Question 1

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

Accepted Answer

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

Question 2

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in the

Accepted Answer

A) capital market line that shows that investors will only invest in the riskless asset. 
B) capital market line that shows that investors will invest in a combination of the riskless asset and the tangency portfolio. 
C) security market line that shows that all investors will invest in the riskless asset only. 
D) security market line that shows that all investors will invest in a combination of the riskless asset and the tangency portfolio. 
E) capital market line that shows that investors will invest at the vertical intercept point of that line. 
A) capital market line that shows that investors will only invest in the riskless asset. 
B) capital market line that shows that investors will invest in a combination of the riskless asset and the tangency portfolio. 
C) security market line that shows that all investors will invest in the riskless asset only. 
D) security market line that shows that all investors will invest in a combination of the riskless asset and the tangency portfolio. 
E) capital market line that shows that investors will invest at the vertical intercept point of that line. B

Question 3

The market price of ABC stock is most apt to be affected by which one of these events?

Accepted Answer

A) Twenty-five percent increase in interest rates,just as expected 
B) The sudden passing of ABC's CEO 
C) An increase in ABC's annual dividend by the same percentage as last year's increase 
D) The completion of ABC's new distribution center,right on schedule 
E) An increase in ABC's payroll costs,in line with current inflation 
A) Twenty-five percent increase in interest rates,just as expected 
B) The sudden passing of ABC's CEO 
C) An increase in ABC's annual dividend by the same percentage as last year's increase 
D) The completion of ABC's new distribution center,right on schedule 
E) An increase in ABC's payroll costs,in line with current inflation B

Question 4

Stock A has an expected return of 16 percent,and stock B has an expected return of 8 percent.However,the risk of stock A as measured by its variance is 3.2 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) 11.50% 
B) 9.50% 
C) 12.00% 
D) 8.25% 
E) 14.10% 
A) 11.50% 
B) 9.50% 
C) 12.00% 
D) 8.25% 
E) 14.10%

Question 5

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 6

You recently purchased a stock that is expected to earn 12 percent in a booming economy,9 percent in a normal economy,and lose 15 percent in a recessionary economy.The probabilities of a boom,a normal economy,and a recession are 18,75,and 7 percent,respectively.What is your expected rate of return on this stock?

Accepted Answer

A) 7.93% 
B) 7.45% 
C) 7.86% 
D) 7.75% 
E) 7.68% 
A) 7.93% 
B) 7.45% 
C) 7.86% 
D) 7.75% 
E) 7.68%

Question 7

The market risk of a portfolio of two stocks will be reduced the most if the securities within that portfolio have a correlation of

Accepted Answer

A) −1 
B) −0.5 
C) 0 
D) 0.5 
E) 1 
A) −1 
B) −0.5 
C) 0 
D) 0.5 
E) 1

Question 8

A portfolio consists of five securities that have individual betas of 1.38,0.87,1.02,1.49,and 0.67.You do not know the portfolio weight of each security.What do you know with certainty?

Accepted Answer

A) The portfolio beta will not be affected by any change in the portfolio weights. 
B) The portfolio beta will not change if an additional security with a beta of 1 is added to the portfolio. 
C) The portfolio beta will be greater than the market beta. 
D) The portfolio beta will be less than 1.49 and greater than 0.67. 
E) The optimal portfolio beta for any investor must be greater than 0 and less than 1. 
A) The portfolio beta will not be affected by any change in the portfolio weights. 
B) The portfolio beta will not change if an additional security with a beta of 1 is added to the portfolio. 
C) The portfolio beta will be greater than the market beta. 
D) The portfolio beta will be less than 1.49 and greater than 0.67. 
E) The optimal portfolio beta for any investor must be greater than 0 and less than 1.

Question 9

Which one of these statements is correct regarding a portfolio of two risky securities?

Accepted Answer

A) Both the rate of return and the standard deviation of a portfolio can be changed by changing the portfolio weights. 
B) The opportunity set is represented by a forward bending curve when expected returns are graphed against standard deviation. 
C) Diversification occurs when the correlation between two securities is +1. 
D) The standard deviation of a portfolio cannot be lower than the weighted average standard deviation of the securities held within the portfolio. 
E) The minimum variance portfolio of two stocks also represents the portfolio's highest possible rate of return. 
A) Both the rate of return and the standard deviation of a portfolio can be changed by changing the portfolio weights. 
B) The opportunity set is represented by a forward bending curve when expected returns are graphed against standard deviation. 
C) Diversification occurs when the correlation between two securities is +1. 
D) The standard deviation of a portfolio cannot be lower than the weighted average standard deviation of the securities held within the portfolio. 
E) The minimum variance portfolio of two stocks also represents the portfolio's highest possible rate of return.

