Question 1

Diversifiable risks:

Accepted Answer

A)  Are measured by beta. 
B)  Affect the entire market. 
C)  Are systematic in nature. 
D)  Are rewarded in the market place. 
E)  Are also referred to as unique risks. 
A)  Are measured by beta. 
B)  Affect the entire market. 
C)  Are systematic in nature. 
D)  Are rewarded in the market place. 
E)  Are also referred to as unique risks.

Question 2

The Capital Asset Pricing Model specifically rewards investors for assuming unsystematic risk via the application of beta in the formula.

Accepted Answer

A) True 
 B)False

Question 3

If the total risk of firm X is greater than that of firm Y, then the beta of firm X must be greater than that of firm Y.

Accepted Answer

A) True 
 B)False

Question 4

What is the expected return on this portfolio?

Accepted Answer

A)  10.84% 
B)  11.67% 
C)  12.39% 
D)  12.91% 
E)  13.16% 
A)  10.84% 
B)  11.67% 
C)  12.39% 
D)  12.91% 
E)  13.16%

Question 5

A firm in Moose Jaw announces a revolutionary way to make auto airbags in a way that decreases their risk to automobile occupants. This is a type of surprise that would be characterized as unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 6

What is the standard deviation of a portfolio which is comprised of $4,500 invested in stock S and $3,000 in stock T?

Accepted Answer

A)  1.4% 
B)  1.9% 
C)  2.6% 
D)  5.7% 
E)  7.2% 
A)  1.4% 
B)  1.9% 
C)  2.6% 
D)  5.7% 
E)  7.2%

Question 7

The security market line:

Accepted Answer

A)  Is a quadratic function depicting the relationship between risk and return. 
B)  Has a slope which is equal to the market risk premium. 
C)  Has an intercept point which is equal to the market rate of return. 
D)  Has a slope which is equal to the risk-free rate of return. 
E)  Is a linear function of the relationship between total risk and the market rate of return. 
A)  Is a quadratic function depicting the relationship between risk and return. 
B)  Has a slope which is equal to the market risk premium. 
C)  Has an intercept point which is equal to the market rate of return. 
D)  Has a slope which is equal to the risk-free rate of return. 
E)  Is a linear function of the relationship between total risk and the market rate of return.

Question 8

Which one of the following events is considered part of the expected return on Fido stock?

Accepted Answer

A)  The president of Fido suddenly announced that the firm is going to cut production effective immediately. 
B)  The government just announced a tax cut which will directly impact the sales of Fido. 
C)  The management of Fido announced their ten-year plan for expansion five years ago. 
D)  The price of Fido stock suddenly dropped due to rumours concerning company fraud. 
E)  Fido just won a major government contract which they had not anticipated winning. 
A)  The president of Fido suddenly announced that the firm is going to cut production effective immediately. 
B)  The government just announced a tax cut which will directly impact the sales of Fido. 
C)  The management of Fido announced their ten-year plan for expansion five years ago. 
D)  The price of Fido stock suddenly dropped due to rumours concerning company fraud. 
E)  Fido just won a major government contract which they had not anticipated winning.

Question 9

Stocks with a beta equal to the market beta are added to a portfolio of Treasury bills would increase a portfolio's systematic risk.

Accepted Answer

A) True 
 B)False

Question 10

A portfolio has an expected return of 11.57%. The portfolio consists of stock A with an expected return of 8.6% and stock B with a beta of 1.28. The risk-free rate of return is 3% and the market risk premium is 8%. What is the portfolio weight of Stock A?

Accepted Answer

A)  31% 
B)  32% 
C)  34% 
D)  36% 
E)  37% 
A)  31% 
B)  32% 
C)  34% 
D)  36% 
E)  37%

Question 11

The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the particular asset's:

Accepted Answer

A)  Beta coefficient. 
B)  Reward to risk ratio. 
C)  Law of One Price. 
D)  Diversifiable risk. 
E)  Treynor index. 
A)  Beta coefficient. 
B)  Reward to risk ratio. 
C)  Law of One Price. 
D)  Diversifiable risk. 
E)  Treynor index.

Question 12

Provide a definition for systematic risk principle.

Accepted Answer

A risk that influenc

Question 13

Which one of the following is most apt to be a nondiversifiable risk?

Accepted Answer

A)  A fire at a petroleum refinery. 
B)  An airline pilot's strike. 
C)  A sudden increase in inflation. 
D)  A shortage of peaches cane due to a hail storm. 
E)  A lawsuit arising from faulty refrigeration units. 
A)  A fire at a petroleum refinery. 
B)  An airline pilot's strike. 
C)  A sudden increase in inflation. 
D)  A shortage of peaches cane due to a hail storm. 
E)  A lawsuit arising from faulty refrigeration units.

