Question 1

What is the expected return for asset A?

Accepted Answer

A)  1.2% 
B)  4.0% 
C)  8.0% 
D)  8.8% 
E)  9.3% 
A)  1.2% 
B)  4.0% 
C)  8.0% 
D)  8.8% 
E)  9.3%

Question 2

What is the standard deviation of a portfolio which is comprised of $9,000 invested in stock S and $6,000 in stock T?

Accepted Answer

A)  2.1% 
B)  3.6% 
C)  4.0% 
D)  4.4% 
E)  6.3% 
A)  2.1% 
B)  3.6% 
C)  4.0% 
D)  4.4% 
E)  6.3%

Question 3

The expected return of the portfolio considers the performance of each stock given various economic scenarios.

Accepted Answer

A) True 
 B)False

Question 4

What is the expected portfolio return given the following information:

Accepted Answer

A)  7.71% 
B)  9.23% 
C)  18.75% 
D)  19.25% 
E)  21.15% 
A)  7.71% 
B)  9.23% 
C)  18.75% 
D)  19.25% 
E)  21.15%

Question 5

Assume you are looking at a graph depicting the security market line. A stock which is undervalued will plot on that graph:

Accepted Answer

A)  To the right of the overall market. 
B)  To the left of the overall market. 
C)  Above the security market line. 
D)  On the security market line. 
E)  Below the security market line. 
A)  To the right of the overall market. 
B)  To the left of the overall market. 
C)  Above the security market line. 
D)  On the security market line. 
E)  Below the security market line.

Question 6

What is the standard deviation of a portfolio that is invested 30% in stock Q and 70% in stock R?

Accepted Answer

A)  1.22% 
B)  3.93% 
C)  5.28% 
D)  8.03% 
E)  11.47% 
A)  1.22% 
B)  3.93% 
C)  5.28% 
D)  8.03% 
E)  11.47%

Question 7

What is the expected return on the following stock?

Accepted Answer

A)  6% 
B)  9% 
C)  12% 
D)  15% 
E)  18% 
A)  6% 
B)  9% 
C)  12% 
D)  15% 
E)  18%

Question 8

For a stock with beta equal to 1.5 signifies that the stock has 50% more systematic risk than the average stock.

Accepted Answer

A) True 
 B)False

Question 9

The market risk premium of an individual security is dependent upon the security's unique risk.

Accepted Answer

A) True 
 B)False

Question 10

Zelo, Inc. stock has a beta of 1.23. The risk-free rate of return is 4.5% and the market rate of return is 10%. What is the amount of the risk premium on Zelo stock?

Accepted Answer

A)  4.47% 
B)  5.50% 
C)  5.54% 
D)  6.77% 
E)  12.30% 
A)  4.47% 
B)  5.50% 
C)  5.54% 
D)  6.77% 
E)  12.30%

Question 11

What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy enjoys a boom period?

Accepted Answer

A)  6.4% 
B)  6.8% 
C)  10.4% 
D)  13.2% 
E)  14.0% 
A)  6.4% 
B)  6.8% 
C)  10.4% 
D)  13.2% 
E)  14.0%

Question 12

Higher quarterly loss than expected for Air Canada is considered an example of unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 13

Beta is the measurement of:

Accepted Answer

A)  A security's total risk. 
B)  The market's unsystematic risk. 
C)  The total risk associated with a portfolio. 
D)  A stock's risk from unanticipated events. 
E)  A portfolio's systematic risk. 
A)  A security's total risk. 
B)  The market's unsystematic risk. 
C)  The total risk associated with a portfolio. 
D)  A stock's risk from unanticipated events. 
E)  A portfolio's systematic risk.

