Question 1

What is the variance of the returns on a portfolio that is invested 60 percent in stock S and 40 percent in stock T?

Accepted Answer

A) .000017 
B) .000023 
C) .000118 
D) .000136 
E) .000161 
A) .000017 
B) .000023 
C) .000118 
D) .000136 
E) .000161

Question 2

You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected return of 8.7 percent. Stock A has an expected return of 11.4 percent while stock B is expected to return 6.4 percent. What is the portfolio weight of stock A?

Accepted Answer

A)  39 percent 
B)  46 percent 
C)  54 percent 
D)  61 percent 
E)  67 percent 
A)  39 percent 
B)  46 percent 
C)  54 percent 
D)  61 percent 
E)  67 percent

Question 3

The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent. The risk-free rate of return is 3.7 percent. What is the expected market risk premium?

Accepted Answer

A) 7.02 percent 
B) 7.90 percent 
C) 10.63 percent 
D) 11.22 percent 
E) 11.60 percent 
A) 7.02 percent 
B) 7.90 percent 
C) 10.63 percent 
D) 11.22 percent 
E) 11.60 percent

Question 4

The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock:

Accepted Answer

A) is underpriced. 
B) is correctly priced. 
C) will plot below the security market line. 
D) will plot on the security market line. 
E) will plot to the right of the overall market on a security market line graph. 
A) is underpriced. 
B) is correctly priced. 
C) will plot below the security market line. 
D) will plot on the security market line. 
E) will plot to the right of the overall market on a security market line graph.

Question 5

Explain how the slope of the security market line is determined and why every stock that is correctly priced, according to CAPM, will lie on this line.

Accepted Answer

The market risk premium is the slope of

Question 6

Unsystematic risk:

Accepted Answer

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

Question 7

Which one of the following should earn the most risk premium based on CAPM?

Accepted Answer

A) diversified portfolio with returns similar to the overall market 
B) stock with a beta of 1.38 
C) stock with a beta of 0.74 
D) U.S.Treasury bill 
E) portfolio with a beta of 1.01 
A) diversified portfolio with returns similar to the overall market 
B) stock with a beta of 1.38 
C) stock with a beta of 0.74 
D) U.S.Treasury bill 
E) portfolio with a beta of 1.01

Question 8

What is the expected return of an equally weighted portfolio comprised of the following three stocks?

Accepted Answer

A) 16.33 percent 
B) 18.60 percent 
C) 19.67 percent 
D) 20.48 percent 
E) 21.33 percent 
A) 16.33 percent 
B) 18.60 percent 
C) 19.67 percent 
D) 20.48 percent 
E) 21.33 percent

Question 9

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?

Accepted Answer

A) Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. 
B) The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. 
C) Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. 
D) The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified. 
E) Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero. 
A) Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market. 
B) The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved. 
C) Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio. 
D) The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified. 
E) Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.

Question 10

What is the standard deviation of the returns on a $30,000 portfolio which consists of stocks S and T? Stock S is valued at $12,000.

Accepted Answer

A) 1.07 percent 
B) 1.22 percent 
C) 1.36 percent 
D) 1.49 percent 
E) 1.63 percent 
A) 1.07 percent 
B) 1.22 percent 
C) 1.36 percent 
D) 1.49 percent 
E) 1.63 percent

Question 11

You own the following portfolio of stocks. What is the portfolio weight of stock C?

Accepted Answer

A) 39.85 percent 
B) 42.86 percent 
C) 44.41 percent 
D) 48.09 percent 
E) 52.65 percent 
A) 39.85 percent 
B) 42.86 percent 
C) 44.41 percent 
D) 48.09 percent 
E) 52.65 percent

Question 12

Jerilu Markets has a beta of 1.09. The risk-free rate of return is 2.75 percent and the market rate of return is 9.80 percent. What is the risk premium on this stock?

Accepted Answer

A) 6.47 percent 
B) 7.03 percent 
C) 7.68 percent 
D) 8.99 percent 
E) 9.80 percent 
A) 6.47 percent 
B) 7.03 percent 
C) 7.68 percent 
D) 8.99 percent 
E) 9.80 percent

Question 13

Which one of the following statements related to unexpected returns is correct?

