Question 1

Which one of the following is expressed as "E(RM) - Rf"?

Accepted Answer

A)  market risk premium 
B)  individual security risk premium 
C)  real rate of return 
D)  total expected rate of return 
E)  market rate of return 
A)  market risk premium 
B)  individual security risk premium 
C)  real rate of return 
D)  total expected rate of return 
E)  market rate of return

Question 2

Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent. The risk-free rate is 2.6 percent and the market risk premium is 6 percent. This stock is _____ because the CAPM return for the stock is _____ percent.

Accepted Answer

A)  undervalued; 7.34 
B)  undervalued; 7.49 
C)  undervalued; 7.64 
D)  overvalued; 7.34 
E)  overvalued; 7.49 
A)  undervalued; 7.34 
B)  undervalued; 7.49 
C)  undervalued; 7.64 
D)  overvalued; 7.34 
E)  overvalued; 7.49

Question 3

A stock has an expected return of 14.59 percent and a beta of 1.35. What is the risk-free rate if the market rate is 12.7 percent?

Accepted Answer

A)  6.48 percent 
B)  6.92 percent 
C)  7.01 percent 
D)  7.30 percent 
E)  7.90 percent 
A)  6.48 percent 
B)  6.92 percent 
C)  7.01 percent 
D)  7.30 percent 
E)  7.90 percent

Question 4

Which one of the following measures systematic risk?

Accepted Answer

A)  beta 
B)  alpha 
C)  variance 
D)  standard deviation 
E)  correlation coefficient 
A)  beta 
B)  alpha 
C)  variance 
D)  standard deviation 
E)  correlation coefficient

Question 5

Home Interior's stock has an expected return of 12.89 percent and a beta of 1.28. The market return is 10.7 percent and the risk-free rate is 2.8 percent. This stock is _____ because the CAPM return for the stock is _____ percent.

Accepted Answer

A)  greatly overvalued; 16.50 
B)  slightly overvalued; 12.91 
C)  priced correctly; 12.89 
D)  slightly undervalued; 12.91 
E)  greatly undervalued; 16.50 
A)  greatly overvalued; 16.50 
B)  slightly overvalued; 12.91 
C)  priced correctly; 12.89 
D)  slightly undervalued; 12.91 
E)  greatly undervalued; 16.50

Question 6

Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money, the reward for bearing systematic risk, and the amount of systematic risk?

Accepted Answer

A)  reward-to-risk theory 
B)  capital asset pricing model 
C)  risk premium proposal 
D)  market slope hypothesis 
E)  security market line proposition 
A)  reward-to-risk theory 
B)  capital asset pricing model 
C)  risk premium proposal 
D)  market slope hypothesis 
E)  security market line proposition

Question 7

A portfolio beta is computed as which one of the following?

Accepted Answer

A)  weighted average 
B)  arithmetic average 
C)  geometric average 
D)  correlated value 
E)  covariance value 
A)  weighted average 
B)  arithmetic average 
C)  geometric average 
D)  correlated value 
E)  covariance value

Question 8

Which one of the following betas represents the greatest level of systematic risk?

Accepted Answer

A)  .05 
B)  .68 
C)  1.00 
D)  1.19 
E)  1.27 
A)  .05 
B)  .68 
C)  1.00 
D)  1.19 
E)  1.27

Question 9

Which one of the following is the type of risk that only affects either a single firm or just a small number of firms?

Accepted Answer

A)  unexpected 
B)  market 
C)  systematic 
D)  unsystematic 
E)  expected 
A)  unexpected 
B)  market 
C)  systematic 
D)  unsystematic 
E)  expected

Question 10

A portfolio is comprised of two stocks. Stock A comprises 55 percent of the portfolio and has a beta of 1.31. Stock B has a beta of .98. What is the portfolio beta?

