Question 1

Beta is defined as the:

Accepted Answer

A)  Slope of the security market line. 
B)  Amount of systematic risk in a risky asset relative to that in an average asset. 
C)  Ratio of unsystematic risk in a risky asset relative to the systematic risk in the overall market. 
D)  Ratio of the total risk in a risky asset relative to the systematic risk in the overall market. 
E)  Amount of systematic risk in a risky asset relative to that of a risk-free asset. 
A)  Slope of the security market line. 
B)  Amount of systematic risk in a risky asset relative to that in an average asset. 
C)  Ratio of unsystematic risk in a risky asset relative to the systematic risk in the overall market. 
D)  Ratio of the total risk in a risky asset relative to the systematic risk in the overall market. 
E)  Amount of systematic risk in a risky asset relative to that of a risk-free asset.

Question 2

It is NOT possible to construct a portfolio with zero variance of expected returns from assets whose expected returns have positive variance individually.

Accepted Answer

A) True 
 B)False

Question 3

The market risk premium can be defined as the:

Accepted Answer

A)  Return on the market plus the risk-free rate of return. 
B)  Amount of return received for accepting unsystematic risk. 
C)  Beta multiplied by the risk-free rate of return. 
D)  Slope of the market portfolio's security market line. 
E)  Intercept point of the security market line. 
A)  Return on the market plus the risk-free rate of return. 
B)  Amount of return received for accepting unsystematic risk. 
C)  Beta multiplied by the risk-free rate of return. 
D)  Slope of the market portfolio's security market line. 
E)  Intercept point of the security market line.

Question 4

What is the value of systematic risk for a portfolio with 75% of the funds invested in A and 25% of the funds invested in B?

Accepted Answer

A)  0.98 
B)  1.13 
C)  1.28 
D)  1.40 
E)  1.60 
A)  0.98 
B)  1.13 
C)  1.28 
D)  1.40 
E)  1.60

Question 5

Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 6

What is the portfolio beta if 75% of your money is invested in the market portfolio, and the remainder is invested in a risk-free asset?

Accepted Answer

A)  0.50 
B)  0.25 
C)  1.25 
D)  1.00 
E)  0.75 
A)  0.50 
B)  0.25 
C)  1.25 
D)  1.00 
E)  0.75

Question 7

If the portfolio beta is greater than one then the portfolio has more risk than the overall market.

Accepted Answer

A) True 
 B)False

Question 8

If the standard deviation of return on the stocks of the S&P/TSX Composite Index has been approximately 24% per year over the last decade, it must be true that half of the firms in the index have a standard deviation of return below 24% over the same period.

Accepted Answer

A) True 
 B)False

Question 9

What is the standard deviation of a portfolio with weights of 60% in security A and the remainder in security B?

Accepted Answer

A)  0.5% 
B)  0.9% 
C)  1.5% 
D)  2.3% 
E)  6.4% 
A)  0.5% 
B)  0.9% 
C)  1.5% 
D)  2.3% 
E)  6.4%

Question 10

What is the standard deviation of a portfolio which is invested 10% in stock A, 35% in stock B and 55% in stock C?

Accepted Answer

A)  4.39% 
B)  4.54% 
C)  4.67% 
D)  5.02% 
E)  5.34% 
A)  4.39% 
B)  4.54% 
C)  4.67% 
D)  5.02% 
E)  5.34%

Question 11

Consider a portfolio made up of two risky assets and a risk-free asset. You invest 40% in asset A with a beta of 1.25 and 40% in asset B with a beta of 1.15. What is the beta of the portfolio?

Accepted Answer

A)  0.84 
B)  0.96 
C)  1.03 
D)  1.12 
E)  1.20 
A)  0.84 
B)  0.96 
C)  1.03 
D)  1.12 
E)  1.20

Question 12

What relationship are the volatilities of stock A and B exhibiting?

Accepted Answer

A)  Positive correlation. 
B)  Negative correlation 
C)  No correlation 
D)  Unsystematic correlation. 
E)  Systematic correlation. 
A)  Positive correlation. 
B)  Negative correlation 
C)  No correlation 
D)  Unsystematic correlation. 
E)  Systematic correlation.

Question 13

The systematic risk principle implies that the _____ an asset depends only on that asset's systematic risk.

Accepted Answer

A)  variance of the returns on 
B)  standard deviation of the returns on 
C)  expected return on 
D)  total risk assumed by owning 
E)  diversification benefits of 
A)  variance of the returns on 
B)  standard deviation of the returns on 
C)  expected return on 
D)  total risk assumed by owning 
E)  diversification benefits of

Question 14

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

Accepted Answer

A)  .86 
B)  .97 
C)  1.02 
D)  1.11 
E)  1.22 
A)  .86 
B)  .97 
C)  1.02 
D)  1.11 
E)  1.22

Question 15

The percentage of a portfolio's total value invested in a particular asset is called that asset's:

Accepted Answer

A)  Portfolio return. 
B)  Portfolio weight. 
C)  Portfolio risk. 
D)  Rate of return. 
E)  Investment value. 
A)  Portfolio return. 
B)  Portfolio weight. 
C)  Portfolio risk. 
D)  Rate of return. 
E)  Investment value.