Accepted Answer

A) All announcements by a firm affect that firm's unexpected returns. 
B) Unexpected returns over time have a negative effect on the total return of a firm. 
C) Unexpected returns are relatively predictable in the short-term. 
D) Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. 
E) Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term. 
A) All announcements by a firm affect that firm's unexpected returns. 
B) Unexpected returns over time have a negative effect on the total return of a firm. 
C) Unexpected returns are relatively predictable in the short-term. 
D) Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term. 
E) Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.

Question 14

Which one of the following risks is irrelevant to a well-diversified investor?

Accepted Answer

A) systematic risk 
B) unsystematic risk 
C) market risk 
D) nondiversifiable risk 
E) systematic portion of a surprise 
A) systematic risk 
B) unsystematic risk 
C) market risk 
D) nondiversifiable risk 
E) systematic portion of a surprise

Question 15

You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.9 and the total portfolio is equally as risky as the market. What is the beta of the second stock?

Accepted Answer

A) 0.75 
B) 0.80 
C) 0.94 
D) 1.00 
E) 1.10 
A) 0.75 
B) 0.80 
C) 0.94 
D) 1.00 
E) 1.10

Question 16

What is the expected return on a portfolio which is invested 25 percent in stock A, 55 percent in stock B, and the remainder in stock C?

Accepted Answer

A) -1.06 percent 
B) 2.38 percent 
C) 2.99 percent 
D) 5.93 percent 
E) 6.10 percent 
A) -1.06 percent 
B) 2.38 percent 
C) 2.99 percent 
D) 5.93 percent 
E) 6.10 percent

Question 17

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

Accepted Answer

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

Question 18

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.2 percent and the market rate of return is 11.76 percent?

Accepted Answer

A) A 
B) B 
C) C 
D) D 
E) E 
A) A 
B) B 
C) C 
D) D 
E) E

Question 19

Standard deviation measures which type of risk?

Accepted Answer

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

Question 20

The expected return on a stock given various states of the economy is equal to the:

Accepted Answer

A) highest expected return given any economic state. 
B) arithmetic average of the returns for each economic state. 
C) summation of the individual expected rates of return. 
D) weighted average of the returns for each economic state. 
E) return for the economic state with the highest probability of occurrence. 
A) highest expected return given any economic state. 
B) arithmetic average of the returns for each economic state. 
C) summation of the individual expected rates of return. 
D) weighted average of the returns for each economic state. 
E) return for the economic state with the highest probability of occurrence.

Exam 13: Return, Risk, and the Security Market Line

What is the variance of the returns on a portfolio that is invested 60 percent in stock S and 40 percent in stock T?

You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected return of 8.7 percent. Stock A has an expected return of 11.4 percent while stock B is expected to return 6.4 percent. What is the portfolio weight of stock A?

The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent. The risk-free rate of return is 3.7 percent. What is the expected market risk premium?

The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock:

Explain how the slope of the security market line is determined and why every stock that is correctly priced, according to CAPM, will lie on this line.

Unsystematic risk:

Which one of the following should earn the most risk premium based on CAPM?

What is the expected return of an equally weighted portfolio comprised of the following three stocks?

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?

What is the standard deviation of the returns on a $30,000 portfolio which consists of stocks S and T? Stock S is valued at $12,000.

You own the following portfolio of stocks. What is the portfolio weight of stock C?

Jerilu Markets has a beta of 1.09. The risk-free rate of return is 2.75 percent and the market rate of return is 9.80 percent. What is the risk premium on this stock?

Which one of the following statements related to unexpected returns is correct?

Which one of the following risks is irrelevant to a well-diversified investor?

You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.9 and the total portfolio is equally as risky as the market. What is the beta of the second stock?

What is the expected return on a portfolio which is invested 25 percent in stock A, 55 percent in stock B, and the remainder in stock C?

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.2 percent and the market rate of return is 11.76 percent?

Standard deviation measures which type of risk?

The expected return on a stock given various states of the economy is equal to the:

Introduction to Corporate Finance

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Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

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Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

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Dividends and Dividend Policy

Short-Term Finance and Planning

Cash and Liquidity Management

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International Corporate Finance

Behavioral Finance: Implications for Financial Management

Risk Management: An Introduction to Financial Engineering

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