Question 1

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 2

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 3

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy.Given the probabilities of each state of the economy occurring,you anticipate that your stock will earn 6.5 percent next year.Which one of the following terms applies to this 6.5 percent?

Accepted Answer

A) arithmetic return 
B) historical return 
C) expected return 
D) geometric return 
E) required return 
A) arithmetic return 
B) historical return 
C) expected return 
D) geometric return 
E) required return

Question 4

Your portfolio is comprised of 40 percent of stock X,15 percent of stock Y,and 45 percent of stock Z.Stock X has a beta of 1.16,stock Y has a beta of 1.47,and stock Z has a beta of 0.42.What is the beta of your portfolio?

Accepted Answer

A) 0.87 
B) 1.09 
C) 1.13 
D) 1.18 
E) 1.21 
A) 0.87 
B) 1.09 
C) 1.13 
D) 1.18 
E) 1.21

Question 5

Which one of the following statements is correct?

Accepted Answer

A) The unexpected return is always negative. 
B) The expected return minus the unexpected return is equal to the total return. 
C) Over time, the average return is equal to the unexpected return. 
D) The expected return includes the surprise portion of news announcements. 
E) Over time, the average unexpected return will be zero. 
A) The unexpected return is always negative. 
B) The expected return minus the unexpected return is equal to the total return. 
C) Over time, the average return is equal to the unexpected return. 
D) The expected return includes the surprise portion of news announcements. 
E) Over time, the average unexpected return will be zero.

Question 6

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

Accepted Answer

A) 15.49 percent; 14.28 percent 
B) 15.49 percent; 14.67 percent 
C) 18.80 percent; 14.95 percent 
D) 18.80 percent; 15.74 percent 
E) 18.80 percent'; 16.01 percent 
A) 15.49 percent; 14.28 percent 
B) 15.49 percent; 14.67 percent 
C) 18.80 percent; 14.95 percent 
D) 18.80 percent; 15.74 percent 
E) 18.80 percent'; 16.01 percent

Question 7

At a minimum,which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset?
I.asset's standard deviation
II.asset's beta
III.risk-free rate of return
IV.market risk premium

Accepted Answer

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

Question 8

The standard deviation of a portfolio:

Accepted Answer

A) is a measure of that portfolio's systematic risk. 
B) is a weighed average of the standard deviations of the individual securities held in that portfolio. 
C) measures the amount of diversifiable risk inherent in the portfolio. 
D) serves as the basis for computing the appropriate risk premium for that portfolio. 
E) can be less than the weighted average of the standard deviations of the individual securities held in that portfolio. 
A) is a measure of that portfolio's systematic risk. 
B) is a weighed average of the standard deviations of the individual securities held in that portfolio. 
C) measures the amount of diversifiable risk inherent in the portfolio. 
D) serves as the basis for computing the appropriate risk premium for that portfolio. 
E) can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

Question 9

According to CAPM,the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

Accepted Answer

A) amount of total risk assumed and the market risk premium. 
B) market risk premium and the amount of systematic risk inherent in the security. 
C) risk free rate, the market rate of return, and the standard deviation of the security. 
D) beta of the security and the market rate of return. 
E) standard deviation of the security and the risk-free rate of return. 
A) amount of total risk assumed and the market risk premium. 
B) market risk premium and the amount of systematic risk inherent in the security. 
C) risk free rate, the market rate of return, and the standard deviation of the security. 
D) beta of the security and the market rate of return. 
E) standard deviation of the security and the risk-free rate of return.

Question 10

The expected return on a portfolio considers which of the following factors?
I.percentage of the portfolio invested in each individual security
II.projected states of the economy
III.the performance of each security given various economic states
IV.probability of occurrence for each state of the economy

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 11

The standard deviation of a portfolio:

Accepted Answer

A) is a weighted average of the standard deviations of the individual securities held in the portfolio. 
B) can never be less than the standard deviation of the most risky security in the portfolio. 
C) must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. 
D) is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. 
E) can be less than the standard deviation of the least risky security in the portfolio. 
A) is a weighted average of the standard deviations of the individual securities held in the portfolio. 
B) can never be less than the standard deviation of the most risky security in the portfolio. 
C) must be equal to or greater than the lowest standard deviation of any single security held in the portfolio. 
D) is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio. 
E) can be less than the standard deviation of the least risky security in the portfolio.

Question 12

The expected return on JK stock is 15.78 percent while the expected return on the market is 11.34 percent.The stock's beta is 1.51.What is the risk-free rate of return?

Accepted Answer

A) 2.22 percent 
B) 2.31 percent 
C) 2.42 percent 
D) 2.50 percent 
E) 2.63 percent 
A) 2.22 percent 
B) 2.31 percent 
C) 2.42 percent 
D) 2.50 percent 
E) 2.63 percent

Question 13

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 14

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 15

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 16

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 17

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 18

The systematic risk of the market is measured by:

Accepted Answer

A) a beta of 1.0. 
B) a beta of 0.0. 
C) a standard deviation of 1.0. 
D) a standard deviation of 0.0. 
E) a variance of 1.0. 
A) a beta of 1.0. 
B) a beta of 0.0. 
C) a standard deviation of 1.0. 
D) a standard deviation of 0.0. 
E) a variance of 1.0.

Question 19

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.

Accepted Answer

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

Question 20

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

Accepted Answer

A) interest rates increase 
B) energy costs increase 
C) core inflation increases 
D) a firm's sales decrease 
E) taxes decrease 
A) interest rates increase 
B) energy costs increase 
C) core inflation increases 
D) a firm's sales decrease 
E) taxes decrease

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

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

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?

Your portfolio is comprised of 40 percent of stock X,15 percent of stock Y,and 45 percent of stock Z.Stock X has a beta of 1.16,stock Y has a beta of 1.47,and stock Z has a beta of 0.42.What is the beta of your portfolio?

Which one of the following statements is correct?

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

At a minimum,which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? I.asset's standard deviation II.asset's beta III.risk-free rate of return IV.market risk premium

The standard deviation of a portfolio:

According to CAPM,the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

The standard deviation of a portfolio:

The expected return on JK stock is 15.78 percent while the expected return on the market is 11.34 percent.The stock's beta is 1.51.What is the risk-free rate of return?

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

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?

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?

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 systematic risk of the market is measured by:

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

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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