Question 14

In a competitive market the reward to risk ratio can be expressed as:

Accepted Answer

A)  [E(R
A) - Rf]/ßa> [E(R
B) - Rf]/ßb 
B)  [E(RA )- Rf]/ßa = [E(R
B) - Rf]/ßb 
C)  [E(R
A) - Rf] = ßa 
D)  E(R
A)  = E(Rb) 
E)  E(R
A) - E(R
B)  = Rf 
A)  [E(R
A) - Rf]/ßa> [E(R
B) - Rf]/ßb 
B)  [E(RA )- Rf]/ßa = [E(R
B) - Rf]/ßb 
C)  [E(R
A) - Rf] = ßa 
D)  E(R
A)  = E(Rb) 
E)  E(R
A) - E(R
B)  = Rf

Question 15

Kurt's Adventures, Inc. stock is quite cyclical. In a boom economy, the stock is expected to return 30% in comparison to 12% in a normal economy and a negative 20% in a recessionary period. The probability of a recession is 15%. There is a 30% chance of a boom economy. The remainder of the time the economy will be at normal levels. What is the standard deviation of the returns on Kurt's Adventures, Inc. stock?

Accepted Answer

A)  10.05% 
B)  12.60% 
C)  15.83% 
D)  17.46% 
E)  25.04% 
A)  10.05% 
B)  12.60% 
C)  15.83% 
D)  17.46% 
E)  25.04%

Question 16

The steeper the slope of the security market line, the:

Accepted Answer

A)  Higher the risk-free rate of return. 
B)  Lower the risk-free rate of return. 
C)  Higher the market beta. 
D)  Higher the risk premium. 
E)  Lower the risk premium. 
A)  Higher the risk-free rate of return. 
B)  Lower the risk-free rate of return. 
C)  Higher the market beta. 
D)  Higher the risk premium. 
E)  Lower the risk premium.

Question 17

A security that has a rate of return that exceeds the Treasury bill rate but is less than the market rate of return must:

Accepted Answer

A)  Be a risk-free asset. 
B)  Have a beta that is greater than 1.0 but less than 2.0. 
C)  Be a risk-free asset with a beta less than.99. 
D)  Be a risky asset with a standard deviation less than 1.0. 
E)  Be a risky asset with a beta less than 1.0. 
A)  Be a risk-free asset. 
B)  Have a beta that is greater than 1.0 but less than 2.0. 
C)  Be a risk-free asset with a beta less than.99. 
D)  Be a risky asset with a standard deviation less than 1.0. 
E)  Be a risky asset with a beta less than 1.0.

Question 18

What is the expected return on this portfolio?

Accepted Answer

A)  9.50% 
B)  9.67% 
C)  9.78% 
D)  10.59% 
E)  10.87% 
A)  9.50% 
B)  9.67% 
C)  9.78% 
D)  10.59% 
E)  10.87%

Question 19

The principle of diversification tells us that:

Accepted Answer

A)  Concentrating an investment in two or three large stocks will eliminate all of your risk. 
B)  Concentrating an investment in two large stocks will cut your risk exactly in half. 
C)  Spreading an investment across many diverse assets cannot (in an efficient market) eliminate any risk. 
D)  Spreading an investment across many diverse assets will eliminate all of the risk. 
E)  Spreading an investment across many diverse assets will eliminate some of the risk. 
A)  Concentrating an investment in two or three large stocks will eliminate all of your risk. 
B)  Concentrating an investment in two large stocks will cut your risk exactly in half. 
C)  Spreading an investment across many diverse assets cannot (in an efficient market) eliminate any risk. 
D)  Spreading an investment across many diverse assets will eliminate all of the risk. 
E)  Spreading an investment across many diverse assets will eliminate some of the risk.

Question 20

Provide a definition for Portfolio.

Accepted Answer

Group of assets such

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

Diversifiable risks:

The Capital Asset Pricing Model specifically rewards investors for assuming unsystematic risk via the application of beta in the formula.

If the total risk of firm X is greater than that of firm Y, then the beta of firm X must be greater than that of firm Y.

What is the expected return on this portfolio?

A firm in Moose Jaw announces a revolutionary way to make auto airbags in a way that decreases their risk to automobile occupants. This is a type of surprise that would be characterized as unsystematic risk.

What is the standard deviation of a portfolio which is comprised of $4,500 invested in stock S and $3,000 in stock T?

The security market line:

Which one of the following events is considered part of the expected return on Fido stock?

Stocks with a beta equal to the market beta are added to a portfolio of Treasury bills would increase a portfolio's systematic risk.

A portfolio has an expected return of 11.57%. The portfolio consists of stock A with an expected return of 8.6% and stock B with a beta of 1.28. The risk-free rate of return is 3% and the market risk premium is 8%. What is the portfolio weight of Stock A?

The amount of systematic risk present in a particular risky asset, relative to the systematic risk present in an average risky asset, is called the particular asset's:

Provide a definition for systematic risk principle.

Which one of the following is most apt to be a nondiversifiable risk?

In a competitive market the reward to risk ratio can be expressed as:

The steeper the slope of the security market line, the:

A security that has a rate of return that exceeds the Treasury bill rate but is less than the market rate of return must:

What is the expected return on this portfolio?

The principle of diversification tells us that:

Provide a definition for Portfolio.

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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