Question 1

Risk that affects a large number of assets,each to a greater or lesser degree,is called _____ risk.

Accepted Answer

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

Question 2

What is the expected return on this portfolio?
$\begin{array}{|l|l|l|l|}
\hline \text { Share } & \text { Expected Return } & \text { Number of Shares } & \text { SharePrice } \
\hline \text { A } & 8 \% & 520 & € 25 \
\hline \text { B } & 15 \% & 300 & € 48 \
\hline \text { C } & 6 \% & 250 & € 26 \
\hline
\end{array}$

Accepted Answer

A) 9.50% 
B) 9.67% 
C) 9.78% 
D) 10.59% 
E) 10.87% 
A) 9.50% 
B) 9.67% 
C) 9.78% 
D) 10.59% 
E) 10.87%

Question 3

Explain in words what beta is and why it is important.

Accepted Answer

This is a concept check question that re

Question 4

The elements in the off-diagonal positions of the variance/covariance matrix are:

Accepted Answer

A) covariances. 
B) security selections. 
C) variances. 
D) security weights. 
E) None of the above. 
A) covariances. 
B) security selections. 
C) variances. 
D) security weights. 
E) None of the above.

Question 5

You have a portfolio of two risky shares which turns out to have no diversification benefit.The reason you have no diversification is the returns:

Accepted Answer

A) are too small. 
B) move perfectly opposite of one another. 
C) are too large to offset. 
D) move perfectly with one another. 
E) are completely unrelated to one another. 
A) are too small. 
B) move perfectly opposite of one another. 
C) are too large to offset. 
D) move perfectly with one another. 
E) are completely unrelated to one another.

Question 6

The expected return on a portfolio:

Accepted Answer

A) can be greater than the expected return on the best performing security in the portfolio. 
B) can be less than the expected return on the worst performing security in the portfolio. 
C) is independent of the performance of the overall economy. 
D) is limited by the returns on the individual securities within the portfolio. 
E) is an arithmetic average of the returns of the individual securities when the weights of those securities are unequal. 
A) can be greater than the expected return on the best performing security in the portfolio. 
B) can be less than the expected return on the worst performing security in the portfolio. 
C) is independent of the performance of the overall economy. 
D) is limited by the returns on the individual securities within the portfolio. 
E) is an arithmetic average of the returns of the individual securities when the weights of those securities are unequal.

Question 7

You are considering purchasing share S.This share has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period.The overall expected rate of return on this share will:

Accepted Answer

A) be equal to one-half of 8% if there is a 50% chance of an economic boom. 
B) vary inversely with the growth of the economy. 
C) increase as the probability of a recession increases. 
D) be equal to 75% of 8% if there is a 75% chance of a boom economy. 
E) increase as the probability of a boom economy increases. 
A) be equal to one-half of 8% if there is a 50% chance of an economic boom. 
B) vary inversely with the growth of the economy. 
C) increase as the probability of a recession increases. 
D) be equal to 75% of 8% if there is a 75% chance of a boom economy. 
E) increase as the probability of a boom economy increases.

Question 8

An efficient set of portfolios is:

Accepted Answer

A) the complete opportunity set. 
B) the portion of the opportunity set below the minimum variance portfolio. 
C) only the minimum variance portfolio. 
D) the dominant portion of the opportunity set. 
E) only the maximum return portfolio. 
A) the complete opportunity set. 
B) the portion of the opportunity set below the minimum variance portfolio. 
C) only the minimum variance portfolio. 
D) the dominant portion of the opportunity set. 
E) only the maximum return portfolio.

Question 9

Draw the SML and plot asset C such that it has less risk than the market but plots above the SML,and asset D such that it has more risk than the market and plots below the SML.(Be sure to indicate where the market portfolio is on your graph.)Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium.

Accepted Answer

The student should correctly draw a SML

Question 10

Which one of the following is an example of unsystematic risk?

Accepted Answer

A) the inflation rate increases unexpectedly 
B) the federal government lowers income taxes 
C) an oil tanker runs aground and spills its cargo 
D) interest rates decline by one-half of one percent 
E) the GDP rises by 2% more than anticipated 
A) the inflation rate increases unexpectedly 
B) the federal government lowers income taxes 
C) an oil tanker runs aground and spills its cargo 
D) interest rates decline by one-half of one percent 
E) the GDP rises by 2% more than anticipated

Question 11

When shares with the same expected return are combined into a portfolio:

Accepted Answer

A) the expected return of the portfolio is less than the weighted average expected return of the shares. 
B) the expected return of the portfolio is greater than the weighted average expected return of the shares. 
C) the expected return of the portfolio is equal to the weighted average expected return of the shares. 
D) there is no relationship between the expected return of the portfolio and the expected return of the shares. 
E) None of the above. 
A) the expected return of the portfolio is less than the weighted average expected return of the shares. 
B) the expected return of the portfolio is greater than the weighted average expected return of the shares. 
C) the expected return of the portfolio is equal to the weighted average expected return of the shares. 
D) there is no relationship between the expected return of the portfolio and the expected return of the shares. 
E) None of the above.

Question 12

A portfolio has 25% of its funds invested in Security C and 75% of its funds invested in Securityd.Security C has an expected return of 8% and a standard deviation of 6.Security D has an expected return of 10% and a standard deviation of 10.The securities have a coefficient of correlation of 0.6.Which of the following values is closest to portfolio return and variance?

Accepted Answer

A) .090; .0081 
B) .095; .001675 
C) .095; .0072 
D) .100; .00849 
E) Cannot calculate without the number of covariance terms. 
A) .090; .0081 
B) .095; .001675 
C) .095; .0072 
D) .100; .00849 
E) Cannot calculate without the number of covariance terms.

