Question 1

The capital asset line (CAL) relates:

Accepted Answer

A)  Total risk to the expected holding period return of a portfolio 
B)  Systematic risk to the required return 
C)  Total risk to the return investors require 
D)  Total risk to the systematic risk 
E)  None of the above 
A)  Total risk to the expected holding period return of a portfolio 
B)  Systematic risk to the required return 
C)  Total risk to the return investors require 
D)  Total risk to the systematic risk 
E)  None of the above

Question 2

Given the beta and expected return of ALL of the following assets, which of the following asset bundles could NOT be found on the security market line? Assume the risk free asset has an expected return of 4%.

$$\begin{array} { l c c } 
\text { Asset Bundle } & \text { Beta } & \text { Expected Return } \
\text { Market Portfolio } & 1.00 & 12 \% \
\text { Bundle ABC } & 0.50 & 8 \% \
\text { Bundle AEP } & 1.50 & 14 \% \
\text { Bundle KAM } & 0.75 & 10 \%
\end{array}$$

Accepted Answer

A)  The Market Portfolio 
B)  Bundle ABC 
C)  Bundle AEP 
D)  Bundle KAM 
E)  All of the above would found on the security market line 
A)  The Market Portfolio 
B)  Bundle ABC 
C)  Bundle AEP 
D)  Bundle KAM 
E)  All of the above would found on the security market line

Question 3

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has a beta of 1.50, what is the weight of the stock in the portfolio?

Accepted Answer

A)  105% 
B)  111% 
C)  126% 
D)  119% 
E)  115% 
A)  105% 
B)  111% 
C)  126% 
D)  119% 
E)  115%

Question 4

An asset that plots below the security market line:

Accepted Answer

A)  is inefficient. 
B)  is underpriced. 
C)  has a return that is too high for its level of total risk. 
D)  is overpriced. 
E)  has a return that is too low for its level of systematic risk. 
A)  is inefficient. 
B)  is underpriced. 
C)  has a return that is too high for its level of total risk. 
D)  is overpriced. 
E)  has a return that is too low for its level of systematic risk.

Question 5

The capital asset pricing model can be applied to:

Accepted Answer

A)  stocks. 
B)  bonds. 
C)  portfolios. 
D)  international stocks. 
E)  all assets. 
A)  stocks. 
B)  bonds. 
C)  portfolios. 
D)  international stocks. 
E)  all assets.

Question 6

The slope of the security market line is:

Accepted Answer

A)  greater for high beta stocks. 
B)  generally downward sloping. 
C)  always the same. 
D)  the same as the market risk premium. 
E)  similar to the yield curve. 
A)  greater for high beta stocks. 
B)  generally downward sloping. 
C)  always the same. 
D)  the same as the market risk premium. 
E)  similar to the yield curve.

Question 7

Answer the following two questions about portfolio risk and return. Assume all weights are positive.
 1) Can the return of a portfolio ever be lower than the lowest return on an individual security in the portfolio?
2) Can the variance of a portfolio ever be lower than the lowest variance of an individual security in the portfolio?

Accepted Answer

A)  1) yes; 2) yes 
B)  1) yes; 2) no 
C)  1) no; 2) yes 
D)  1) no; 2) no 
E)  1) maybe; 2) no 
A)  1) yes; 2) yes 
B)  1) yes; 2) no 
C)  1) no; 2) yes 
D)  1) no; 2) no 
E)  1) maybe; 2) no

Question 8

In an efficient market, which of the following is/are the same for all assets in the market?
I. The market risk premium.
II. The beta.
III. The reward-to-risk ratio.
IV. The risk-free rate.

Accepted Answer

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

Question 9

Explain what it means for all assets to have the same reward-to-risk ratio. How can you increase your return if this holds true?
 Why would we expect that all assets have the same reward-to-risk ratio in liquid, well-functioning markets?

Accepted Answer

If every asset has the same reward-to-ri

Question 10

Beta values for a particular security will vary depending upon I. The interval of time frequency used for the data sample.
II) The length of the time period used for the data sample.
III) The particular time period selected.
IV) The index selected as the measure of the market.

Accepted Answer

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

Question 11

Stock X has a beta of 0.87 and an expected return of 10.4%. Stock Y has a beta of 1.1 and an expected return of 12.2%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

Accepted Answer

A)  2.50% 
B)  4.38% 
C)  3.59% 
D)  3.94% 
E)  3.09% 
A)  2.50% 
B)  4.38% 
C)  3.59% 
D)  3.94% 
E)  3.09%

Question 12

The risk of owning a security comes from

Accepted Answer

A)  Expected news 
B)  Surprises 
C)  Anticipated events 
D)  Predictable announcement 
E)  Expected returns 
A)  Expected news 
B)  Surprises 
C)  Anticipated events 
D)  Predictable announcement 
E)  Expected returns

Question 13

Which one of the following must be equal for two individual securities with differing betas if those securities are correctly priced according to the capital asset pricing model?