Question 16

Which one of the following is an example of a nondiversifiable risk?

Accepted Answer

A)  A well-respected president of a firm suddenly resigns. 
B)  A well-respected governor of the Bank of Canada suddenly resigns. 
C)  A key employee of a firm suddenly resigns and accepts employment with a key competitor. 
D)  A well-managed firm reduces its work force and automates several jobs. 
E)  A poorly managed firm suddenly goes out of business due to lack of sales. 
A)  A well-respected president of a firm suddenly resigns. 
B)  A well-respected governor of the Bank of Canada suddenly resigns. 
C)  A key employee of a firm suddenly resigns and accepts employment with a key competitor. 
D)  A well-managed firm reduces its work force and automates several jobs. 
E)  A poorly managed firm suddenly goes out of business due to lack of sales.

Question 17

Which of the following statements is false?

Accepted Answer

A)  Total risk = market risk + unique risk. 
B)  Total risk = systematic risk + unsystematic risk. 
C)  Market risk = non-diversifiable risk + asset-specific risk. 
D)  Announcement = expected part + surprise. 
E)  Total return = expected return + unexpected return. 
A)  Total risk = market risk + unique risk. 
B)  Total risk = systematic risk + unsystematic risk. 
C)  Market risk = non-diversifiable risk + asset-specific risk. 
D)  Announcement = expected part + surprise. 
E)  Total return = expected return + unexpected return.

Question 18

What relationship are the volatilities of stock A and B exhibiting?

Accepted Answer

A)  Positive correlation. 
B)  Negative correlation 
C)  No correlation 
D)  Unsystematic correlation. 
E)  Systematic correlation. 
A)  Positive correlation. 
B)  Negative correlation 
C)  No correlation 
D)  Unsystematic correlation. 
E)  Systematic correlation.

Question 19

A portfolio is comprised of five risky stocks. The standard deviations of these stocks are 5.6%, 12.8%, 2.3%, 8.9%, and 10.2%. The standard deviation of the portfolio:

Accepted Answer

A)  Is equal to the arithmetic average of the individual standard deviations. 
B)  Must be greater than 2.3%. 
C)  Must equal that of the market. 
D)  Is equal to the weighted average of the individual standard deviations. 
E)  Cannot be determined from the information provided. 
A)  Is equal to the arithmetic average of the individual standard deviations. 
B)  Must be greater than 2.3%. 
C)  Must equal that of the market. 
D)  Is equal to the weighted average of the individual standard deviations. 
E)  Cannot be determined from the information provided.

Question 20

Diversification works because firm-specific risk can be dramatically reduced if not eliminated.

Accepted Answer

A) True 
 B)False

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

Beta is defined as the:

It is NOT possible to construct a portfolio with zero variance of expected returns from assets whose expected returns have positive variance individually.

The market risk premium can be defined as the:

What is the value of systematic risk for a portfolio with 75% of the funds invested in A and 25% of the funds invested in B?

Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk.

What is the portfolio beta if 75% of your money is invested in the market portfolio, and the remainder is invested in a risk-free asset?

If the portfolio beta is greater than one then the portfolio has more risk than the overall market.

If the standard deviation of return on the stocks of the S&P/TSX Composite Index has been approximately 24% per year over the last decade, it must be true that half of the firms in the index have a standard deviation of return below 24% over the same period.

What is the standard deviation of a portfolio with weights of 60% in security A and the remainder in security B?

What is the standard deviation of a portfolio which is invested 10% in stock A, 35% in stock B and 55% in stock C?

Consider a portfolio made up of two risky assets and a risk-free asset. You invest 40% in asset A with a beta of 1.25 and 40% in asset B with a beta of 1.15. What is the beta of the portfolio?

What relationship are the volatilities of stock A and B exhibiting?

The systematic risk principle implies that the _____ an asset depends only on that asset's systematic risk.

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

The percentage of a portfolio's total value invested in a particular asset is called that asset's:

Which one of the following is an example of a nondiversifiable risk?

Which of the following statements is false?

What relationship are the volatilities of stock A and B exhibiting?

A portfolio is comprised of five risky stocks. The standard deviations of these stocks are 5.6%, 12.8%, 2.3%, 8.9%, and 10.2%. The standard deviation of the portfolio:

Diversification works because firm-specific risk can be dramatically reduced if not eliminated.

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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