Question 1

Which one of the following indicates a portfolio is being effectively diversified?

Accepted Answer

A)  An increase in the portfolio beta 
B)  A decrease in the portfolio beta 
C)  An increase in the portfolio rate of return 
D)  An increase in the portfolio standard deviation 
E)  A decrease in the portfolio standard deviation 
A)  An increase in the portfolio beta 
B)  A decrease in the portfolio beta 
C)  An increase in the portfolio rate of return 
D)  An increase in the portfolio standard deviation 
E)  A decrease in the portfolio standard deviation

Question 2

Jerilu Markets has a beta of 1.09. The risk-free rate of return is 3.18 percent and the market rate of return is 11.27 percent. What is the risk premium on this stock?

Accepted Answer

A)  3.47 percent 
B)  7.03 percent 
C)  8.82 percent 
D)  8.99 percent 
E)  7.80 percent 
A)  3.47 percent 
B)  7.03 percent 
C)  8.82 percent 
D)  8.99 percent 
E)  7.80 percent

Question 3

Suppose you observe the following situation: $\begin{array}{ccc}
&& \text { Expected } \
\text { Security } & \text { Beta } & \text { Retumn } \
\mathrm{A} & 1.16 & .1137 \
\mathrm{~B} & .92 & .0984
\end{array}$
Assume these securities are correctly priced. Based on the CAPM, what is the return on the market?

Accepted Answer

A)  9.99 percent 
B)  11.42 percent 
C)  10.35 percent 
D)  9.78 percent 
E)  11.01 percent 
A)  9.99 percent 
B)  11.42 percent 
C)  10.35 percent 
D)  9.78 percent 
E)  11.01 percent

Question 4

Total risk is measured by ________ and systematic risk is measured by ________.

Accepted Answer

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

Question 5

A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12 percent. What type of risk does this news flash best represent?

Accepted Answer

A)  Portfolio 
B)  Non-diversifiable 
C)  Market 
D)  Unsystematic 
E)  Expected 
A)  Portfolio 
B)  Non-diversifiable 
C)  Market 
D)  Unsystematic 
E)  Expected

Question 6

What is the expected return of an equally weighted portfolio comprised of the following three stocks? $$\begin{array} { l c c c r } 
 \text { State of } &\text { Probability of }& { \text { Rate of Return } } \
 \text { Economy } & \text { State of Economy } & { \text { if State Occurs } } \

& & \begin{array}{ll}   \text { Stock A } & \text { Stock B } & \text { Stock C }  \end{array}  \
\text { Boom } & .25 &\begin{array}{ccc}    .19  \quad  \quad  \quad& .13 \quad  \quad  & .07 \quad  \quad  \end{array} \
\text { Nonnal } & .72 &\begin{array}{ccc}   .15  \quad   \quad  & .05  \quad  \quad & .13 \quad  \quad  \end{array} \
\text { Bust } & .03 & \begin{array}{ccc}   - .29  \quad  \quad & - .14 \quad  \quad  & .22 \quad  \quad  \end{array}
\end{array}$$

Accepted Answer

A)  9.82 percent 
B)  10.96 percent 
C)  9.67 percent 
D)  10.48 percent 
E)  11.33 percent 
A)  9.82 percent 
B)  10.96 percent 
C)  9.67 percent 
D)  10.48 percent 
E)  11.33 percent

Question 7

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?

Accepted Answer

A)  Beta 
B)  Reward-to-risk ratio 
C)  Risk ratio 
D)  Standard deviation 
E)  Price-earnings ratio 
A)  Beta 
B)  Reward-to-risk ratio 
C)  Risk ratio 
D)  Standard deviation 
E)  Price-earnings ratio

Question 8

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?

Accepted Answer

A)  Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. 
B)  The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. 
C)  Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. 
D)  The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified. 
E)  Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero. 
A)  Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. 
B)  The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. 
C)  Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. 
D)  The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified. 
E)  Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

Question 9

The systematic risk of the market is measured by a:

Accepted Answer

A)  beta of 1. 
B)  beta of 0. 
C)  standard deviation of 1. 
D)  standard deviation of 0. 
E)  variance of 1. 
A)  beta of 1. 
B)  beta of 0. 
C)  standard deviation of 1. 
D)  standard deviation of 0. 
E)  variance of 1.