Accepted Answer

A)  standard deviation 
B)  rate of return 
C)  beta 
D)  risk premium 
E)  reward-to-risk ratio 
A)  standard deviation 
B)  rate of return 
C)  beta 
D)  risk premium 
E)  reward-to-risk ratio

Question 14

The systematic portion of an asset's return is given by which of the following?

Accepted Answer

A)  $\beta$[RM - E(RM)] 
B)  $\beta$[E(R) - E(RM)] 
C)  $\beta$[R - E(RM)] 
D)  $\beta$[RM - E(R)] 
E)  $\beta$[E(R) - RM] 
A)  $\beta$[RM - E(RM)] 
B)  $\beta$[E(R) - E(RM)] 
C)  $\beta$[R - E(RM)] 
D)  $\beta$[RM - E(R)] 
E)  $\beta$[E(R) - RM]

Question 15

A risky asset has a beta of 1.64 and the expected return of 18.8%. What is the risk-free rate if the reward-to-risk ratio is 7%?

Accepted Answer

A)  7.50% 
B)  7.32% 
C)  5.73% 
D)  6.94% 
E)  7.09% 
A)  7.50% 
B)  7.32% 
C)  5.73% 
D)  6.94% 
E)  7.09%

Question 16

Which of the following has the highest expected risk premium?

Accepted Answer

A)  Stock portfolio has a beta of 0.99 
B)  Risk-free Treasury securities 
C)  Individual stock with a beta of 0.67 
D)  A stock fund with a beta of 1.38 
E)  Individual stock with a beta of 1.22 
A)  Stock portfolio has a beta of 0.99 
B)  Risk-free Treasury securities 
C)  Individual stock with a beta of 0.67 
D)  A stock fund with a beta of 1.38 
E)  Individual stock with a beta of 1.22

Question 17

$\begin{array}{c}
\begin{array}{c}
\underline{\text { Year }} \
1 \
2 \
3 \
4
\end{array}
\begin{array}{c}
\underline{\text {Stock X}}\
-27 \% \
6 \% \
34 \%\
11\%
\end{array}
\begin{array}{c}
\underline{\text { Market } }\
-7 \% \
11 \% \
18 \% \
10\%
\end{array}
\end{array}$

-The market has a standard deviation of 13.6% while a risky stock has a standard deviation of 22.4%. The covariance of the stock with the market is 0.012. What is the beta of the stock?

Accepted Answer

A)  1.05 
B)  -1.27 
C)  0.49 
D)  0.38 
E)  0.65 
A)  1.05 
B)  -1.27 
C)  0.49 
D)  0.38 
E)  0.65

Question 18

In the capital asset pricing model, the market is comprised of:

Accepted Answer

A)  all TSX stocks. 
B)  all Nasdaq stocks. 
C)  all NYSE and Nasdaq stocks. 
D)  all NYSE, Nasdaq, and TSX stocks. 
E)  all risky assets. 
A)  all TSX stocks. 
B)  all Nasdaq stocks. 
C)  all NYSE and Nasdaq stocks. 
D)  all NYSE, Nasdaq, and TSX stocks. 
E)  all risky assets.

Question 19

$\begin{array}{llcc}
  \text {Expected return on the market   } &13\%  \
 \text { Standard deviation of the market } &21\%\
 \text {  Risk-free rate} &5.5\%\
\text { Correlation coefficient between }&\
\text { Stock A and the market } & 0.65 \
\text { Stock B and the market } & 0.28 \
\text { Standard deviation of Stock A } & 64 \% \
\text { Standard deviation of Stock B } & 53 \%
\end{array}$

-What is the beta of Stock B?

Accepted Answer

A)  0.71 
B)  0.89 
C)  0.78 
D)  0.84 
E)  0.93 
A)  0.71 
B)  0.89 
C)  0.78 
D)  0.84 
E)  0.93

Question 20

The CAPM:

Accepted Answer

A)  uses the risk free rate of return and the efficient market portfolio to estimate risk. 
B)  considers the sensitivity of a stock to different risk factors to calculate risk. 
C)  uses the expected return on a given security to determine its overall risk. 
D)  measures the amount of unsystemic risk to determine the expected return of a stock 
E)  All of these answers are correct 
A)  uses the risk free rate of return and the efficient market portfolio to estimate risk. 
B)  considers the sensitivity of a stock to different risk factors to calculate risk. 
C)  uses the expected return on a given security to determine its overall risk. 
D)  measures the amount of unsystemic risk to determine the expected return of a stock 
E)  All of these answers are correct

The capital asset line (CAL) relates:

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has a beta of 1.50, what is the weight of the stock in the portfolio?

