Question 1

Which one of the following statements concerning beta is correct?

Accepted Answer

A)  The beta of a portfolio must be greater than or equal to zero but less than or equal to one. 
B)  The beta of a portfolio can be greater than the highest beta of an individual security within the portfolio. 
C)  If the weights of the individual securities within a portfolio are changed, the beta of the portfolio will remain constant. 
D)  The beta of a portfolio measures the systematic risk of the portfolio and has a value that cannot exceed the value of the highest beta of any individual security in the portfolio. 
E)  The beta of a portfolio measures the unsystematic risk of the portfolio and has a value that must be greater than or equal to zero. 
A)  The beta of a portfolio must be greater than or equal to zero but less than or equal to one. 
B)  The beta of a portfolio can be greater than the highest beta of an individual security within the portfolio. 
C)  If the weights of the individual securities within a portfolio are changed, the beta of the portfolio will remain constant. 
D)  The beta of a portfolio measures the systematic risk of the portfolio and has a value that cannot exceed the value of the highest beta of any individual security in the portfolio. 
E)  The beta of a portfolio measures the unsystematic risk of the portfolio and has a value that must be greater than or equal to zero.

Question 2

A stock has a beta of 1.4. The expected return on the market is 8% and T-bills are yielding 2%. What is the expected return on the stock?

Accepted Answer

A)  8.40% 
B)  9.65% 
C)  10.40% 
D)  11.65% 
E)  13.20% 
A)  8.40% 
B)  9.65% 
C)  10.40% 
D)  11.65% 
E)  13.20%

Question 3

In a highly competitive market, all stocks should:

Accepted Answer

A)  Produce the same rate of return. 
B)  Plot on the same security market line. 
C)  Have the same beta. 
D)  Have the same standard deviation. 
E)  Plot at the intercept point. 
A)  Produce the same rate of return. 
B)  Plot on the same security market line. 
C)  Have the same beta. 
D)  Have the same standard deviation. 
E)  Plot at the intercept point.

Question 4

Given the following information, what is the portfolio standard deviation?

Accepted Answer

A)  0.0128 
B)  0.0527 
C)  0.0638 
D)  0.0703 
E)  0.1159 
A)  0.0128 
B)  0.0527 
C)  0.0638 
D)  0.0703 
E)  0.1159

Question 5

The market risk premium of an individual security is dependent upon the risk-free rate of return.

Accepted Answer

A) True 
 B)False

Question 6

Portfolio betas will always be greater than 1.0.

Accepted Answer

A) True 
 B)False

Question 7

What is the expected return on a portfolio with weights of 60% in asset A and 40% in asset B?

Accepted Answer

A)  2.2% 
B)  4.4% 
C)  5.8% 
D)  8.8% 
E)  9.9% 
A)  2.2% 
B)  4.4% 
C)  5.8% 
D)  8.8% 
E)  9.9%

Question 8

Using the Capital Asset Pricing Model (CAPM), a decrease 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 9

A stock has a beta of 1.2 and an expected return of 12%. The market is expected to yield 11%. What is the security market line intercept point?

Accepted Answer

A)  0% 
B)  1.20% 
C)  3.5% 
D)  5.00% 
E)  6.00% 
A)  0% 
B)  1.20% 
C)  3.5% 
D)  5.00% 
E)  6.00%

Question 10

Which one of these statements is correct concerning expected and unexpected returns?

Accepted Answer

A)  Total return is equal to the expected return. 
B)  The unexpected return is solely related to unsystematic risk. 
C)  The unexpected return is solely related to systematic risk. 
D)  The unsystematic portion of the surprise component of a return is diversifiable risk. 
E)  Total return is equal to the expected return minus the surprise. 
A)  Total return is equal to the expected return. 
B)  The unexpected return is solely related to unsystematic risk. 
C)  The unexpected return is solely related to systematic risk. 
D)  The unsystematic portion of the surprise component of a return is diversifiable risk. 
E)  Total return is equal to the expected return minus the surprise.