Question 13

What is the expected return on a portfolio which is invested 20% in share A,50% in share B,and 30% in share C?
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$Rate of Retulil if
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$State Occur:
$\begin{array}{|l|l|l|l|l|}
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { Share A } & \text { Share B } & \text { Share C } \
\hline \text { Boom } & 20 \% & 18 \% & 9 \% & 5 \% \
\hline \text { Normal } & 70 \% & 11 \% & 7 \% & 9 \% \
\hline \text { Recession } & 10 \% & -10 \% & 4 \% & 13 \% \
\hline
\end{array}$

Accepted Answer

A) 7.40% 
B) 8.25% 
C) 8.33% 
D) 9.45% 
E) 9.50% 
A) 7.40% 
B) 8.25% 
C) 8.33% 
D) 9.45% 
E) 9.50%

Question 14

Beta measures:

Accepted Answer

A) the ability to diversify risk. 
B) how an asset covaries with the market. 
C) the actual return on an asset. 
D) the standard of the assets' returns. 
E) All of the above. 
A) the ability to diversify risk. 
B) how an asset covaries with the market. 
C) the actual return on an asset. 
D) the standard of the assets' returns. 
E) All of the above.

Question 15

The opportunity set of portfolios is:

Accepted Answer

A) all possible return combinations of those securities. 
B) all possible risk combinations of those securities. 
C) all possible risk-return combinations of those securities. 
D) the best or highest risk-return combination. 
E) the lowest risk-return combination. 
A) all possible return combinations of those securities. 
B) all possible risk combinations of those securities. 
C) all possible risk-return combinations of those securities. 
D) the best or highest risk-return combination. 
E) the lowest risk-return combination.

Question 16

If investors possess homogeneous expectations over all assets in the market portfolio,when riskless lending and borrowing is allowed,the market portfolio is defined to:

Accepted Answer

A) be the same portfolio of risky assets chosen by all investors. 
B) have the securities weighted by their market value proportions. 
C) be a diversified portfolio. 
D) All of the above. 
E) None of the above. 
A) be the same portfolio of risky assets chosen by all investors. 
B) have the securities weighted by their market value proportions. 
C) be a diversified portfolio. 
D) All of the above. 
E) None of the above.

Question 17

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

Accepted Answer

A) will equal the variance of the most volatile share in the portfolio. 
B) may be less than the variance of the least risky share in the portfolio. 
C) must be equal to or greater than the variance of the least risky share in the portfolio. 
D) will be a weighted average of the variances of the individual securities in the portfolio. 
E) will be an arithmetic average of the variance of the individual securities in the portfolio. 
A) will equal the variance of the most volatile share in the portfolio. 
B) may be less than the variance of the least risky share in the portfolio. 
C) must be equal to or greater than the variance of the least risky share in the portfolio. 
D) will be a weighted average of the variances of the individual securities in the portfolio. 
E) will be an arithmetic average of the variance of the individual securities in the portfolio.

Question 18

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 19

According to the CAPM:

Accepted Answer

A) the expected return on a security is negatively and non-linearly related to the security's beta. 
B) the expected return on a security is negatively and linearly related to the security's beta. 
C) the expected return on a security is positively and linearly related to the security's variance. 
D) the expected return on a security is positively and non-linearly related to the security's beta. 
E) the expected return on a security is positively and linearly related to the security's beta. 
A) the expected return on a security is negatively and non-linearly related to the security's beta. 
B) the expected return on a security is negatively and linearly related to the security's beta. 
C) the expected return on a security is positively and linearly related to the security's variance. 
D) the expected return on a security is positively and non-linearly related to the security's beta. 
E) the expected return on a security is positively and linearly related to the security's beta.

Question 20

A typical investor is assumed to be:

Accepted Answer

A) a fair gambler. 
B) a gambler. 
C) a single security holder. 
D) risk averse. 
E) risk neutral. 
A) a fair gambler. 
B) a gambler. 
C) a single security holder. 
D) risk averse. 
E) risk neutral.

Exam 10: Return and Risk: The Capital Asset Pricing Model Capm

Risk that affects a large number of assets,each to a greater or lesser degree,is called _____ risk.

What is the expected return on this portfolio? Share Expected Return Number of Shares SharePrice A 8\% 520 25 B 15\% 300 48 C 6\% 250 26

Explain in words what beta is and why it is important.

The elements in the off-diagonal positions of the variance/covariance matrix are:

You have a portfolio of two risky shares which turns out to have no diversification benefit.The reason you have no diversification is the returns:

The expected return on a portfolio:

You are considering purchasing share S.This share has an expected return of 8% if the economy booms and 3% if the economy goes into a recessionary period.The overall expected rate of return on this share will:

An efficient set of portfolios is:

Which one of the following is an example of unsystematic risk?

When shares with the same expected return are combined into a portfolio:

Beta measures:

The opportunity set of portfolios is:

If investors possess homogeneous expectations over all assets in the market portfolio,when riskless lending and borrowing is allowed,the market portfolio is defined to:

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

The primary purpose of portfolio diversification is to:

According to the CAPM:

A typical investor is assumed to be:

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis and Long-Term Planning

Discounted Cash Flow Valuation

How to Value Bonds and Shares

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Factor Models and the Arbitrage Pricing Theory

Risk, cost of Capital, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: An Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividend and Other Payouts

Equity Financing

Debt Financing

Leasing and Off-Balance-Sheet Financing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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