Question 1

The CML is the pricing relationship between:

Accepted Answer

A)  efficient portfolios and beta. 
B)  the risk-free asset and standard deviation of the portfolio return. 
C)  the optimal portfolio and the standard deviation of portfolio return. 
D)  beta and the standard deviation of portfolio return. 
A)  efficient portfolios and beta. 
B)  the risk-free asset and standard deviation of the portfolio return. 
C)  the optimal portfolio and the standard deviation of portfolio return. 
D)  beta and the standard deviation of portfolio return.

Question 2

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:   The correlation between the returns of IS and DS is:

Accepted Answer

A)  +1.00 
B)  -1.10 
C)  +0.30 
D)  -0.03 
E)  0.03 
A)  +1.00 
B)  -1.10 
C)  +0.30 
D)  -0.03 
E)  0.03

Question 3

The elements along the diagonal of the Variance Covariance matrix are:

Accepted Answer

A)  covariances. 
B)  security weights. 
C)  security selections. 
D)  variances. 
A)  covariances. 
B)  security weights. 
C)  security selections. 
D)  variances.

Question 4

Diversification can effectively reduce risk. Once a portfolio is diversified the type of risk remaining is:

Accepted Answer

A)  individual security risk. 
B)  riskless security risk. 
C)  risk related to the market portfolio. 
D)  total standard deviations. 
A)  individual security risk. 
B)  riskless security risk. 
C)  risk related to the market portfolio. 
D)  total standard deviations.

Question 5

The rate of return on the common stock of Flowers by Flo is expected to be 14% in a boom economy, 8% in a normal economy, and only 2% in a recessionary economy. The probabilities of these economic states are 20% for a boom, 70% for a normal economy, and 10% for a recession. What is the variance of the returns on the common stock of Flowers by Flo?

Accepted Answer

A)  0.001044 
B)  0.001280 
C)  0.001863 
D)  0.002001 
E)  0.002471 
A)  0.001044 
B)  0.001280 
C)  0.001863 
D)  0.002001 
E)  0.002471

Question 6

If you have a portfolio of two risky stocks which turns out to have no diversification. The reason you have no diversification is:

Accepted Answer

A)  the returns are too small. 
B)  the returns move perfectly opposite of one another. 
C)  the returns are too large to offset. 
D)  the returns move perfectly with one another. 
E)  the returns are completely unrelated to one another. 
A)  the returns are too small. 
B)  the returns move perfectly opposite of one another. 
C)  the returns are too large to offset. 
D)  the returns move perfectly with one another. 
E)  the returns are completely unrelated to one another.

Question 7

The beta of a security is calculated by:

Accepted Answer

A)  dividing the covariance of the security with the market by the variance of the market. 
B)  dividing the correlation of the security with the market by the variance of the market. 
C)  dividing the variance of the market by the covariance of the security with the market. 
D)  dividing the variance of the market by the correlation of the security with the market. 
A)  dividing the covariance of the security with the market by the variance of the market. 
B)  dividing the correlation of the security with the market by the variance of the market. 
C)  dividing the variance of the market by the covariance of the security with the market. 
D)  dividing the variance of the market by the correlation of the security with the market.

Question 8

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

Question 9

For a highly diversified equally weighted portfolio, the portfolio variance is:

Accepted Answer

A)  the average covariance. 
B)  the average expected value. 
C)  the average variance. 
D)  the weighted average expected value. 
E)  the weighted average variance. 
A)  the average covariance. 
B)  the average expected value. 
C)  the average variance. 
D)  the weighted average expected value. 
E)  the weighted average variance.

Question 10

You've owned a share of stock for 6 years. It returned 5% in 3 of those years and -5% in the other 3. What was the variance?

Accepted Answer

A)  0.15%. 
B)  0.16%. 
C)  0.25%. 
D)  0%. 
A)  0.15%. 
B)  0.16%. 
C)  0.25%. 
D)  0%.

Question 11

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 B has an expected return of 10% and a standard deviation of 10%. The securities have a coefficient of correlation of.6. Which of the following values is closest to portfolio return and variance?

Accepted Answer

A)  .095; .001675. 
B)  .095; .0072. 
C)  .100; .00849. 
D)  .090;.0081. 
A)  .095; .001675. 
B)  .095; .0072. 
C)  .100; .00849. 
D)  .090;.0081.