Question 10

Assume the risk-free rate of return is 6.5 percent and the market rate of return is 11.2 percent.Stock A with a beta of 0.88 and an expected return of 9.79 percent; Stock B with a beta of 1.26 and an expected return of 11.36 percent; Stock C with a beta of 1.47 and an expected return of 12.28 percent; Stock D with a beta of 0.79 and an expected return of 10.61 percent.Which one of the following stocks,if any,is correctly priced according to CAPM?

Accepted Answer

A) Stock A 
B) Stock B 
C) Stock C 
D) Stock D 
E) None of the stocks are correctly priced according to CAPM. 
A) Stock A 
B) Stock B 
C) Stock C 
D) Stock D 
E) None of the stocks are correctly priced according to CAPM.

Question 11

PPO stock has a beta of 0.97 and an expected return of 11.22 percent.The risk-free rate of return is 2.48 percent.What is the expected return on the market?

Accepted Answer

A) 11.85% 
B) 13.04% 
C) 11.62% 
D) 11.49% 
E) 12.16% 
A) 11.85% 
B) 13.04% 
C) 11.62% 
D) 11.49% 
E) 12.16%

Question 12

A portfolio has a beta of 1.27.The portfolio consists of 25 percent U.S.Treasury bills,38 percent Stock A,and 37 percent Stock B.Stock A has a risk level equivalent to that of the overall market.What is the beta of Stock B?

Accepted Answer

A) 1.54 
B) 1.49 
C) 2.02 
D) 1.79 
E) 2.41 
A) 1.54 
B) 1.49 
C) 2.02 
D) 1.79 
E) 2.41

Question 13

Amy has a portfolio with a beta of 1.26 but has decided to lower her investment risk.Adding which one of the following securities to her portfolio is most assuredly going to lower the risk of the portfolio?

Accepted Answer

A) A stock that has a covariance with the market of 0.89 
B) A security that has a standard deviation of 11 percent 
C) A security with a beta of 1.58 
D) U.S.Treasury bills 
E) A mix of small-company and large-company stocks 
A) A stock that has a covariance with the market of 0.89 
B) A security that has a standard deviation of 11 percent 
C) A security with a beta of 1.58 
D) U.S.Treasury bills 
E) A mix of small-company and large-company stocks

Question 14

The market risk premium is computed by

Accepted Answer

A) adding the risk-free rate of return to the inflation rate. 
B) adding the risk-free rate of return to the market rate of return. 
C) subtracting the risk-free rate of return from the inflation rate. 
D) subtracting the risk-free rate of return from the market rate of return. 
E) multiplying the risk-free rate of return by a beta of one. 
A) adding the risk-free rate of return to the inflation rate. 
B) adding the risk-free rate of return to the market rate of return. 
C) subtracting the risk-free rate of return from the inflation rate. 
D) subtracting the risk-free rate of return from the market rate of return. 
E) multiplying the risk-free rate of return by a beta of one.

Question 15

Unsystematic risk

Accepted Answer

A) can be effectively eliminated through portfolio diversification. 
B) is measured by beta. 
C) is compensated for by the risk premium. 
D) is nondiversifiable. 
E) is related to the overall economy. 
A) can be effectively eliminated through portfolio diversification. 
B) is measured by beta. 
C) is compensated for by the risk premium. 
D) is nondiversifiable. 
E) is related to the overall economy.

Question 16

Angelo anticipates earning a rate of return of 11.4 percent on his portfolio next year.The 11.4 percent is referred to as the

Accepted Answer

A) expected return. 
B) future return. 
C) holding period return. 
D) actual return. 
E) average return. 
A) expected return. 
B) future return. 
C) holding period return. 
D) actual return. 
E) average return.

Question 17

You would like to combine a risky stock with a beta of 1.87 with U.S.Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in the risky asset?

Accepted Answer

A) 46.29% 
B) 53.48% 
C) 50.55% 
D) 47.45% 
E) 57.08% 
A) 46.29% 
B) 53.48% 
C) 50.55% 
D) 47.45% 
E) 57.08%

Question 18

The probabilities of an economic boom,normal economy,and a recession are 15 percent,83 percent,and 2 percent,respectively.For these economic states,Stock A has deviations from its expected returns of −0.03,0.01,and 0.02 for the three economic states respectively.Stock B has deviations from its expected returns of 0.15,0.06,and −0.09 for the three economic states,respectively.What is the covariance of the two stocks?