Question 14

Aziz Equipment Co. invests in a group of risky projects, which increases the unsystematic risk of the firm, but does not change the systematic risk of the firm. All else the same, the expected risk premium on its common stock is most likely to:

Accepted Answer

A)  Increase, because the difference between the expected return on the firm's stock and the risk-free rate will widen. 
B)  Decrease, because the difference between the expected return on the firm's stock and the risk-free rate will narrow. 
C)  Remain unchanged, because the level of systematic risk is unchanged. 
D)  Increase or decrease, depending on the internal rate of return of the new projects. 
E)  Decrease, because the difference between the expected return on the firm's stock and the risk-free rate will widen. 
A)  Increase, because the difference between the expected return on the firm's stock and the risk-free rate will widen. 
B)  Decrease, because the difference between the expected return on the firm's stock and the risk-free rate will narrow. 
C)  Remain unchanged, because the level of systematic risk is unchanged. 
D)  Increase or decrease, depending on the internal rate of return of the new projects. 
E)  Decrease, because the difference between the expected return on the firm's stock and the risk-free rate will widen.

Question 15

In the first chapter, it was stated that financial managers should act to maximize shareholder wealth. Why are the efficient markets hypothesis (EMH), the CAPM, and the SML so important in the accomplishment of this objective?

Accepted Answer

In simple terms, one could say that maxi

Question 16

The CAPM shows that the expected return for a particular asset depends on the reward for bearing systematic risk.

Accepted Answer

A) True 
 B)False

Question 17

The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6% and the market risk premium is 9%. What is the expected rate of return on Martin Industries stock?

Accepted Answer

A)  11.3% 
B)  14.1% 
C)  16.5% 
D)  17.4% 
E)  18.0% 
A)  11.3% 
B)  14.1% 
C)  16.5% 
D)  17.4% 
E)  18.0%

Question 18

The expected return on Joseph's Restaurant's stock is 14.25% while the expected return on the market is 12.38%. The stock's beta is 1.18. What is the risk-free rate of return?

Accepted Answer

A)  1.99% 
B)  2.04% 
C)  2.48% 
D)  3.23% 
E)  3.68% 
A)  1.99% 
B)  2.04% 
C)  2.48% 
D)  3.23% 
E)  3.68%

Question 19

The realized return on an asset can be broken down into an expected component and a discounted component.

Accepted Answer

A) True 
 B)False

Question 20

A security that is fairly priced will have a return that lies _____ the Security Market Line.

Accepted Answer

A)  Below. 
B)  On or below. 
C)  On. 
D)  On or above. 
E)  Above. 
A)  Below. 
B)  On or below. 
C)  On. 
D)  On or above. 
E)  Above.

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

What is the expected return for asset A?

What is the standard deviation of a portfolio which is comprised of $9,000 invested in stock S and $6,000 in stock T?

The expected return of the portfolio considers the performance of each stock given various economic scenarios.

What is the expected portfolio return given the following information:

Assume you are looking at a graph depicting the security market line. A stock which is undervalued will plot on that graph:

What is the standard deviation of a portfolio that is invested 30% in stock Q and 70% in stock R?

What is the expected return on the following stock?

For a stock with beta equal to 1.5 signifies that the stock has 50% more systematic risk than the average stock.

The market risk premium of an individual security is dependent upon the security's unique risk.

Zelo, Inc. stock has a beta of 1.23. The risk-free rate of return is 4.5% and the market rate of return is 10%. What is the amount of the risk premium on Zelo stock?

What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy enjoys a boom period?

Higher quarterly loss than expected for Air Canada is considered an example of unsystematic risk.

Beta is the measurement of:

Aziz Equipment Co. invests in a group of risky projects, which increases the unsystematic risk of the firm, but does not change the systematic risk of the firm. All else the same, the expected risk premium on its common stock is most likely to:

In the first chapter, it was stated that financial managers should act to maximize shareholder wealth. Why are the efficient markets hypothesis (EMH), the CAPM, and the SML so important in the accomplishment of this objective?

The CAPM shows that the expected return for a particular asset depends on the reward for bearing systematic risk.

The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6% and the market risk premium is 9%. What is the expected rate of return on Martin Industries stock?

The expected return on Joseph's Restaurant's stock is 14.25% while the expected return on the market is 12.38%. The stock's beta is 1.18. What is the risk-free rate of return?

The realized return on an asset can be broken down into an expected component and a discounted component.

A security that is fairly priced will have a return that lies _____ the Security Market Line.

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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