Question 12

The characteristic line is graphically depicted as:

Accepted Answer

A)  the plot of the relationship between beta and expected return. 
B)  the plot of the returns of the security against the beta. 
C)  the plot of the security against the market index returns. 
D)  the plot of the beta against the market index returns. 
A)  the plot of the relationship between beta and expected return. 
B)  the plot of the returns of the security against the beta. 
C)  the plot of the security against the market index returns. 
D)  the plot of the beta against the market index returns.

Question 13

Beta measures:

Accepted Answer

A)  the ability to diversify risk. 
B)  how an asset covaries with the market. 
C)  the actual return on an asset. 
D)  the standard of the assets' returns. 
A)  the ability to diversify risk. 
B)  how an asset covaries with the market. 
C)  the actual return on an asset. 
D)  the standard of the assets' returns.

Question 14

An efficient set of portfolios is:

Accepted Answer

A)  the complete opportunity set. 
B)  the portion of the opportunity set below the minimum variance portfolio. 
C)  only the minimum variance portfolio. 
D)  the dominant portion of the opportunity set. 
E)  only the maximum return portfolio. 
A)  the complete opportunity set. 
B)  the portion of the opportunity set below the minimum variance portfolio. 
C)  only the minimum variance portfolio. 
D)  the dominant portion of the opportunity set. 
E)  only the maximum return portfolio.

Question 15

If the correlation between two stocks 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. 
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.

Question 16

A portfolio will usually contain:

Accepted Answer

A)  only one riskless asset. 
B)  only one risky asset. 
C)  two or more assets. 
D)  no assets. 
A)  only one riskless asset. 
B)  only one risky asset. 
C)  two or more assets. 
D)  no assets.

Question 17

The separation principle states that an investor will:

Accepted Answer

A)  choose any efficient portfolio and invest some amount in the riskless asset to generate the expected return. 
B)  choose an efficient portfolio based on individual risk tolerance or utility. 
C)  never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time. 
D)  invest only in the riskless asset and tangency portfolio choosing the weights based on individual risk tolerance. 
A)  choose any efficient portfolio and invest some amount in the riskless asset to generate the expected return. 
B)  choose an efficient portfolio based on individual risk tolerance or utility. 
C)  never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time. 
D)  invest only in the riskless asset and tangency portfolio choosing the weights based on individual risk tolerance.

Question 18

Given the following information on three stocks:
   $\sigma$= -.05333
bc
Now suppose you diversify into two securities. Given all choices, can any portfolio be eliminated? Assume equal weights.

Accepted Answer

Portfolio

Question 19

Draw the SML and plot asset C such that it has less risk than the market but plots above the SML, and asset D such that it has more risk than the market and plots below the SML. (Be sure to indicate where the market portfolio is on your graph.) Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium.

Accepted Answer

The student should correctly draw a SML

Question 20

Stock A has an expected return of 20%, and stock B has an expected return of 4%. However, the risk of stock A as measured by its variance is 3 times that of stock B. If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?

Accepted Answer

A)  20.0%. 
B)  4.0%. 
C)  12.0%. 
D)  Greater than 20%. 
A)  20.0%. 
B)  4.0%. 
C)  12.0%. 
D)  Greater than 20%.

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

The CML is the pricing relationship between:

The elements along the diagonal of the Variance Covariance matrix are:

Diversification can effectively reduce risk. Once a portfolio is diversified the type of risk remaining is:

If you have a portfolio of two risky stocks which turns out to have no diversification. The reason you have no diversification is:

The beta of a security is calculated by:

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

For a highly diversified equally weighted portfolio, the portfolio variance is:

You've owned a share of stock for 6 years. It returned 5% in 3 of those years and -5% in the other 3. What was the variance?

The characteristic line is graphically depicted as:

Beta measures:

An efficient set of portfolios is:

If the correlation between two stocks is -1, the returns:

A portfolio will usually contain:

The separation principle states that an investor will:

Given the following information on three stocks: σ\sigmaσ = -.05333 bc Now suppose you diversify into two securities. Given all choices, can any portfolio be eliminated? Assume equal weights.

Stock A has an expected return of 20%, and stock B has an expected return of 4%. However, the risk of stock A as measured by its variance is 3 times that of stock B. If the two stocks are combined equally in a portfolio, what would be the portfolio's expected return?

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