Question 1

What is the expected return on this portfolio?

Accepted Answer

A) 11.48 percent 
B) 11.92 percent 
C) 13.03 percent 
D) 13.42 percent 
E) 13.97 percent 
A) 11.48 percent 
B) 11.92 percent 
C) 13.03 percent 
D) 13.42 percent 
E) 13.97 percent

Question 2

Which one of the following is a risk that applies to most securities?

Accepted Answer

A) unsystematic 
B) diversifiable 
C) systematic 
D) asset-specific 
E) total 
A) unsystematic 
B) diversifiable 
C) systematic 
D) asset-specific 
E) total

Question 3

Which one of the following statements is correct concerning unsystematic risk?

Accepted Answer

A) An investor is rewarded for assuming unsystematic risk. 
B) Eliminating unsystematic risk is the responsibility of the individual investor. 
C) Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. 
D) Beta measures the level of unsystematic risk inherent in an individual security. 
E) Standard deviation is a measure of unsystematic risk. 
A) An investor is rewarded for assuming unsystematic risk. 
B) Eliminating unsystematic risk is the responsibility of the individual investor. 
C) Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. 
D) Beta measures the level of unsystematic risk inherent in an individual security. 
E) Standard deviation is a measure of unsystematic risk.

Question 4

The intercept point of the security market line is the rate of return which corresponds to:

Accepted Answer

A) the risk-free rate. 
B) the market rate. 
C) a return of zero. 
D) a return of 1.0 percent. 
E) the market risk premium. 
A) the risk-free rate. 
B) the market rate. 
C) a return of zero. 
D) a return of 1.0 percent. 
E) the market risk premium.

Question 5

Explain how the beta of a portfolio can equal the market beta if 50 percent of the portfolio is invested in a security that has twice the amount of systematic risk as an average risky security.

Accepted Answer

An average risky security has a beta of

Question 6

The returns on the common stock of New Image Products are quite cyclical. In a boom economy, the stock is expected to return 32 percent in comparison to 14 percent in a normal economy and a negative 28 percent in a recessionary period. The probability of a recession is 25 percent while the probability of a boom is 10 percent. What is the standard deviation of the returns on this stock?

Accepted Answer

A) 19.94 percent 
B) 21.56 percent 
C) 25.83 percent 
D) 32.08 percent 
E) 39.77 percent 
A) 19.94 percent 
B) 21.56 percent 
C) 25.83 percent 
D) 32.08 percent 
E) 39.77 percent

Question 7

Which of the following statements concerning risk are correct?
I. Nondiversifiable risk is measured by beta.
II. The risk premium increases as diversifiable risk increases.
III. Systematic risk is another name for nondiversifiable risk.
IV. Diversifiable risks are market risks you cannot avoid.

Accepted Answer

A) I and III only 
B) II and IV only 
C) I and II only 
D) III and IV only 
E) I, II, and III only 
A) I and III only 
B) II and IV only 
C) I and II only 
D) III and IV only 
E) I, II, and III only

Question 8

The principle of diversification tells us that:

Accepted Answer

A) concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. 
B) concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. 
C) spreading an investment across five diverse companies will not lower the total risk. 
D) spreading an investment across many diverse assets will eliminate all of the systematic risk. 
E) spreading an investment across many diverse assets will eliminate some of the total risk. 
A) concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. 
B) concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. 
C) spreading an investment across five diverse companies will not lower the total risk. 
D) spreading an investment across many diverse assets will eliminate all of the systematic risk. 
E) spreading an investment across many diverse assets will eliminate some of the total risk.

Question 9

Which one of the following indicates 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 10

A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent. What type of risk does this news flash represent?

Accepted Answer

A) portfolio 
B) nondiversifiable 
C) market 
D) unsystematic 
E) total 
A) portfolio 
B) nondiversifiable 
C) market 
D) unsystematic 
E) total

Question 11

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium is 8.8 percent?

Accepted Answer

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

Question 12

You want your portfolio beta to be 0.95. Currently, your portfolio consists of $4,000 invested in stock A with a beta of 1.47 and $3,000 in stock B with a beta of 0.54. You have another $9,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in the risk-free asset?

