Question 1

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 2

Zelo NV share 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 shares?

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 3

Systematic risk is measured by:

Accepted Answer

A) the mean. 
B) beta. 
C) the geometric average. 
D) the standard deviation. 
E) the arithmetic average. 
A) the mean. 
B) beta. 
C) the geometric average. 
D) the standard deviation. 
E) the arithmetic average.

Question 4

When a security is added to a portfolio the appropriate return and risk contributions are:

Accepted Answer

A) the expected return of the asset and its standard deviation. 
B) the expected return and the variance. 
C) the expected return and the beta. 
D) the historical return and the beta. 
E) these both can not be measured. 
A) the expected return of the asset and its standard deviation. 
B) the expected return and the variance. 
C) the expected return and the beta. 
D) the historical return and the beta. 
E) these both can not be measured.

Question 5

A portfolio has 25% of its funds invested in Security C and 75% of its funds invested in Security D. Security C has an expected return of 8% and a standard deviation of 6%.Security D has an
Expected return of 10% and a standard deviation of 10%.The securities have a coeﬃcient of
Correlation of 0.6.Which of the following values are the portfolio return and variance?

Accepted Answer

A) .090; .0081 
B) .095; .001675 
C) .095; .0072 
D) .100; .00849 
E) Cannot calculate without the number of covariance terms. 
A) .090; .0081 
B) .095; .001675 
C) .095; .0072 
D) .100; .00849 
E) Cannot calculate without the number of covariance terms.

Question 6

A portfolio is entirely invested into Buzz's Bauxite Boring Equity, which is expected to return 16%, and Zum's bonds, which are expected to return 8%.60% of the funds are invested in Buzz's and the
Rest in Zum's.What is the expected return on the portfolio?

Accepted Answer

A) 6.4% 
B) 9.6% 
C) 12.8% 
D) 24.2% 
E) Need additional information. 
A) 6.4% 
B) 9.6% 
C) 12.8% 
D) 24.2% 
E) Need additional information.

Question 7

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 8

Inferior Goods SpA equity is expected to earn 14% in a boom, 6% in a normal economy, and lose 4% in a recession economy.The probability of a boom is 20% while the probability of a normal
Economy is 55% and the chance of a recession is 25%.What is the expected rate of return on this
Share?

Accepted Answer

A) 5.10% 
B) 6.72% 
C) 6.80% 
D) 7.60% 
E) 11.33% 
A) 5.10% 
B) 6.72% 
C) 6.80% 
D) 7.60% 
E) 11.33%

Question 9

You have a portfolio consisting solely of share A and share B.The portfolio has an expected return of 10.2%.Share A has an expected return of 12% while share B is expected to return 7%.What is the
Portfolio weight of share A?

Accepted Answer

A) 46% 
B) 54% 
C) 58% 
D) 64% 
E) 70% 
A) 46% 
B) 54% 
C) 58% 
D) 64% 
E) 70%

Question 10

The market has an expected rate of return of 9.8%.The long-term government bond is expected to yield 4.5% and Treasury bills are expected to yield 3.4%.The inﬂation rate is 3.1%.What is the
Market risk premium?

Accepted Answer

A) 2.2% 
B) 3.3% 
C) 5.3% 
D) 6.4% 
E) 6.7% 
A) 2.2% 
B) 3.3% 
C) 5.3% 
D) 6.4% 
E) 6.7%

Question 11

Which one of the following measures is relevant to the systematic risk principle?

Accepted Answer

A) variance 
B) alpha 
C) standard deviation 
D) theta 
E) beta 
A) variance 
B) alpha 
C) standard deviation 
D) theta 
E) beta

Question 12

A portfolio will usually contain:

Accepted Answer

A) one riskless asset. 
B) one risky asset. 
C) two or more assets. 
D) no assets. 
E) None of the above. 
A) one riskless asset. 
B) one risky asset. 
C) two or more assets. 
D) no assets. 
E) None of the above.

Question 13

We routinely assume that investors are risk-averse return-seekers; i.e., they like returns and dislike risk.If so, why do we contend that only systematic risk and not total risk is important?

Accepted Answer

This question, of course, gets to the po

Question 14

What is the expected return on a portfolio comprised of $\mathrm { C } , 000$ in share M and 
 
 in share N if the economy enjoys a boom period?
$\begin{array} { | l | l | l | l | } 
\hline & & \text { Returns if State Occurs } \
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { Share M } & \text { Share N } \
\hline \text { Boom } & 10 \% & 18 \% & 10 \% \
\hline \text { Normal } & 75 \% & 7 \% & 8 \% \
\hline \text { Recession } & 15 \% & - 20 \% & 6 \% \
\hline
\end{array}$

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 15

If the covariance of share 1 with share 2 is -.0065, then what is the covariance of share 2 with share 1?

