Question 1

A stock with a beta of zero would be expected to:

Accepted Answer

A)  have a rate of return equal to the risk-free rate. 
B)  have a rate of return equal to the market rate. 
C)  have a rate of return equal to zero. 
D)  have a rate of return equal to the one. 
A)  have a rate of return equal to the risk-free rate. 
B)  have a rate of return equal to the market rate. 
C)  have a rate of return equal to zero. 
D)  have a rate of return equal to the one. A

Question 2

Covariance measures the interrelationship between two securities in terms of:

Accepted Answer

A)  both expected return and direction of return movement. 
B)  both size and direction of return movement. 
C)  the standard deviation of returns. 
D)  both expected return and size of return movements. 
E)  the correlations of returns. 
A)  both expected return and direction of return movement. 
B)  both size and direction of return movement. 
C)  the standard deviation of returns. 
D)  both expected return and size of return movements. 
E)  the correlations of returns. B

Question 3

GenLabs has been a hot stock the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows:   The variance and standard deviation of GenLabs returns are:

Accepted Answer

A)  0.042875; 0.2070628. 
B)  0.0714612; 8.450.845142. 
C)  0.093958; 0.3065169. 
D)  0.112750; 0.335809. 
A)  0.042875; 0.2070628. 
B)  0.0714612; 8.450.845142. 
C)  0.093958; 0.3065169. 
D)  0.112750; 0.335809. A

Question 4

The dominant portfolio with the lowest possible risk measures is:

Accepted Answer

A)  the efficient frontier. 
B)  the minimum variance portfolio. 
C)  the upper tail of the efficient set. 
D)  the tangency portfolio. 
A)  the efficient frontier. 
B)  the minimum variance portfolio. 
C)  the upper tail of the efficient set. 
D)  the tangency portfolio.

Question 5

A portfolio is entirely invested into Buzz's Bauxite Boring Equity, which is expected to return 16%, and Zum's Inc. bonds, which are expected to return 8%. Sixty percent 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)  9.6%. 
B)  12.8%. 
C)  24.1%. 
D)  6.4%. 
A)  9.6%. 
B)  12.8%. 
C)  24.1%. 
D)  6.4%.

Question 6

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

Accepted Answer

A)  -.0065. 
B)  less than -.0065. 
C)  greater than +.0065. 
D)  +.0065. 
A)  -.0065. 
B)  less than -.0065. 
C)  greater than +.0065. 
D)  +.0065.

Question 7

The total number of variance and covariance terms in portfolio is N2. How many of these would be (including non-unique) covariances?

Accepted Answer

A)  N. 
B)  N2. 
C)  N2- N. 
D)  N2- N/2. 
A)  N. 
B)  N2. 
C)  N2- N. 
D)  N2- N/2.

Question 8

Why are some risks diversifiable and some nondiversifiable? Give an example of each.

Accepted Answer

A reasonable answer would, at a minimum,

Question 9

According to the CAPM, the expected return on a risky asset depends on three components. Describe each component, and explain its role in determining expected return.

Accepted Answer

The CAPM suggests that the expected retu

Question 10

You want your portfolio beta to be 1.20. Currently, your portfolio consists of $100 invested in stock A with a beta of 1.4 and $300 in stock B with a beta of.6. You have another $400 to invest and want to divide it between an asset with a beta of 1.6 and a risk-free asset. How much should you invest in the risk-free asset?

Accepted Answer

A)  $0 
B)  $140 
C)  $200 
D)  $320 
A)  $0 
B)  $140 
C)  $200 
D)  $320

Question 11

Total risk can be divided into:

Accepted Answer

A)  standard deviation and variance. 
B)  standard deviation and covariance. 
C)  portfolio risk and beta. 
D)  portfolio risk and unsystematic risk. 
E)  portfolio risk and covariance. 
A)  standard deviation and variance. 
B)  standard deviation and covariance. 
C)  portfolio risk and beta. 
D)  portfolio risk and unsystematic risk. 
E)  portfolio risk and covariance.

Question 12

Idaho Slopes (IS) and Dakota Steppes (DS) are both seasonal businesses. IS is a downhill skiing facility, while DS is a tour company that specializes in walking tours and camping. The equally likely returns on each company over the next year is expected to be:   If IS and DS are combined in a portfolio with 50% invested in each, the expected return and risk would be:

Accepted Answer

A)  5.625%; 37.2%. 
B)  4.5%; 5.48%. 
C)  8.0%; 8.2%. 
D)  5.0%; 0%. 
E)  4.5%; 0%. 
A)  5.625%; 37.2%. 
B)  4.5%; 5.48%. 
C)  8.0%; 8.2%. 
D)  5.0%; 0%. 
E)  4.5%; 0%.