An asset that plots below the security market line:

The capital asset pricing model can be applied to:

The slope of the security market line is:

In an efficient market, which of the following is/are the same for all assets in the market? I. The market risk premium. II. The beta. III. The reward-to-risk ratio. IV. The risk-free rate.

Explain what it means for all assets to have the same reward-to-risk ratio. How can you increase your return if this holds true? Why would we expect that all assets have the same reward-to-risk ratio in liquid, well-functioning markets?

Beta values for a particular security will vary depending upon I. The interval of time frequency used for the data sample. II) The length of the time period used for the data sample. III) The particular time period selected. IV) The index selected as the measure of the market.

Stock X has a beta of 0.87 and an expected return of 10.4%. Stock Y has a beta of 1.1 and an expected return of 12.2%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

The risk of owning a security comes from

Which one of the following must be equal for two individual securities with differing betas if those securities are correctly priced according to the capital asset pricing model?

The systematic portion of an asset's return is given by which of the following?

A risky asset has a beta of 1.64 and the expected return of 18.8%. What is the risk-free rate if the reward-to-risk ratio is 7%?

Which of the following has the highest expected risk premium?

1 2 3 4 -27\% 6\% 34\% 11\% -7\% 11\% 18\% 10\% -The market has a standard deviation of 13.6% while a risky stock has a standard deviation of 22.4%. The covariance of the stock with the market is 0.012. What is the beta of the stock?

In the capital asset pricing model, the market is comprised of:

Expected return on the market 13\% Standard deviation of the market 21\% Risk-free rate 5.5\% Correlation coefficient between Stock A and the market 0.65 Stock B and the market 0.28 Standard deviation of Stock A 64\% Standard deviation of Stock B 53\% -What is the beta of Stock B?

The CAPM:

A Brief History of Risk and Return

Diversification and Risky Asset Allocation

The Investment Process

Overview of Security Types

Mutual Funds

The Stock Market

Common Stock Valuation

Stock Price Behaviour and Market Efficiency

Behavioural Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Performance Evaluation and Risk Management

Options

Option Valuation

Futures Contracts

Projecting Cash Flow and Earnings

Corporate Bonds

Government Bonds and Mortgaged-Backed Securities

International Portfolio Investment

Filters

Exam 12: Return, Risk and Security Management

The capital asset line (CAL) relates:

A stock has a beta of 1.30 and an expected return of 16 percent. The risk-free rate is 5 percent. If a portfolio of the two assets has a beta of 1.50, what is the weight of the stock in the portfolio?

An asset that plots below the security market line:

The capital asset pricing model can be applied to:

The slope of the security market line is:

In an efficient market, which of the following is/are the same for all assets in the market? I. The market risk premium. II. The beta. III. The reward-to-risk ratio. IV. The risk-free rate.

Explain what it means for all assets to have the same reward-to-risk ratio. How can you increase your return if this holds true? Why would we expect that all assets have the same reward-to-risk ratio in liquid, well-functioning markets?

Beta values for a particular security will vary depending upon I. The interval of time frequency used for the data sample. II) The length of the time period used for the data sample. III) The particular time period selected. IV) The index selected as the measure of the market.

Stock X has a beta of 0.87 and an expected return of 10.4%. Stock Y has a beta of 1.1 and an expected return of 12.2%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

The risk of owning a security comes from

Which one of the following must be equal for two individual securities with differing betas if those securities are correctly priced according to the capital asset pricing model?

The systematic portion of an asset's return is given by which of the following?

A risky asset has a beta of 1.64 and the expected return of 18.8%. What is the risk-free rate if the reward-to-risk ratio is 7%?

Which of the following has the highest expected risk premium?

1 2 3 4 -27\% 6\% 34\% 11\% -7\% 11\% 18\% 10\% -The market has a standard deviation of 13.6% while a risky stock has a standard deviation of 22.4%. The covariance of the stock with the market is 0.012. What is the beta of the stock?

In the capital asset pricing model, the market is comprised of:

Expected return on the market 13\% Standard deviation of the market 21\% Risk-free rate 5.5\% Correlation coefficient between Stock A and the market 0.65 Stock B and the market 0.28 Standard deviation of Stock A 64\% Standard deviation of Stock B 53\% -What is the beta of Stock B?

The CAPM:

A Brief History of Risk and Return

Diversification and Risky Asset Allocation

The Investment Process

Overview of Security Types

Mutual Funds

The Stock Market

Common Stock Valuation

Stock Price Behaviour and Market Efficiency

Behavioural Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Performance Evaluation and Risk Management

Options

Option Valuation

Futures Contracts

Projecting Cash Flow and Earnings

Corporate Bonds

Government Bonds and Mortgaged-Backed Securities

International Portfolio Investment

Filters