Accepted Answer

A) -.0065 
B) +.0065 
C) greater than +.0065 
D) less than -.0065 
E) Need additional information. 
A) -.0065 
B) +.0065 
C) greater than +.0065 
D) less than -.0065 
E) Need additional information.

Question 16

The risk premium for an individual security is computed by:

Accepted Answer

A) multiplying the security's beta by the market risk premium. 
B) multiplying the security's beta by the risk-free rate of return. 
C) adding the risk-free rate to the security's expected return. 
D) dividing the market risk premium by the quantity (1 - beta). 
E) dividing the market risk premium by the beta of the security. 
A) multiplying the security's beta by the market risk premium. 
B) multiplying the security's beta by the risk-free rate of return. 
C) adding the risk-free rate to the security's expected return. 
D) dividing the market risk premium by the quantity (1 - beta). 
E) dividing the market risk premium by the beta of the security.

Question 17

The variance of Share A is .004, the variance of the market is .007 and the covariance between the two is .0026.What is the correlation coeﬃcient?

Accepted Answer

A) .9285 
B) .8542 
C) .5010 
D) .4914 
E) .3510 
A) .9285 
B) .8542 
C) .5010 
D) .4914 
E) .3510

Question 18

If the correlation between two shares is −1, the returns:

Accepted Answer

A) generally move in the same direction. 
B) move perfectly opposite one another. 
C) are unrelated to one another as it is < 0. 
D) have standard deviations of equal size but opposite signs. 
E) None of the above. 
A) generally move in the same direction. 
B) move perfectly opposite one another. 
C) are unrelated to one another as it is < 0. 
D) have standard deviations of equal size but opposite signs. 
E) None of the above.

Question 19

Risk that affects at most a small number of assets is called _____ risk.

Accepted Answer

A) portfolio 
B) undiversiﬁable 
C) market 
D) unsystematic 
E) total 
A) portfolio 
B) undiversiﬁable 
C) market 
D) unsystematic 
E) total

Question 20

A security that is fairly priced will have a return _____ 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 10: Risk and Return: the Capital Asset Pricing Model

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

Zelo NV share 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 shares?

Systematic risk is measured by:

When a security is added to a portfolio the appropriate return and risk contributions are:

A portfolio is entirely invested into Buzz's Bauxite Boring Equity, which is expected to return 16%, and Zum's bonds, which are expected to return 8%.60% of the funds are invested in Buzz's and the Rest in Zum's.What is the expected return on the portfolio?

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

Inferior Goods SpA equity is expected to earn 14% in a boom, 6% in a normal economy, and lose 4% in a recession economy.The probability of a boom is 20% while the probability of a normal Economy is 55% and the chance of a recession is 25%.What is the expected rate of return on this Share?

You have a portfolio consisting solely of share A and share B.The portfolio has an expected return of 10.2%.Share A has an expected return of 12% while share B is expected to return 7%.What is the Portfolio weight of share A?

The market has an expected rate of return of 9.8%.The long-term government bond is expected to yield 4.5% and Treasury bills are expected to yield 3.4%.The inﬂation rate is 3.1%.What is the Market risk premium?

Which one of the following measures is relevant to the systematic risk principle?

A portfolio will usually contain:

We routinely assume that investors are risk-averse return-seekers; i.e., they like returns and dislike risk.If so, why do we contend that only systematic risk and not total risk is important?

If the covariance of share 1 with share 2 is -.0065, then what is the covariance of share 2 with share 1?

The risk premium for an individual security is computed by:

The variance of Share A is .004, the variance of the market is .007 and the covariance between the two is .0026.What is the correlation coeﬃcient?

If the correlation between two shares is −1, the returns:

Risk that affects at most a small number of assets is called _____ risk.

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

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis

Discounted Cash Flow Valuation

Bond, Equity and Firm Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options and Capital Budgeting

Risk and Return: Lessons From Market History

Factor Models and the Arbitrage Pricing Theory

Risk, Cost of Capital and Capital Budgeting

Efficient Capital Markets and Behavioural Finance

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Equity Financing

Debt Financing

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Short-Term Capital Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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