Question 10

Which one of the following events would be included in the expected return on Sussex stock?

Accepted Answer

A)  The chief financial officer of Sussex unexpectedly resigned. 
B)  The labor union representing Sussex's employees unexpectedly called a strike. 
C)  This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. 
D)  The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. 
E)  The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending. 
A)  The chief financial officer of Sussex unexpectedly resigned. 
B)  The labor union representing Sussex's employees unexpectedly called a strike. 
C)  This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. 
D)  The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. 
E)  The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.

Question 11

The primary purpose of portfolio diversification is to:

Accepted Answer

A)  increase returns and risks. 
B)  eliminate all risks. 
C)  eliminate asset-specific risk. 
D)  eliminate systematic risk. 
E)  lower both returns and risks. 
A)  increase returns and risks. 
B)  eliminate all risks. 
C)  eliminate asset-specific risk. 
D)  eliminate systematic risk. 
E)  lower both returns and risks.

Question 12

You have a portfolio consisting solely of Stock A and Stock B. The portfolio has an expected return of 10.2 percent. Stock A has an expected return of 11.7 percent while Stock B is expected to return 8.3 percent. What is the portfolio weight of Stock A?

Accepted Answer

A)  57.01 percent 
B)  55.88 percent 
C)  63.13 percent 
D)  61.20 percent 
E)  59.97 percent 
A)  57.01 percent 
B)  55.88 percent 
C)  63.13 percent 
D)  61.20 percent 
E)  59.97 percent

Question 13

The capital asset pricing model (CAPM) assumes which of the following?
I. A risk-free asset has no systematic risk.
II. Beta is a reliable estimate of total risk.
III. The reward-to-risk ratio is constant.
IV. The market rate of return can be approximated.

Accepted Answer

A)  I and III only 
B)  II and IV only 
C)  I, III, and IV only 
D)  II, III, and IV only 
E)  I, II, III, and IV 
A)  I and III only 
B)  II and IV only 
C)  I, III, and IV only 
D)  II, III, and IV only 
E)  I, II, III, and IV

Question 14

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

Accepted Answer

A)  the risk-free rate. 
B)  the market rate. 
C)  a return of zero. 
D)  a return of 1.0 percent. 
E)  the market risk premium. 
A)  the risk-free rate. 
B)  the market rate. 
C)  a return of zero. 
D)  a return of 1.0 percent. 
E)  the market risk premium.

Question 15

What is the standard deviation of the returns on a stock given the following information? $$\begin{array} { l c c } 
 { \text { State of } } & \text { Probability of } & \text { Rate of Return } \
\text { Econony } & \text { State of Economy } & \text { if State Occurs } \
\text { Boom } & .28 & .175 \
\text { Normal } & .67 & .128 \
\text { Recession } & .05 & .026
\end{array}$$

Accepted Answer

A)  3.57 percent 
B)  3.28 percent 
C)  3.89 percent 
D)  3.42 percent 
E)  4.01 percent 
A)  3.57 percent 
B)  3.28 percent 
C)  3.89 percent 
D)  3.42 percent 
E)  4.01 percent

Question 16

You own a portfolio that has $2,800 invested in Stock A and $3,250 invested in Stock B. The expected returns on these stocks are 14.7 percent and 9.3 percent, respectively. What is the expected return on the portfolio?

Accepted Answer

A)  12.06 percent 
B)  12.36 percent 
C)  11.80 percent 
D)  11.13 percent 
E)  11.41 percent 
A)  12.06 percent 
B)  12.36 percent 
C)  11.80 percent 
D)  11.13 percent 
E)  11.41 percent

Question 17

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?

