Question 1

A portfolio is:

Accepted Answer

A) a group of assets,such as shares and bonds,held as a collective unit by an investor. 
B) the expected return on a risky asset. 
C) the expected return on a collection of risky assets. 
D) the variance of returns for a risky asset. 
E) the standard deviation of returns for a collection of risky assets. 
A) a group of assets,such as shares and bonds,held as a collective unit by an investor. 
B) the expected return on a risky asset. 
C) the expected return on a collection of risky assets. 
D) the variance of returns for a risky asset. 
E) the standard deviation of returns for a collection of risky assets.

Question 2

If the correlation between two shares is +1,then a portfolio combining these two shares will have a variance that is:

Accepted Answer

A) less than the weighted average of the two individual variances. 
B) greater than the weighted average of the two individual variances. 
C) equal to the weighted average of the two individual variances. 
D) less than or equal to average variance of the two weighted variances,depending on other information. 
E) None of the above. 
A) less than the weighted average of the two individual variances. 
B) greater than the weighted average of the two individual variances. 
C) equal to the weighted average of the two individual variances. 
D) less than or equal to average variance of the two weighted variances,depending on other information. 
E) None of the above.

Question 3

The excess return earned by an asset that has a beta of 1.0 over that earned by a risk- free asset is referred to as the:

Accepted Answer

A) market rate of return. 
B) market risk premium. 
C) systematic return. 
D) total return. 
E) real rate of return. 
A) market rate of return. 
B) market risk premium. 
C) systematic return. 
D) total return. 
E) real rate of return.

Question 4

When a security is added to a portfolio the appropriate return and risk contributions are:

Accepted Answer

A) the expected return of the asset and its standard deviation. 
B) the expected return and the variance. 
C) the expected return and the beta. 
D) the historical return and the beta. 
E) these both can not be measured. 
A) the expected return of the asset and its standard deviation. 
B) the expected return and the variance. 
C) the expected return and the beta. 
D) the historical return and the beta. 
E) these both can not be measured.

Question 5

You recently purchased a share that is expected to earn 12% in a booming economy,8% in a normal economy and lose 5% in a recessionary economy.There is a 15% probability of a boom,a 75% chance of a normal economy,and a 10% chance of a recession.What is your expected rate of return on this share?

Accepted Answer

A) 5.00% 
B) 6.45% 
C) 7.30% 
D) 7.65% 
E) 8.30% 
A) 5.00% 
B) 6.45% 
C) 7.30% 
D) 7.65% 
E) 8.30%

Question 6

Kurt's Adventures SA equity is quite cyclical.In a boom economy,the equity is expected to return 30% in comparison to 12% in a normal economy and a negative 20% in a recessionary period.The probability of a recession is 15%.There is a 30% chance of a boom economy.The remainder of the time,the economy will be at normal levels.What is the standard deviation of the returns on Kurt's Adventures SA?

Accepted Answer

A) 10.05% 
B) 12.60% 
C) 15.83% 
D) 17.46% 
E) 25.04% 
A) 10.05% 
B) 12.60% 
C) 15.83% 
D) 17.46% 
E) 25.04%

Question 7

What is the standard deviation of a portfolio which is invested 20% in share A,30% in share B and 50% in share C?
$\begin{array}{|l|l|l|l|l|} 
\hline
& & \begin{array}{l}
\text { Returns if } \
\text { State } \
\text { Occurs }
\end{array}& &{} \
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { ShareA } & \text { ShareB } & \text { Share C } \
\hline \text { Boom } & 10 \% & 15 \% & 10 \% & 5 \% \
\hline \text { Normal } & 70 \% & 9 \% & 6 \% & 7 \% \
\hline \text { Recession } & 20 \% & -14 \% & 2 \% & 8 \%\
\hline
\end{array}$

Accepted Answer

A) 0.6% 
B) 0.9% 
C) 1.8% 
D) 2.2% 
E) 4.9% 
A) 0.6% 
B) 0.9% 
C) 1.8% 
D) 2.2% 
E) 4.9%

Question 8

Why are some risks diversifiable and some nondiversifiable?
 Give an example of each.

Accepted Answer

A reasonable answer would,at a minimum,e

Question 9

You want your portfolio beta to be 1.20.Currently,your portfolio consists of €100 invested in share A with a beta of 1.4 and €300 in share B with a beta of .6.You have another €400 to invest and want to divide it between an asset with a beta of 1.6 and a risk-free asset.How much should you invest in the risk-free asset?

