Question 1

A stock has an expected return of 11 percent,the risk-free rate is 5.2 percent,and the market risk premium is 5 percent.What is the stock's beta?

Accepted Answer

A) 1.08 
B) 1.16 
C) 1.29 
D) 1.32 
E) 1.35 
A) 1.08 
B) 1.16 
C) 1.29 
D) 1.32 
E) 1.35

Question 2

A portfolio beta is a weighted average of the betas of the individual securities which comprise the portfolio.However,the standard deviation is not a weighted average of the standard deviations of the individual securities which comprise the portfolio.Explain why this difference exists.

Accepted Answer

Standard deviation measures total risk.T

Question 3

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 4

You have a $12,000 portfolio which is invested in stocks A and B,and a risk-free asset.$5,000 is invested in stock A.Stock A has a beta of 1.76 and stock B has a beta of 0.89.How much needs to be invested in stock B if you want a portfolio beta of 1.10?

Accepted Answer

A)  $3,750.00 
B)  $4,333.33 
C)  $4,706.20 
D)  $4,943.82 
E)  $5,419.27 
A)  $3,750.00 
B)  $4,333.33 
C)  $4,706.20 
D)  $4,943.82 
E)  $5,419.27

Question 5

You own a portfolio with the following expected returns given the various states of the economy.What is the overall portfolio expected return?

Accepted Answer

A) 6.49 percent 
B) 8.64 percent 
C) 8.87 percent 
D) 9.86 percent 
E) 10.23 percent 
A) 6.49 percent 
B) 8.64 percent 
C) 8.87 percent 
D) 9.86 percent 
E) 10.23 percent

Question 6

Which one of the following events would be included in the expected return on Sussex stock?

Accepted Answer

A) The chief financial officer of Sussex unexpectedly resigned. 
B) The labor union representing Sussex' employees unexpectedly called a strike. 
C) This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. 
D) The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. 
E) The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending. 
A) The chief financial officer of Sussex unexpectedly resigned. 
B) The labor union representing Sussex' employees unexpectedly called a strike. 
C) This morning, Sussex confirmed that its CEO is retiring at the end of the year as was anticipated. 
D) The price of Sussex stock suddenly declined in value because researchers accidentally discovered that one of the firm's products can be toxic to household pets. 
E) The board of directors made an unprecedented decision to give sizeable bonuses to the firm's internal auditors for their efforts in uncovering wasteful spending.

Question 7

The primary purpose of portfolio diversification is to:

Accepted Answer

A) increase returns and risks. 
B) eliminate all risks. 
C) eliminate asset-specific risk. 
D) eliminate systematic risk. 
E) lower both returns and risks. 
A) increase returns and risks. 
B) eliminate all risks. 
C) eliminate asset-specific risk. 
D) eliminate systematic risk. 
E) lower both returns and risks.

Question 8

What is the standard deviation of the returns on a portfolio that is invested in stocks A,B,and C? Twenty five percent of the portfolio is invested in stock A and 40 percent is invested in stock C.

Accepted Answer

A) 6.31 percent 
B) 6.49 percent 
C) 7.40 percent 
D) 7.83 percent 
E)  8.72 percent 
A) 6.31 percent 
B) 6.49 percent 
C) 7.40 percent 
D) 7.83 percent 
E)  8.72 percent

Question 9

What is the expected return on this portfolio?

Accepted Answer

A) 11.48 percent 
B) 12.37 percent 
C) 13.03 percent 
D) 13.42 percent 
E) 13.97 percent 
A) 11.48 percent 
B) 12.37 percent 
C) 13.03 percent 
D) 13.42 percent 
E) 13.97 percent

Question 10

The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B.Stock A has a beta of 0.82 and stock B has a beta of 1.29.This information implies that:

Accepted Answer

A)  stock A is riskier than stock B and both stocks are fairly priced. 
B)  stock A is less risky than stock B and both stocks are fairly priced. 
C)  either stock A is underpriced or stock B is overpriced or both. 
D)  either stock A is overpriced or stock B is underpriced or both. 
E)  both stock A and stock B are correctly priced since stock A is riskier than stock B. 
A)  stock A is riskier than stock B and both stocks are fairly priced. 
B)  stock A is less risky than stock B and both stocks are fairly priced. 
C)  either stock A is underpriced or stock B is overpriced or both. 
D)  either stock A is overpriced or stock B is underpriced or both. 
E)  both stock A and stock B are correctly priced since stock A is riskier than stock B.