Question 13

A well-diversified portfolio has negligible:

Accepted Answer

A)  expected return. 
B)  systematic risk. 
C)  unsystematic risk. 
D)  variance. 
A)  expected return. 
B)  systematic risk. 
C)  unsystematic risk. 
D)  variance.

Question 14

A portfolio exists containing stocks D, E, and F held in proportions 30%, 40%, and 30% respectively. The expected returns on the three stocks are given by 12%, 20%, and 28% respectively. Calculate the portfolio's expected return.

Accepted Answer

Portfolio return = .

Question 15

The opportunity set of portfolios is:

Accepted Answer

A)  all possible return combinations of those securities. 
B)  all possible risk combinations of those securities. 
C)  all possible risk-return combinations of those securities. 
D)  the best or highest risk-return combination. 
E)  the lowest risk-return combination. 
A)  all possible return combinations of those securities. 
B)  all possible risk combinations of those securities. 
C)  all possible risk-return combinations of those securities. 
D)  the best or highest risk-return combination. 
E)  the lowest risk-return combination.

Question 16

When many assets are included in a portfolio or index the risk of the portfolio or index will be:

Accepted Answer

A)  less than the risk of the securities because the correlations are greater than 1. 
B)  equal to the risk of the securities because the correlations are equal to 1. 
C)  less than the risk of the securities because the correlations are usually less than 1. 
D)  unaffected by the risk of securities because their correlations are less than 1. 
A)  less than the risk of the securities because the correlations are greater than 1. 
B)  equal to the risk of the securities because the correlations are equal to 1. 
C)  less than the risk of the securities because the correlations are usually less than 1. 
D)  unaffected by the risk of securities because their correlations are less than 1.

Question 17

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 18

When stocks with the same expected return are combined into a portfolio:

Accepted Answer

A)  the expected return of the portfolio is less than the average expected return of the stocks. 
B)  the expected return of the portfolio is greater than the average expected return of the stocks. 
C)  the expected return of the portfolio is equal to the average expected return of the stocks. 
D)  there is no relationship between the expected return of the portfolio and the expected return of the stocks. 
A)  the expected return of the portfolio is less than the average expected return of the stocks. 
B)  the expected return of the portfolio is greater than the average expected return of the stocks. 
C)  the expected return of the portfolio is equal to the average expected return of the stocks. 
D)  there is no relationship between the expected return of the portfolio and the expected return of the stocks.

Question 19

Given the following information on three stocks:
   $\sigma$= -.05333
bc
Suppose you desire to invest in any one of the stocks listed above. Can any be recommended?

Accepted Answer

Can't tell

Question 20

Suppose the MiniCD Corporation's common stock has a return of 12%. Assume the risk-free rate is 4%, the expected market return is 9%, and no unsystematic influence affected Mini's return. The beta for MiniCD is:

Accepted Answer

A)  0.89. 
B)  1.60. 
C)  2.40. 
D)  3.00. 
A)  0.89. 
B)  1.60. 
C)  2.40. 
D)  3.00.

Exam 11: Risk and Return: the Capital Asset Pricing Model

A stock with a beta of zero would be expected to:

Covariance measures the interrelationship between two securities in terms of:

GenLabs has been a hot stock the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows: The variance and standard deviation of GenLabs returns are:

The dominant portfolio with the lowest possible risk measures is:

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

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

The total number of variance and covariance terms in portfolio is N2. How many of these would be (including non-unique) covariances?

Why are some risks diversifiable and some nondiversifiable? Give an example of each.

According to the CAPM, the expected return on a risky asset depends on three components. Describe each component, and explain its role in determining expected return.

Total risk can be divided into:

A well-diversified portfolio has negligible:

A portfolio exists containing stocks D, E, and F held in proportions 30%, 40%, and 30% respectively. The expected returns on the three stocks are given by 12%, 20%, and 28% respectively. Calculate the portfolio's expected return.

The opportunity set of portfolios is:

When many assets are included in a portfolio or index the risk of the portfolio or index will be:

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?

When stocks with the same expected return are combined into a portfolio:

Given the following information on three stocks: σ\sigmaσ = -.05333 bc Suppose you desire to invest in any one of the stocks listed above. Can any be recommended?

Suppose the MiniCD Corporation's common stock has a return of 12%. Assume the risk-free rate is 4%, the expected market return is 9%, and no unsystematic influence affected Mini's return. The beta for MiniCD is:

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

The Time Value of Money

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, Return, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

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

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

The total number of variance and covariance terms in portfolio is N². How many of these would be (including non-unique) covariances?