Question 1

Which one of the following would indicate 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

Which one of the following statements is correct concerning the standard deviation of a portfolio?

Accepted Answer

A)  The greater the diversification of a portfolio, the greater the standard deviation of that portfolio. 
B)  The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio. 
C)  Standard deviation is used to determine the amount of risk premium that should apply to a portfolio. 
D)  Standard deviation measures only the systematic risk of a portfolio. 
E)  The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within the portfolio. 
A)  The greater the diversification of a portfolio, the greater the standard deviation of that portfolio. 
B)  The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio. 
C)  Standard deviation is used to determine the amount of risk premium that should apply to a portfolio. 
D)  Standard deviation measures only the systematic risk of a portfolio. 
E)  The standard deviation of a portfolio is equal to a weighted average of the standard deviations of the individual securities held within the portfolio.

Question 3

Which one of the following is an example of a nondiversifiable risk?

Accepted Answer

A)  a well-respected president of a firm suddenly resigns 
B)  a well-respected chairman of the Federal Reserve suddenly resigns 
C)  a key employee suddenly resigns and accepts employment with a key competitor 
D)  a well-managed firm reduces its work force and automates several jobs 
E)  a poorly managed firm suddenly goes out of business due to lack of sales 
A)  a well-respected president of a firm suddenly resigns 
B)  a well-respected chairman of the Federal Reserve suddenly resigns 
C)  a key employee suddenly resigns and accepts employment with a key competitor 
D)  a well-managed firm reduces its work force and automates several jobs 
E)  a poorly managed firm suddenly goes out of business due to lack of sales

Question 4

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 is closest to 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 5

What is the beta of a portfolio comprised of the following securities?

Accepted Answer

A)  1.008 
B)  1.014 
C)  1.038 
D)  1.067 
E)  1.127 
A)  1.008 
B)  1.014 
C)  1.038 
D)  1.067 
E)  1.127

Question 6

The diagram below represents an opportunity set for a two asset combination. Indicate the correct efficient set with labels; explain why it is so.

Accepted Answer

Efficient set is portion of op

Question 7

The correlation between stocks A and B is the:

Accepted Answer

A)  covariance between A and B divided by the standard deviation of A times the standard deviation of B. 
B)  standard deviation A divided by the standard deviation of B. 
C)  standard deviation of B divided by the covariance between A and B. 
D)  variance of A plus the variance of B dividend by the covariance. 
E)  None of these. 
A)  covariance between A and B divided by the standard deviation of A times the standard deviation of B. 
B)  standard deviation A divided by the standard deviation of B. 
C)  standard deviation of B divided by the covariance between A and B. 
D)  variance of A plus the variance of B dividend by the covariance. 
E)  None of these.

Question 8

The total number of variance and covariance terms in a 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 
E)  None of these. 
A)  N 
B)  N2 
C)  N2- N 
D)  N2- N/2 
E)  None of these.

Question 9

A portfolio is made up of 75% of stock 1,and 25% of stock 2. Stock 1 has a variance of .08,and stock 2 has a variance of .035. The covariance between the stocks is -.001. Calculate both the variance and the standard deviation of the portfolio.

Accepted Answer

σ² = (.75)²(.08) + (.2

Question 10

The standard deviation of a portfolio will tend to increase when:

Accepted Answer

A)  a risky asset in the portfolio is replaced with U.S. Treasury bills. 
B)  one of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry. 
C)  the portfolio concentration in a single cyclical industry increases. 
D)  the weights of the various diverse securities become more evenly distributed. 
E)  short-term bonds are replaced with Treasury Bills. 
A)  a risky asset in the portfolio is replaced with U.S. Treasury bills. 
B)  one of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry. 
C)  the portfolio concentration in a single cyclical industry increases. 
D)  the weights of the various diverse securities become more evenly distributed. 
E)  short-term bonds are replaced with Treasury Bills.

Question 11

Your portfolio is comprised of 20% of stock X,70% of stock Y,and 10% of stock Z. Stock X has a beta of .82,stock Y has a beta of 1.62,and stock Z has a beta of 1.08. What is the beta of your portfolio?