Question 11

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 12

If the economy is normal,Charleston Freight stock is expected to return 16.5 percent.If the economy falls into a recession,the stock's return is projected at a negative 11.6 percent.The probability of a normal economy is 80 percent while the probability of a recession is 20 percent.What is the variance of the returns on this stock?

Accepted Answer

A) 0.010346 
B) 0.012634 
C) 0.013420 
D) 0.013927 
E) 0.014315 
A) 0.010346 
B) 0.012634 
C) 0.013420 
D) 0.013927 
E) 0.014315

Question 13

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

Accepted Answer

A) 13.99 percent 
B) 14.42 percent 
C) 14.67 percent 
D) 14.78 percent 
E) 15.01 percent 
A) 13.99 percent 
B) 14.42 percent 
C) 14.67 percent 
D) 14.78 percent 
E) 15.01 percent

Question 14

What is the beta of the following portfolio?

Accepted Answer

A) .95 
B) 1.01 
C) 1.05 
D) 1.09 
E) 1.23 
A) .95 
B) 1.01 
C) 1.05 
D) 1.09 
E) 1.23

Question 15

A stock has a beta of 1.2 and an expected return of 17 percent.A risk-free asset currently earns 5.1 percent.The beta of a portfolio comprised of these two assets is 0.85.What percentage of the portfolio is invested in the stock?

Accepted Answer

A) 71 percent 
B) 77 percent 
C) 84 percent 
D) 89 percent 
E) 92 percent 
A) 71 percent 
B) 77 percent 
C) 84 percent 
D) 89 percent 
E) 92 percent

Question 16

Your portfolio is invested 30 percent each in Stocks A and C,and 40 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)  13.97 percent 
A) 12.38 percent 
B) 12.64 percent 
C) 12.72 percent 
D) 12.89 percent 
E)  13.97 percent

Question 17

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

Accepted Answer

A) Portfolio betas range between -1.0 and +1.0. 
B) A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. 
C) A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification. 
D) A portfolio of U.S. Treasury bills will have a beta of +1.0. 
E) The beta of a market portfolio is equal to zero. 
A) Portfolio betas range between -1.0 and +1.0. 
B) A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio. 
C) A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification. 
D) A portfolio of U.S. Treasury bills will have a beta of +1.0. 
E) The beta of a market portfolio is equal to zero.

Question 18

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 19

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 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

A stock has an expected return of 11 percent,the risk-free rate is 5.2 percent,and the market risk premium is 5 percent.What is the stock's beta?

A portfolio beta is a weighted average of the betas of the individual securities which comprise the portfolio.However,the standard deviation is not a weighted average of the standard deviations of the individual securities which comprise the portfolio.Explain why this difference exists.

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.

You have a $12,000 portfolio which is invested in stocks A and B,and a risk-free asset.$5,000 is invested in stock A.Stock A has a beta of 1.76 and stock B has a beta of 0.89.How much needs to be invested in stock B if you want a portfolio beta of 1.10?

You own a portfolio with the following expected returns given the various states of the economy.What is the overall portfolio expected return?

Which one of the following events would be included in the expected return on Sussex stock?

The primary purpose of portfolio diversification is to:

What is the standard deviation of the returns on a portfolio that is invested in stocks A,B,and C? Twenty five percent of the portfolio is invested in stock A and 40 percent is invested in stock C.

What is the expected return on this portfolio?

The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B.Stock A has a beta of 0.82 and stock B has a beta of 1.29.This information implies that:

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?

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

What is the beta of the following portfolio?

A stock has a beta of 1.2 and an expected return of 17 percent.A risk-free asset currently earns 5.1 percent.The beta of a portfolio comprised of these two assets is 0.85.What percentage of the portfolio is invested in the stock?

Your portfolio is invested 30 percent each in Stocks A and C,and 40 percent in Stock B.What is the standard deviation of your portfolio given the following information?

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

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

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:

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 Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

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