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

The expected return on a portfolio: I. can never exceed the expected return of the best performing security in the portfolio. II. must be equal to or greater than the expected return of the worst performing security in the portfolio. III. is independent of the unsystematic risks of the individual securities held in the portfolio. IV. is independent of the allocation of the portfolio amongst individual securities.

The rate of return on the common stock of Lancaster Woolens is expected to be 21 percent in a boom economy, 11 percent in a normal economy, and only 3 percent in a recessionary economy. The probabilities of these economic states are 10 percent for a boom, 70 percent for a normal economy, and 20 percent for a recession. What is the variance of the returns on this common stock?

Which one of the following statements is correct?

What is the expected return and standard deviation for the following stock?

Your portfolio has a beta of 1.12. The portfolio consists of 20 percent U.S. Treasury bills, 50 percent stock A, and 30 percent stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B?

If a stock portfolio is well diversified, then the portfolio variance:

Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:

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

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

Which one of the following is the best example of a diversifiable risk?

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

Consider the following information on three stocks: A portfolio is invested 35 percent each in Stock A and Stock B and 30 percent in Stock C. What is the expected risk premium on the portfolio if the expected T-bill rate is 3.8 percent?

The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent. What is the expected rate of return on a stock with a beta of 1.21?

You own a portfolio that has $2,000 invested in Stock A and $1,400 invested in Stock B. The expected returns on these stocks are 14 percent and 9 percent, respectively. What is the expected return on the portfolio?

The standard deviation of a portfolio:

Consider the following information on Stocks I and II: The market risk premium is 8 percent, and the risk-free rate is 3.6 percent. The beta of stock I is _____ and the beta of stock II is _____.

The market risk premium is computed by:

Which one of the following is least apt to reduce the unsystematic risk of a portfolio?

The market has an expected rate of return of 10.7 percent. The long-term government bond is expected to yield 5.8 percent and the U.S. Treasury bill is expected to yield 3.9 percent. The inflation rate is 3.6 percent. What is the market risk premium?

Suppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, what is the return on the market?