Accepted Answer

A)  .98 
B)  1.03 
C)  1.08 
D)  1.16 
E)  1.22 
A)  .98 
B)  1.03 
C)  1.08 
D)  1.16 
E)  1.22

Question 11

Which one of the following is the best example of a risk associated with stock ownership?

Accepted Answer

A)  The stock paid a regular quarterly dividend. 
B)  The firm's net income decreased by 4 percent for the quarter, as had been expected. 
C)  One of the firm's patent applications was unexpectedly rejected. 
D)  The firm's cost of debt increased as the result of an expected tax cut. 
E)  The firm's production costs increased in line with previous years. 
A)  The stock paid a regular quarterly dividend. 
B)  The firm's net income decreased by 4 percent for the quarter, as had been expected. 
C)  One of the firm's patent applications was unexpectedly rejected. 
D)  The firm's cost of debt increased as the result of an expected tax cut. 
E)  The firm's production costs increased in line with previous years.

Question 12

What is the covariance of security A to the market given the following information?

Accepted Answer

A)  23.14 
B)  29.88 
C)  48.83 
D)  99.18 
E)  114.01 
A)  23.14 
B)  29.88 
C)  48.83 
D)  99.18 
E)  114.01

Question 13

What is the covariance of security A to the market given the following information?

Accepted Answer

A)  75.0 
B)  80.1 
C)  83.8 
D)  87.0 
E)  91.1 
A)  75.0 
B)  80.1 
C)  83.8 
D)  87.0 
E)  91.1

Question 14

Alfonso Rodriquez has served as the president of Imports United for the past six years. During his tenure, the company has grown significantly and provided above-average returns to its shareholders. Thus, Mr. Rodriquez is highly admired. Yesterday, he announced that he will be retiring at the end of this quarter. You expected the stock price of Imports United to decline on this news because of the admiration investors have for this gentleman. Contrary to your expectations, the price of the stock remained unchanged. There was no other relevant market news related to this firm and the overall market also remained relatively unchanged for the day. What explanation can be given for the market not reacting as you expected to Mr. Rodriquez's announcement?

Accepted Answer

There are several potential explanations

Question 15

What is the beta of a portfolio which consists of the following?

Accepted Answer

A)  1.01 
B)  1.24 
C)  1.26 
D)  1.29 
E)  1.31 
A)  1.01 
B)  1.24 
C)  1.26 
D)  1.29 
E)  1.31

Question 16

Which of the following are needed to compute the beta of an individual security?
I. average return on the market for the period
II. standard deviation of the security and the market
III. returns on the security and the market for multiple time periods
IV. correlation of the security to the market

Accepted Answer

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

Question 17

Which one of the following will increase the slope of the security market line? Assume all else constant.

Accepted Answer

A)  increasing the beta of an efficiently-priced portfolio 
B)  increasing the risk-free rate 
C)  increasing the market risk premium 
D)  decreasing the market rate of return 
E)  replacing a low-beta stock with a high-beta stock within a portfolio 
A)  increasing the beta of an efficiently-priced portfolio 
B)  increasing the risk-free rate 
C)  increasing the market risk premium 
D)  decreasing the market rate of return 
E)  replacing a low-beta stock with a high-beta stock within a portfolio

Question 18

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 19

Which one of the following statements is true?

Accepted Answer

A)  Risk and return are inversely related. 
B)  Investors are compensated only for diversifiable risk. 
C)  The beta of a portfolio may be lower than the lowest beta of any individual security held within the portfolio. 
D)  How a security affects the risk of a portfolio is less important than the actual risk of the security itself. 
E)  Investing has two dimensions: risk and return. 
A)  Risk and return are inversely related. 
B)  Investors are compensated only for diversifiable risk. 
C)  The beta of a portfolio may be lower than the lowest beta of any individual security held within the portfolio. 
D)  How a security affects the risk of a portfolio is less important than the actual risk of the security itself. 
E)  Investing has two dimensions: risk and return.