Accepted Answer

A) $4,316.08 
B) $4,425.29 
C) $4,902.29 
D) $4,574.71 
E) $4,683.92 
A) $4,316.08 
B) $4,425.29 
C) $4,902.29 
D) $4,574.71 
E) $4,683.92

Question 13

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?

Accepted Answer

A) beta 
B) reward-to-risk ratio 
C) risk ratio 
D) standard deviation 
E) price-earnings ratio 
A) beta 
B) reward-to-risk ratio 
C) risk ratio 
D) standard deviation 
E) price-earnings ratio

Question 14

Total risk is measured by _____ and systematic risk is measured by _____.

Accepted Answer

A) beta; alpha 
B) beta; standard deviation 
C) alpha; beta 
D) standard deviation; beta 
E) standard deviation; variance 
A) beta; alpha 
B) beta; standard deviation 
C) alpha; beta 
D) standard deviation; beta 
E) standard deviation; variance

Question 15

The capital asset pricing model (CAPM) assumes which of the following?
I. a risk-free asset has no systematic risk.
II. beta is a reliable estimate of total risk.
III. the reward-to-risk ratio is constant.
IV. the market rate of return can be approximated.

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 16

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?

Accepted Answer

A) variance 
B) standard deviation 
C) reward-to-risk ratio 
D) beta 
E) risk premium 
A) variance 
B) standard deviation 
C) reward-to-risk ratio 
D) beta 
E) risk premium

Question 17

Your portfolio is invested 26 percent each in Stocks A and C, and 48 percent in Stock B. What is the standard deviation of your portfolio given the following information?

Accepted Answer

A) 12.38 percent 
B) 12.64 percent 
C) 12.72 percent 
D) 12.89 percent 
E) 13.73 percent 
A) 12.38 percent 
B) 12.64 percent 
C) 12.72 percent 
D) 12.89 percent 
E) 13.73 percent

Question 18

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

Accepted Answer

A) portfolio return 
B) portfolio weight 
C) degree of risk 
D) price-earnings ratio 
E) index value 
A) portfolio return 
B) portfolio weight 
C) degree of risk 
D) price-earnings ratio 
E) index value

Question 19

Suppose you observe the following situation:   Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21. What is the expected market risk premium?

Accepted Answer

A) 8.8 percent 
B) 9.5 percent 
C) 12.6 percent 
D) 17.9 percent 
E) 20.0 percent 
A) 8.8 percent 
B) 9.5 percent 
C) 12.6 percent 
D) 17.9 percent 
E) 20.0 percent

Question 20

Systematic risk is measured by:

Accepted Answer

A) the mean. 
B) beta. 
C) the geometric average. 
D) the standard deviation. 
E) the arithmetic average. 
A) the mean. 
B) beta. 
C) the geometric average. 
D) the standard deviation. 
E) the arithmetic average.

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

What is the expected return on this portfolio?

Which one of the following is a risk that applies to most securities?

Which one of the following statements is correct concerning unsystematic risk?

The intercept point of the security market line is the rate of return which corresponds to:

Explain how the beta of a portfolio can equal the market beta if 50 percent of the portfolio is invested in a security that has twice the amount of systematic risk as an average risky security.

Which of the following statements concerning risk are correct? I. Nondiversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for nondiversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.

The principle of diversification tells us that:

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

A news flash just appeared that caused about a dozen stocks to suddenly drop in value by about 20 percent. What type of risk does this news flash represent?

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium is 8.8 percent?

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset?

Total risk is measured by _____ and systematic risk is measured by _____.

The capital asset pricing model (CAPM) assumes which of the following? I. a risk-free asset has no systematic risk. II. beta is a reliable estimate of total risk. III. the reward-to-risk ratio is constant. IV. the market rate of return can be approximated.

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?

Your portfolio is invested 26 percent each in Stocks A and C, and 48 percent in Stock B. What is the standard deviation of your portfolio given the following information?

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

Suppose you observe the following situation: Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21. What is the expected market risk premium?

Systematic risk is measured by:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Dividend Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Risk Management: An Introduction to Financial Engineering

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters

Total risk is measured by _ and systematic risk is measured by _.