Accepted Answer

A)  Reward-to-risk matrix 
B)  Portfolio weight graph 
C)  Normal distribution 
D)  Security market line 
E)  Market real returns 
A)  Reward-to-risk matrix 
B)  Portfolio weight graph 
C)  Normal distribution 
D)  Security market line 
E)  Market real returns

Question 18

The standard deviation of a portfolio:

Accepted Answer

A)  is a measure of that portfolio's systematic risk. 
B)  is a weighted average of the standard deviations of the individual securities held in that portfolio. 
C)  measures the amount of diversifiable risk inherent in the portfolio. 
D)  serves as the basis for computing the appropriate risk premium for that portfolio. 
E)  can be less than the weighted average of the standard deviations of the individual securities held in that portfolio. 
A)  is a measure of that portfolio's systematic risk. 
B)  is a weighted average of the standard deviations of the individual securities held in that portfolio. 
C)  measures the amount of diversifiable risk inherent in the portfolio. 
D)  serves as the basis for computing the appropriate risk premium for that portfolio. 
E)  can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

Question 19

Which one of the following is least apt to reduce the unsystematic risk of a portfolio?

Accepted Answer

A)  Reducing the number of stocks held in a portfolio 
B)  Adding bonds to a stock portfolio 
C)  Adding international securities into a portfolio of U.S. stocks 
D)  Adding U.S. Treasury bills to a risky portfolio 
E)  Adding technology stocks to a portfolio of industrial stocks 
A)  Reducing the number of stocks held in a portfolio 
B)  Adding bonds to a stock portfolio 
C)  Adding international securities into a portfolio of U.S. stocks 
D)  Adding U.S. Treasury bills to a risky portfolio 
E)  Adding technology stocks to a portfolio of industrial stocks

Question 20

You have $21,600 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14.3 percent and Stock Y with an expected return of 8.1 percent. Your goal is to create a portfolio with an expected return of 12.5 percent. All money must be invested. How much will you invest in Stock X?

Accepted Answer

A)  $15,800 
B)  $18,273 
C)  $14,600 
D)  $15,329 
E)  $19,208 
A)  $15,800 
B)  $18,273 
C)  $14,600 
D)  $15,329 
E)  $19,208

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

Which one of the following indicates a portfolio is being effectively diversified?

Jerilu Markets has a beta of 1.09. The risk-free rate of return is 3.18 percent and the market rate of return is 11.27 percent. What is the risk premium on this stock?

Suppose you observe the following situation: Expected Security Beta Retumn 1.16 .1137 .92 .0984 Assume these securities are correctly priced. Based on the CAPM, what is the return on the market?

Total risk is measured by ________ and systematic risk is measured by ________.

A news flash just appeared that caused about a dozen stocks to suddenly increase in value by 12 percent. What type of risk does this news flash best represent?

What is the expected return of an equally weighted portfolio comprised of the following three stocks? State of Probability of Rate of Return Economy State of Economy if State Occurs Stock A Stock B Stock C Boom .25 .19 .13 .07 Nonnal .72 .15 .05 .13 Bust .03 -.29 -.14 .22

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?

The systematic risk of the market is measured by a:

Which one of the following events would be included in the expected return on Sussex stock?

The primary purpose of portfolio diversification is to:

You have a portfolio consisting solely of Stock A and Stock B. The portfolio has an expected return of 10.2 percent. Stock A has an expected return of 11.7 percent while Stock B is expected to return 8.3 percent. What is the portfolio weight of Stock A?

The capital asset pricing model (CAPM) assumes which of the following? I. A risk-free asset has no systematic risk. II. Beta is a reliable estimate of total risk. III. The reward-to-risk ratio is constant. IV. The market rate of return can be approximated.

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

What is the standard deviation of the returns on a stock given the following information? State of Probability of Rate of Return Econony State of Economy if State Occurs Boom .28 .175 Normal .67 .128 Recession .05 .026

You own a portfolio that has $2,800 invested in Stock A and $3,250 invested in Stock B. The expected returns on these stocks are 14.7 percent and 9.3 percent, respectively. What is the expected return on the portfolio?

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?

The standard deviation of a portfolio:

Which one of the following is least apt to reduce the unsystematic risk of a portfolio?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and 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

Some Lessons from Capital Market History

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters

Total risk is measured by and systematic risk is measured by .