Accepted Answer

A) 0.02049 
B) 0.02143 
C) -0.00021 
D) 0.00116 
E) -0.01054 
A) 0.02049 
B) 0.02143 
C) -0.00021 
D) 0.00116 
E) -0.01054

Question 19

The excess return earned by an asset that has a beta of one over that earned by a risk-free asset is referred to as the

Accepted Answer

A) market rate of return. 
B) systematic return. 
C) real rate of return. 
D) market risk premium. 
E) total return. 
A) market rate of return. 
B) systematic return. 
C) real rate of return. 
D) market risk premium. 
E) total return.

Question 20

A portfolio consists of 33 percent of Stock X,52 percent of Stock Y,and 15 percent of Stock Z.Stock X has a beta of 0.94,Stock Y has a beta of 1.21,and Stock Z has a beta of 1.08.What is the portfolio beta?

Accepted Answer

A) 1.012 
B) 1.111 
C) 1.117 
D) 1.124 
E) 1.101 
A) 1.012 
B) 1.111 
C) 1.117 
D) 1.124 
E) 1.101

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

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in the

The market price of ABC stock is most apt to be affected by which one of these events?

Stock A has an expected return of 16 percent,and stock B has an expected return of 8 percent.However,the risk of stock A as measured by its variance is 3.2 times that of stock B.If the two stocks are combined equally in a portfolio,what would be the portfolio's expected return?

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

The market risk of a portfolio of two stocks will be reduced the most if the securities within that portfolio have a correlation of

A portfolio consists of five securities that have individual betas of 1.38,0.87,1.02,1.49,and 0.67.You do not know the portfolio weight of each security.What do you know with certainty?

Which one of these statements is correct regarding a portfolio of two risky securities?

PPO stock has a beta of 0.97 and an expected return of 11.22 percent.The risk-free rate of return is 2.48 percent.What is the expected return on the market?

A portfolio has a beta of 1.27.The portfolio consists of 25 percent U.S.Treasury bills,38 percent Stock A,and 37 percent Stock B.Stock A has a risk level equivalent to that of the overall market.What is the beta of Stock B?

Amy has a portfolio with a beta of 1.26 but has decided to lower her investment risk.Adding which one of the following securities to her portfolio is most assuredly going to lower the risk of the portfolio?

The market risk premium is computed by

Unsystematic risk

Angelo anticipates earning a rate of return of 11.4 percent on his portfolio next year.The 11.4 percent is referred to as the

You would like to combine a risky stock with a beta of 1.87 with U.S.Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in the risky asset?

The excess return earned by an asset that has a beta of one over that earned by a risk-free asset is referred to as the

A portfolio consists of 33 percent of Stock X,52 percent of Stock Y,and 15 percent of Stock Z.Stock X has a beta of 0.94,Stock Y has a beta of 1.21,and Stock Z has a beta of 1.08.What is the portfolio beta?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

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

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

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in the

The market price of ABC stock is most apt to be affected by which one of these events?

Stock A has an expected return of 16 percent,and stock B has an expected return of 8 percent.However,the risk of stock A as measured by its variance is 3.2 times that of stock B.If the two stocks are combined equally in a portfolio,what would be the portfolio's expected return?

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

The market risk of a portfolio of two stocks will be reduced the most if the securities within that portfolio have a correlation of

A portfolio consists of five securities that have individual betas of 1.38,0.87,1.02,1.49,and 0.67.You do not know the portfolio weight of each security.What do you know with certainty?

Which one of these statements is correct regarding a portfolio of two risky securities?

PPO stock has a beta of 0.97 and an expected return of 11.22 percent.The risk-free rate of return is 2.48 percent.What is the expected return on the market?

A portfolio has a beta of 1.27.The portfolio consists of 25 percent U.S.Treasury bills,38 percent Stock A,and 37 percent Stock B.Stock A has a risk level equivalent to that of the overall market.What is the beta of Stock B?

Amy has a portfolio with a beta of 1.26 but has decided to lower her investment risk.Adding which one of the following securities to her portfolio is most assuredly going to lower the risk of the portfolio?

The market risk premium is computed by

Unsystematic risk

Angelo anticipates earning a rate of return of 11.4 percent on his portfolio next year.The 11.4 percent is referred to as the

You would like to combine a risky stock with a beta of 1.87 with U.S.Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in the risky asset?

The excess return earned by an asset that has a beta of one over that earned by a risk-free asset is referred to as the

A portfolio consists of 33 percent of Stock X,52 percent of Stock Y,and 15 percent of Stock Z.Stock X has a beta of 0.94,Stock Y has a beta of 1.21,and Stock Z has a beta of 1.08.What is the portfolio beta?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

Filters