Accepted Answer

A) €0 
B) €140 
C) €200 
D) €320 
E) €400 
A) €0 
B) €140 
C) €200 
D) €320 
E) €400

Question 10

What is the portfolio variance if 30% is invested in share S and 70% is invested in share T?
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$Returns if
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$State Occurs
$\begin{array}{|l|l|l|l|}
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { ShareS } & \text { Share T } \
\hline \text { Boom } & 40 \% & 12 \% & 20 \% \
\hline \text { Normal } & 60 \% & 6 \% & 4 \% \
\hline
\end{array}$

Accepted Answer

A) .002220 
B) .004056 
C) .006224 
D) .008080 
E) .098000 
A) .002220 
B) .004056 
C) .006224 
D) .008080 
E) .098000

Question 11

The market has an expected rate of return of 9.8%.The long-term government bond is expected to yield 4.5% and Treasury bills are expected to yield 3.4%.The inflation rate is 3.1%.What is the market risk premium?

Accepted Answer

A) 2.2% 
B) 3.3% 
C) 5.3% 
D) 6.4% 
E) 6.7% 
A) 2.2% 
B) 3.3% 
C) 5.3% 
D) 6.4% 
E) 6.7%

Question 12

What is the variance of a portfolio consisting of €3,500 in share G and €6,500 in share H?
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$Returns if
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$State Occurs
$\begin{array}{|l|l|l|l|}
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { ShareG } & \text { Share H } \
\hline \text { Boom } & 15 \% & 15 \% & 9 \% \
\hline \text { Normal } & 85 \% & 3 \% & 6 \% \
\hline
\end{array}$

Accepted Answer

A) .000209 
B) .000247 
C) .002098 
D) .037026 
E) .073600 
A) .000209 
B) .000247 
C) .002098 
D) .037026 
E) .073600

Question 13

What is the standard deviation of a portfolio which is comprised of €4,500 invested in share S and €3,000 in share T?
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$Returns if
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad$State Occurs
$\begin{array}{|l|l|l|l|}
\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { ShareS } & \text { Share T } \
\hline \text { Boom } & 10 \% & 12 \% & 4 \% \
\hline \text { Normal } & 65 \% & 9 \% & 6 \% \
\hline \text { Recession } & 25 \% & 2 \% & 9 \% \
\hline
\end{array}$

Accepted Answer

A) 1.4% 
B) 1.9% 
C) 2.6% 
D) 5.7% 
E) 7.2% 
A) 1.4% 
B) 1.9% 
C) 2.6% 
D) 5.7% 
E) 7.2%

Question 14

You have a portfolio consisting solely of share A and shareb.The portfolio has an expected return of 10.2%.Share A has an expected return of 12% while share B is expected to return 7%.What is the portfolio weight of share A?

Accepted Answer

A) 46% 
B) 54% 
C) 58% 
D) 64% 
E) 70% 
A) 46% 
B) 54% 
C) 58% 
D) 64% 
E) 70%

Question 15

A portfolio will usually contain:

Accepted Answer

A) one riskless asset. 
B) one risky asset. 
C) two or more assets. 
D) no assets. 
E) None of the above. 
A) one riskless asset. 
B) one risky asset. 
C) two or more assets. 
D) no assets. 
E) None of the above.

Question 16

The principle of diversification tells us that:

Accepted Answer

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

Question 17

The equity of Flavorful Teas has an expected return of 14.4%.The return on the market is 10% and the risk-free rate of return is 3.5%.What is the beta?

Accepted Answer

A) .65 
B) 1.09 
C) 1.32 
D) 1.44 
E) 1.68 
A) .65 
B) 1.09 
C) 1.32 
D) 1.44 
E) 1.68

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

A portfolio is:

If the correlation between two shares is +1,then a portfolio combining these two shares will have a variance that is:

The excess return earned by an asset that has a beta of 1.0 over that earned by a risk- free asset is referred to as the:

When a security is added to a portfolio the appropriate return and risk contributions are:

You recently purchased a share that is expected to earn 12% in a booming economy,8% in a normal economy and lose 5% in a recessionary economy.There is a 15% probability of a boom,a 75% chance of a normal economy,and a 10% chance of a recession.What is your expected rate of return on this share?

What is the standard deviation of a portfolio which is invested 20% in share A,30% in share B and 50% in share C? Returns if State Occurs State of Economy Probability of State of Economy ShareA ShareB Share C Boom 10\% 15\% 10\% 5\% Normal 70\% 9\% 6\% 7\% Recession 20\% -14\% 2\% 8\%

Why are some risks diversifiable and some nondiversifiable? Give an example of each.

The market has an expected rate of return of 9.8%.The long-term government bond is expected to yield 4.5% and Treasury bills are expected to yield 3.4%.The inflation rate is 3.1%.What is the market risk premium?

You have a portfolio consisting solely of share A and shareb.The portfolio has an expected return of 10.2%.Share A has an expected return of 12% while share B is expected to return 7%.What is the portfolio weight of share A?

A portfolio will usually contain:

The principle of diversification tells us that:

The equity of Flavorful Teas has an expected return of 14.4%.The return on the market is 10% and the risk-free rate of return is 3.5%.What is the beta?

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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