stock risk.

Question 7

An investor has purchased an auto stock. It is expected that during a good economy, the stock will provide a 12% return, while in a poor economy the stock will provide an -4% return. The probability of a good economy is expected to be 70%. Given this information, calculate the standard deviation for this stock.

Accepted Answer

A)  4.63% 
B)  5.53% 
C)  6.43% 
D)  7.33% 
E)  8.23% 
A)  4.63% 
B)  5.53% 
C)  6.43% 
D)  7.33% 
E)  8.23%

Question 8

In an efficient market, all stocks should have the same risk-to-reward ratio. Explain what this means in terms of the returns which investors should expect to earn.

Accepted Answer

If the risk-to-reward ratio is constant

Question 9

The CAPM shows that the expected return for a particular asset depends on the amount of unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 10

The risk premium for an individual security is computed by:

Accepted Answer

A)  Multiplying the security's beta by the market risk premium. 
B)  Multiplying the security's beta by the risk-free rate of return. 
C)  Adding the risk-free rate to the security's expected return. 
D)  Dividing the market risk premium by the quantity (1 - beta). 
E)  Dividing the market risk premium by the beta of the security. 
A)  Multiplying the security's beta by the market risk premium. 
B)  Multiplying the security's beta by the risk-free rate of return. 
C)  Adding the risk-free rate to the security's expected return. 
D)  Dividing the market risk premium by the quantity (1 - beta). 
E)  Dividing the market risk premium by the beta of the security.

Question 11

Non-diversifiable risk is measured by standard deviation.

Accepted Answer

A) True 
 B)False

Question 12

What is the beta of a portfolio comprised of the following securities?

Accepted Answer

A)  .98 
B)  1.04 
C)  1.09 
D)  1.15 
E)  1.32 
A)  .98 
B)  1.04 
C)  1.09 
D)  1.15 
E)  1.32

Question 13

Common stock sold and replaced with Treasury bills would increase a portfolio's systematic risk.

Accepted Answer

A) True 
 B)False

Question 14

What concept is exhibited by the following graph?

Accepted Answer

A)  Capital Asset Pricing Model (CAPM) 
B)  Efficient Frontier 
C)  Positive correlation. 
D)  Negative correlation 
E)  No correlation 
A)  Capital Asset Pricing Model (CAPM) 
B)  Efficient Frontier 
C)  Positive correlation. 
D)  Negative correlation 
E)  No correlation

Question 15

When computing the expected return on a portfolio of stocks the portfolio weights are based on the:

Accepted Answer

A)  Number of shares owned in each stock. 
B)  Price per share of each stock. 
C)  Market value of the total shares held in each stock. 
D)  Original amount invested in each stock. 
E)  Cost per share of each stock held. 
A)  Number of shares owned in each stock. 
B)  Price per share of each stock. 
C)  Market value of the total shares held in each stock. 
D)  Original amount invested in each stock. 
E)  Cost per share of each stock held.

Question 16

Which one of the following statements is correct about a portfolio that is invested 30% in stock A, 40% in stock B, and 30% in stock C?

Accepted Answer

A)  The expected return on the portfolio is equal to the summation of the returns on the individual securities within the portfolio divided by three. 
B)  The standard deviation of the portfolio is equal to the summation of the weights of each security multiplied by the standard deviation of each respective security. 
C)  The expected return on the portfolio is equal to the portfolio beta times the weighted average of the expected returns of each of the individual securities in the portfolio. 
D)  The standard deviation of the portfolio is equal to the square root of the summation of the individual security variances. 
E)  The expected return of the portfolio is equal to the risk free rate of return plus a risk premium based on a weighted average of the betas of the individual securities and the market risk premium. 
A)  The expected return on the portfolio is equal to the summation of the returns on the individual securities within the portfolio divided by three. 
B)  The standard deviation of the portfolio is equal to the summation of the weights of each security multiplied by the standard deviation of each respective security. 
C)  The expected return on the portfolio is equal to the portfolio beta times the weighted average of the expected returns of each of the individual securities in the portfolio. 
D)  The standard deviation of the portfolio is equal to the square root of the summation of the individual security variances. 
E)  The expected return of the portfolio is equal to the risk free rate of return plus a risk premium based on a weighted average of the betas of the individual securities and the market risk premium.

Announcement = Expected part - Surprise

Explain in words what beta is and why it is important.

What is the expected return on a portfolio which is invested 35% in stock A, 45% in stock B, and 20% in stock C?

What is the variance of a portfolio consisting of $2,000 in stock B and $8,000 in stock C?

What type of risk is exhibited in section B of the graph?

In an efficient market, all stocks should have the same risk-to-reward ratio. Explain what this means in terms of the returns which investors should expect to earn.

The CAPM shows that the expected return for a particular asset depends on the amount of unsystematic risk.

The risk premium for an individual security is computed by:

Non-diversifiable risk is measured by standard deviation.

What is the beta of a portfolio comprised of the following securities?

Common stock sold and replaced with Treasury bills would increase a portfolio's systematic risk.

What concept is exhibited by the following graph?

When computing the expected return on a portfolio of stocks the portfolio weights are based on the:

Which one of the following statements is correct about a portfolio that is invested 30% in stock A, 40% in stock B, and 30% in stock C?

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

Filters

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

Announcement = Expected part - Surprise

Explain in words what beta is and why it is important.

What is the expected return on a portfolio which is invested 35% in stock A, 45% in stock B, and 20% in stock C?

What is the variance of a portfolio consisting of $2,000 in stock B and $8,000 in stock C?

What type of risk is exhibited in section B of the graph?

In an efficient market, all stocks should have the same risk-to-reward ratio. Explain what this means in terms of the returns which investors should expect to earn.

The CAPM shows that the expected return for a particular asset depends on the amount of unsystematic risk.

The risk premium for an individual security is computed by:

Non-diversifiable risk is measured by standard deviation.

What is the beta of a portfolio comprised of the following securities?

Common stock sold and replaced with Treasury bills would increase a portfolio's systematic risk.

What concept is exhibited by the following graph?

When computing the expected return on a portfolio of stocks the portfolio weights are based on the:

Which one of the following statements is correct about a portfolio that is invested 30% in stock A, 40% in stock B, and 30% in stock C?

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

Filters