Question 1

If the market is efficient and securities are priced fairly then the _____ will be constant for all securities.

Accepted Answer

A)  Systematic risk. 
B)  Standard deviation. 
C)  Reward-to-risk ratio. 
D)  Beta. 
E)  Risk premium. 
A)  Systematic risk. 
B)  Standard deviation. 
C)  Reward-to-risk ratio. 
D)  Beta. 
E)  Risk premium.

Question 2

Diversifiable risks can be essentially eliminated by investing in several unrelated securities.

Accepted Answer

A) True 
 B)False

Question 3

The risk premium increases as the non-diversifiable risk increases.

Accepted Answer

A) True 
 B)False

Question 4

Systematic risk is considered important because ________________________.

Accepted Answer

A)  It is needed in order to measure the total risk of an asset. 
B)  The risk premium depends only on this type of risk. 
C)  The market does not provide a reward for this type of risk. 
D)  The risk premium depends on both systematic and unsystematic risk. 
E)  Investors are willing to pay more for stocks with high systematic risk components. 
A)  It is needed in order to measure the total risk of an asset. 
B)  The risk premium depends only on this type of risk. 
C)  The market does not provide a reward for this type of risk. 
D)  The risk premium depends on both systematic and unsystematic risk. 
E)  Investors are willing to pay more for stocks with high systematic risk components.

Question 5

Standard deviation is needed to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset.

Accepted Answer

A) True 
 B)False

Question 6

Provide a graphical representation of the opportunity sets of two stocks.

Accepted Answer

The graph should clo

Question 7

Latest unemployment figures increased, as expected is considered an example of unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 8

Which one of the following is an example of systematic risk?

Accepted Answer

A)  The price of lumber declines sharply. 
B)  Airline pilots go on strike. 
C)  The Bank of Canada increases interest rates. 
D)  A blizzard hits St. John's. 
E)  People become diet conscious and avoid fast food restaurants. 
A)  The price of lumber declines sharply. 
B)  Airline pilots go on strike. 
C)  The Bank of Canada increases interest rates. 
D)  A blizzard hits St. John's. 
E)  People become diet conscious and avoid fast food restaurants.

Question 9

Standard deviation measures _____ risk.

Accepted Answer

A)  Total. 
B)  Nondiversifiable. 
C)  Unsystematic. 
D)  Systematic. 
E)  Economic. 
A)  Total. 
B)  Nondiversifiable. 
C)  Unsystematic. 
D)  Systematic. 
E)  Economic.

Question 10

Explain why in a highly competitive market all stocks should plot on the same security market line.

Accepted Answer

The security market line for all stocks

Question 11

Provide a definition for portfolio weights.

Accepted Answer

Percentage of a port

Question 12

Which one of the following is an example of diversifiable risk?

Accepted Answer

A)  The price of electricity just increased. 
B)  The employees of Textile, Inc. just voted to go on strike. 
C)  The government just imposed new safety standards for all employees. 
D)  The government just lowered corporate income tax rates. 
E)  The Workers Compensation Premiums just increased nationwide. 
A)  The price of electricity just increased. 
B)  The employees of Textile, Inc. just voted to go on strike. 
C)  The government just imposed new safety standards for all employees. 
D)  The government just lowered corporate income tax rates. 
E)  The Workers Compensation Premiums just increased nationwide.

Question 13

You would like to combine a risky stock with a beta of 1.5 with Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills?

Accepted Answer

A)  .25 
B)  .33 
C)  .50 
D)  .67 
E)  .75 
A)  .25 
B)  .33 
C)  .50 
D)  .67 
E)  .75

Question 14

You recently purchased a stock that is expected to earn 19% in a booming economy, 11% in a normal economy and lose 15% in a recessionary economy. There is a 20% probability of a boom, a 65% chance of a normal economy, and a 15% chance of a recession. What is your expected rate of return on this stock?

