Question 1

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 three companies all within the same industry will greatly reduce your overall risk. 
C)  spreading an investment across five diverse companies will not lower your overall risk at all. 
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 three companies all within the same industry will greatly reduce your overall risk. 
C)  spreading an investment across five diverse companies will not lower your overall risk at all. 
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 2

The market has an expected rate of return of 9.8%. The long-term government bond is expected to yield 4.5% and the U.S. Treasury bill is 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 3

The systematic risk of the market is measured by:

Accepted Answer

A)  a beta of 1.0. 
B)  a beta of 0.0. 
C)  a standard deviation of 1.0. 
D)  a standard deviation of 0.0. 
E)  a variance of 1.0. 
A)  a beta of 1.0. 
B)  a beta of 0.0. 
C)  a standard deviation of 1.0. 
D)  a standard deviation of 0.0. 
E)  a variance of 1.0.

Question 4

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 5

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 6

The elements along the diagonal of the variance/covariance matrix are:

Accepted Answer

A)  covariances. 
B)  security weights. 
C)  security selections. 
D)  variances. 
E)  None of these. 
A)  covariances. 
B)  security weights. 
C)  security selections. 
D)  variances. 
E)  None of these.

Question 7

The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6% and the market risk premium is 9%. What is the expected rate of return on Martin Industries stock?

Accepted Answer

A)  11.3% 
B)  14.1% 
C)  16.5% 
D)  17.4% 
E)  18.0% 
A)  11.3% 
B)  14.1% 
C)  16.5% 
D)  17.4% 
E)  18.0%

Question 8

The common stock of Chai Tea Inc has an expected return of 14.4%. The return on the market is 10% and the risk-free rate of return is 3.5%. What is the beta of this stock?

Accepted Answer

A)  .65 
B)  1.09 
C)  1.32 
D)  1.44 
E)  1.68 
A)  .65 
B)  1.09 
C)  1.32 
D)  1.44 
E)  1.68

Question 9

When computing the expected return on a portfolio of stocks the portfolio weights are based on the:

Accepted Answer

A)  number of shares owned in each stock. 
B)  price per share of each stock. 
C)  market value of the total shares held in each stock. 
D)  original amount invested in each stock. 
E)  cost per share of each stock held. 
A)  number of shares owned in each stock. 
B)  price per share of each stock. 
C)  market value of the total shares held in each stock. 
D)  original amount invested in each stock. 
E)  cost per share of each stock held.

Question 10

The portfolio expected return considers which of the following factors?
I. the amount of money currently invested in each individual security
II. various levels of economic activity
III. the performance of each stock given various economic scenarios
IV. the probability of various states of the economy

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 11

Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?

Accepted Answer

A)  The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers. 
B)  The expected return is an arithmetic average of the individual returns for each state of the economy. 
C)  The expected return is a weighted average where the probabilities of the economic states are used as the weights. 
D)  The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state. 
E)  As long as the total probabilities of the economic states equal 100%, then the expected return on the stock is a geometric average of the expected returns for each economic statE. 
A)  The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers. 
B)  The expected return is an arithmetic average of the individual returns for each state of the economy. 
C)  The expected return is a weighted average where the probabilities of the economic states are used as the weights. 
D)  The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state. 
E)  As long as the total probabilities of the economic states equal 100%, then the expected return on the stock is a geometric average of the expected returns for each economic statE.

Question 12

The linear relation between an asset's expected return and its beta coefficient is the:

Accepted Answer

A)  reward-to-risk ratio. 
B)  portfolio weight. 
C)  portfolio risk. 
D)  security market line. 
E)  market risk premium. 
A)  reward-to-risk ratio. 
B)  portfolio weight. 
C)  portfolio risk. 
D)  security market line. 
E)  market risk premium.

Question 13

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 14

You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset. $350 is invested in stock A. Stock A has a beta of 1.5 and stock B has a beta of .8. How much needs to be invested in stock B if you want a portfolio beta of .90?

Accepted Answer

A)  $0 
B)  $351 
C)  $382 
D)  $469 
E)  $650 
A)  $0 
B)  $351 
C)  $382 
D)  $469 
E)  $650

Question 15

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

Question 16

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 weighted average expected return of the stocks. 
B)  the expected return of the portfolio is greater than the weighted average expected return of the stocks. 
C)  the expected return of the portfolio is equal to the weighted 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. 
E)  None of these. 
A)  the expected return of the portfolio is less than the weighted average expected return of the stocks. 
B)  the expected return of the portfolio is greater than the weighted average expected return of the stocks. 
C)  the expected return of the portfolio is equal to the weighted 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. 
E)  None of these.

Question 17

The measure of beta associates most closely with:

Accepted Answer

A)  idiosyncratic risk. 
B)  risk-free return. 
C)  systematic risk. 
D)  unexpected risk. 
E)  unsystematic risk. 
A)  idiosyncratic risk. 
B)  risk-free return. 
C)  systematic risk. 
D)  unexpected risk. 
E)  unsystematic risk.

Question 18

Standard deviation measures _____ risk.

Accepted Answer

A)  total 
B)  nondiversifiable 
C)  unsystematic 
D)  systematic 
E)  economic 
A)  total 
B)  nondiversifiable 
C)  unsystematic 
D)  systematic 
E)  economic

Question 19

The risk-free rate of return is 4% and the market risk premium is 8%. What is the expected rate of return on a stock with a beta of 1.28?

Accepted Answer

A)  9.12% 
B)  10.24% 
C)  13.12% 
D)  14.24% 
E)  15.36% 
A)  9.12% 
B)  10.24% 
C)  13.12% 
D)  14.24% 
E)  15.36%

Question 20

If the economy booms,RTF,Inc. stock is expected to return 15%. If the economy goes into a recessionary period,then RTF is expected to only return 3%. The probability of a boom is 60% while the probability of a recession is 40%. What is the variance of the returns on RTF,Inc. stock?

Accepted Answer

A)  .00125 
B)  .00345 
C)  .00629 
D)  .00731 
E)  .12583 
A)  .00125 
B)  .00345 
C)  .00629 
D)  .00731 
E)  .12583

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

The principle of diversification tells us that:

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

The systematic risk of the market is measured by:

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

The opportunity set of portfolios is:

The elements along the diagonal of the variance/covariance matrix are:

The stock of Martin Industries has a beta of 1.43. The risk-free rate of return is 3.6% and the market risk premium is 9%. What is the expected rate of return on Martin Industries stock?

The common stock of Chai Tea Inc has an expected return of 14.4%. The return on the market is 10% and the risk-free rate of return is 3.5%. What is the beta of this stock?

When computing the expected return on a portfolio of stocks the portfolio weights are based on the:

Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?

The linear relation between an asset's expected return and its beta coefficient is the:

What is the expected return on this portfolio?

You have a $1,000 portfolio which is invested in stocks A and B plus a risk-free asset. $350 is invested in stock A. Stock A has a beta of 1.5 and stock B has a beta of .8. How much needs to be invested in stock B if you want a portfolio beta of .90?

A portfolio will usually contain:

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

The measure of beta associates most closely with:

Standard deviation measures _____ risk.

The risk-free rate of return is 4% and the market risk premium is 8%. What is the expected rate of return on a stock with a beta of 1.28?

If the economy booms,RTF,Inc. stock is expected to return 15%. If the economy goes into a recessionary period,then RTF is expected to only return 3%. The probability of a boom is 60% while the probability of a recession is 40%. What is the variance of the returns on RTF,Inc. stock?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

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

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

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