Question 11

Provide a graphical representation of systematic and unsystematic risk within the context of portfolio diversification.

Accepted Answer

The graph should clo

Question 12

Provide a graphical representation of the volatility of the efficient frontier.

Accepted Answer

The graph should clo

Question 13

An asset's undiversifiable risk is measured by its ______________.

Accepted Answer

A)  Total return. 
B)  Expected return. 
C)  Variance of returns. 
D)  Unexpected component of returns. 
E)  Beta coefficient. 
A)  Total return. 
B)  Expected return. 
C)  Variance of returns. 
D)  Unexpected component of returns. 
E)  Beta coefficient.

Question 14

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%?

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  D 
E)  E 
A)  A 
B)  B 
C)  C 
D)  D 
E)  E

Question 15

What is the standard deviation of security A?

Accepted Answer

A)  0.02% 
B)  0.06% 
C)  4.9% 
D)  5.45% 
E)  6% 
A)  0.02% 
B)  0.06% 
C)  4.9% 
D)  5.45% 
E)  6%

Question 16

You want your portfolio beta to be 1.30. Currently, your portfolio consists of $200 invested in stock A with a beta of 1.6 and $400 in stock B with a beta of.8. You have another $600 to invest and want to divide it between an asset with a beta of 1.9 and a risk-free asset. Approximately how much should you invest in the risk-free asset?

Accepted Answer

A)  $0 
B)  $116 
C)  $160 
D)  $440 
E)  $484 
A)  $0 
B)  $116 
C)  $160 
D)  $440 
E)  $484

Question 17

What is the portfolio beta if 25% of your funds are invested in the market portfolio, 25% in an asset with twice as much risk as the market portfolio, and the remainder in a risk-free asset?

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 18

What is the risk premium for the following returns if the risk-free rate is 5%?

Accepted Answer

A)  0.085 
B)  0.100 
C)  0.125 
D)  0.135 
E)  0.175 
A)  0.085 
B)  0.100 
C)  0.125 
D)  0.135 
E)  0.175

Question 19

Eliminating unsystematic risk is the responsibility of the individual investor.

Accepted Answer

A) True 
 B)False

Question 20

A stock has a beta of.8 and an expected return of 6%. The risk-free rate is 3%. What is the expected return on the market?

Accepted Answer

A)  3.50% 
B)  3.75 
C)  4.50% 
D)  5.25% 
E)  6.75% 
A)  3.50% 
B)  3.75 
C)  4.50% 
D)  5.25% 
E)  6.75%

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

Which one of the following statements concerning beta is correct?

A stock has a beta of 1.4. The expected return on the market is 8% and T-bills are yielding 2%. What is the expected return on the stock?

In a highly competitive market, all stocks should:

Given the following information, what is the portfolio standard deviation?

The market risk premium of an individual security is dependent upon the risk-free rate of return.

Portfolio betas will always be greater than 1.0.

What is the expected return on a portfolio with weights of 60% in asset A and 40% in asset B?

Using the Capital Asset Pricing Model (CAPM), a decrease 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.

A stock has a beta of 1.2 and an expected return of 12%. The market is expected to yield 11%. What is the security market line intercept point?

Which one of these statements is correct concerning expected and unexpected returns?

Provide a graphical representation of systematic and unsystematic risk within the context of portfolio diversification.

Provide a graphical representation of the volatility of the efficient frontier.

An asset's undiversifiable risk is measured by its ______________.

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%?

What is the standard deviation of security A?

What is the portfolio beta if 25% of your funds are invested in the market portfolio, 25% in an asset with twice as much risk as the market portfolio, and the remainder in a risk-free asset?

What is the risk premium for the following returns if the risk-free rate is 5%?

Eliminating unsystematic risk is the responsibility of the individual investor.

A stock has a beta of.8 and an expected return of 6%. The risk-free rate is 3%. What is the expected return on the market?

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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