Accepted Answer

A)  6.8% 
B)  7.4% 
C)  8.7% 
D)  11.6% 
E)  13.2% 
A)  6.8% 
B)  7.4% 
C)  8.7% 
D)  11.6% 
E)  13.2%

Question 15

What is the standard deviation of the returns on a stock given the following information?

Accepted Answer

A)  5.80% 
B)  7.34% 
C)  8.38% 
D)  9.15% 
E)  9.87% 
A)  5.80% 
B)  7.34% 
C)  8.38% 
D)  9.15% 
E)  9.87%

Question 16

Which one of the following portfolios should have the most systematic risk?

Accepted Answer

A)  50% invested in Treasury bills and 50% in a market index fund. 
B)  20% invested in Treasury bills and 80% invested in a stock with a beta of.80. 
C)  10% invested in a stock with a beta of 1.0 and 90% invested in a stock with a beta of 1.40. 
D)  100% invested in a mutual fund which mimics the overall market. 
E)  100% invested in Treasury bills. 
A)  50% invested in Treasury bills and 50% in a market index fund. 
B)  20% invested in Treasury bills and 80% invested in a stock with a beta of.80. 
C)  10% invested in a stock with a beta of 1.0 and 90% invested in a stock with a beta of 1.40. 
D)  100% invested in a mutual fund which mimics the overall market. 
E)  100% invested in Treasury bills.

Question 17

What is the standard deviation of the returns on a stock given the following information?

Accepted Answer

A)  4.23% 
B)  5.98% 
C)  6.38% 
D)  6.60% 
E)  7.05% 
A)  4.23% 
B)  5.98% 
C)  6.38% 
D)  6.60% 
E)  7.05%

Question 18

The intercept point of the security market line is the rate of return which corresponds to:

Accepted Answer

A)  The risk-free rate of return. 
B)  The market rate of return. 
C)  A value of zero. 
D)  A value of 1.0. 
E)  The beta of the market. 
A)  The risk-free rate of return. 
B)  The market rate of return. 
C)  A value of zero. 
D)  A value of 1.0. 
E)  The beta of the market.

Question 19

Using the Capital Asset Pricing Model (CAPM), a decrease in the risk premium 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 20

Which of the following is correct?

Accepted Answer

A)  Security Z has the greatest total risk because it has the largest standard deviation. 
B)  Security X has the greatest total risk because it has the largest beta. 
C)  Security X has the greatest diversifiable risk because it has the largest beta. 
D)  Security Y has the lowest total risk because it has the lowest beta. 
E)  An equally-weighted portfolio of XYZ will have the same systematic risk as the market portfolio. 
A)  Security Z has the greatest total risk because it has the largest standard deviation. 
B)  Security X has the greatest total risk because it has the largest beta. 
C)  Security X has the greatest diversifiable risk because it has the largest beta. 
D)  Security Y has the lowest total risk because it has the lowest beta. 
E)  An equally-weighted portfolio of XYZ will have the same systematic risk as the market portfolio.

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

If the market is efficient and securities are priced fairly then the _____ will be constant for all securities.

Diversifiable risks can be essentially eliminated by investing in several unrelated securities.

The risk premium increases as the non-diversifiable risk increases.

Systematic risk is considered important because ________________________.

Standard deviation is needed to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset.

Provide a graphical representation of the opportunity sets of two stocks.

Latest unemployment figures increased, as expected is considered an example of unsystematic risk.

Which one of the following is an example of systematic risk?

Standard deviation measures _____ risk.

Explain why in a highly competitive market all stocks should plot on the same security market line.

Provide a definition for portfolio weights.

Which one of the following is an example of diversifiable risk?

You would like to combine a risky stock with a beta of 1.5 with Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills?

What is the standard deviation of the returns on a stock given the following information?

Which one of the following portfolios should have the most systematic risk?

What is the standard deviation of the returns on a stock given the following information?

The intercept point of the security market line is the rate of return which corresponds to:

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

Which of the following is correct?

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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