Accepted Answer

A)  1.02 
B)  1.17 
C)  1.25 
D)  1.32 
E)  1.41 
A)  1.02 
B)  1.17 
C)  1.25 
D)  1.32 
E)  1.41

Question 12

The expected return on a stock that is computed using economic probabilities is:

Accepted Answer

A)  guaranteed to equal the actual average return on the stock for the next five years. 
B)  guaranteed to be the minimal rate of return on the stock over the next two years. 
C)  guaranteed to equal the actual return for the immediate twelve month period. 
D)  a mathematical expectation based on a weighted average and not an actual anticipated outcome. 
E)  the actual return you will receivE. 
A)  guaranteed to equal the actual average return on the stock for the next five years. 
B)  guaranteed to be the minimal rate of return on the stock over the next two years. 
C)  guaranteed to equal the actual return for the immediate twelve month period. 
D)  a mathematical expectation based on a weighted average and not an actual anticipated outcome. 
E)  the actual return you will receivE.

Question 13

The efficient set of portfolios:

Accepted Answer

A)  contains the portfolio combinations with the highest return for a given level of risk. 
B)  contains the portfolio combinations with the lowest risk for a given level of return. 
C)  is the lowest overall risk portfolio. 
D)  Both contains the portfolio combinations with the highest return for a given level of risk; and contains the portfolio combinations with the lowest risk for a given level of return. 
E)  Both contains the portfolio combinations with the highest return for a given level of risk; and is the lowest overall risk portfolio. 
A)  contains the portfolio combinations with the highest return for a given level of risk. 
B)  contains the portfolio combinations with the lowest risk for a given level of return. 
C)  is the lowest overall risk portfolio. 
D)  Both contains the portfolio combinations with the highest return for a given level of risk; and contains the portfolio combinations with the lowest risk for a given level of return. 
E)  Both contains the portfolio combinations with the highest return for a given level of risk; and is the lowest overall risk portfolio.

Question 14

What is the expected return on a portfolio which is invested 20% in stock A,50% in stock B,and 30% in stock C?

Accepted Answer

A)  7.40% 
B)  8.25% 
C)  8.33% 
D)  9.45% 
E)  9.50% 
A)  7.40% 
B)  8.25% 
C)  8.33% 
D)  9.45% 
E)  9.50%

Question 15

The risk-free rate of return is 5% and the market risk premium is 7%. What is the expected rate of return on a stock with a beta of 1.56?

Accepted Answer

A)  10.23% 
B)  11.08% 
C)  12.00% 
D)  15.92% 
E)  16.36% 
A)  10.23% 
B)  11.08% 
C)  12.00% 
D)  15.92% 
E)  16.36%

Question 16

A well-diversified portfolio has eliminated most of the:

Accepted Answer

A)  expected return. 
B)  unsystematic risk. 
C)  systematic risk. 
D)  variance. 
E)  Both systematic risk; and variancE. 
A)  expected return. 
B)  unsystematic risk. 
C)  systematic risk. 
D)  variance. 
E)  Both systematic risk; and variancE.

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

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

Which one of the following statements is correct concerning the standard deviation of a portfolio?

Which one of the following is an example of a nondiversifiable risk?

What is the beta of a portfolio comprised of the following securities?

The diagram below represents an opportunity set for a two asset combination. Indicate the correct efficient set with labels; explain why it is so.

The correlation between stocks A and B is the:

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

A portfolio is made up of 75% of stock 1,and 25% of stock 2. Stock 1 has a variance of .08,and stock 2 has a variance of .035. The covariance between the stocks is -.001. Calculate both the variance and the standard deviation of the portfolio.

The standard deviation of a portfolio will tend to increase when:

Your portfolio is comprised of 20% of stock X,70% of stock Y,and 10% of stock Z. Stock X has a beta of .82,stock Y has a beta of 1.62,and stock Z has a beta of 1.08. What is the beta of your portfolio?

The expected return on a stock that is computed using economic probabilities is:

The efficient set of portfolios:

What is the expected return on a portfolio which is invested 20% in stock A,50% in stock B,and 30% in stock C?

The risk-free rate of return is 5% and the market risk premium is 7%. What is the expected rate of return on a stock with a beta of 1.56?

A well-diversified portfolio has eliminated most of the:

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

Filters

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