Question 20

The slope of the security market line is equal to the:

Accepted Answer

A)  market risk premium. 
B)  risk-free rate of return. 
C)  market rate of return. 
D)  market rate of return multiplied by any security's beta, given an inefficient market. 
E)  market rate of return multiplied by the risk-free rate. 
A)  market risk premium. 
B)  risk-free rate of return. 
C)  market rate of return. 
D)  market rate of return multiplied by any security's beta, given an inefficient market. 
E)  market rate of return multiplied by the risk-free rate.

Which one of the following is expressed as "E(R_M) - R_f"?

Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent. The risk-free rate is 2.6 percent and the market risk premium is 6 percent. This stock is _ because the CAPM return for the stock is _ percent.

A stock has an expected return of 14.59 percent and a beta of 1.35. What is the risk-free rate if the market rate is 12.7 percent?

Which one of the following measures systematic risk?

Home Interior's stock has an expected return of 12.89 percent and a beta of 1.28. The market return is 10.7 percent and the risk-free rate is 2.8 percent. This stock is _ because the CAPM return for the stock is _ percent.

Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money, the reward for bearing systematic risk, and the amount of systematic risk?

A portfolio beta is computed as which one of the following?

Which one of the following betas represents the greatest level of systematic risk?

Which one of the following is the type of risk that only affects either a single firm or just a small number of firms?

A portfolio is comprised of two stocks. Stock A comprises 55 percent of the portfolio and has a beta of 1.31. Stock B has a beta of .98. What is the portfolio beta?

Which one of the following is the best example of a risk associated with stock ownership?

What is the covariance of security A to the market given the following information?

What is the covariance of security A to the market given the following information?

What is the beta of a portfolio which consists of the following?

Which of the following are needed to compute the beta of an individual security? I. average return on the market for the period II. standard deviation of the security and the market III. returns on the security and the market for multiple time periods IV. correlation of the security to the market

Which one of the following will increase the slope of the security market line? Assume all else constant.

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?

Which one of the following statements is true?

The slope of the security market line is equal to the:

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

Mutual Funds

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Projecting Cash Flow and Earnings

Corporate Bonds

Government Bonds

Mortgage-Backed Securities

Filters

Exam 12: Return, Risk, and the Security Market Line

Which one of the following is expressed as "E(RM) - Rf"?

Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent. The risk-free rate is 2.6 percent and the market risk premium is 6 percent. This stock is _____ because the CAPM return for the stock is _____ percent.

A stock has an expected return of 14.59 percent and a beta of 1.35. What is the risk-free rate if the market rate is 12.7 percent?

Which one of the following measures systematic risk?

Home Interior's stock has an expected return of 12.89 percent and a beta of 1.28. The market return is 10.7 percent and the risk-free rate is 2.8 percent. This stock is _____ because the CAPM return for the stock is _____ percent.

Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money, the reward for bearing systematic risk, and the amount of systematic risk?

A portfolio beta is computed as which one of the following?

Which one of the following betas represents the greatest level of systematic risk?

Which one of the following is the type of risk that only affects either a single firm or just a small number of firms?

A portfolio is comprised of two stocks. Stock A comprises 55 percent of the portfolio and has a beta of 1.31. Stock B has a beta of .98. What is the portfolio beta?

Which one of the following is the best example of a risk associated with stock ownership?

What is the covariance of security A to the market given the following information?

What is the covariance of security A to the market given the following information?

What is the beta of a portfolio which consists of the following?

Which of the following are needed to compute the beta of an individual security? I. average return on the market for the period II. standard deviation of the security and the market III. returns on the security and the market for multiple time periods IV. correlation of the security to the market

Which one of the following will increase the slope of the security market line? Assume all else constant.

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?

Which one of the following statements is true?

The slope of the security market line is equal to the:

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

Mutual Funds

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Projecting Cash Flow and Earnings

Corporate Bonds

Government Bonds

Mortgage-Backed Securities

Filters

Which one of the following is expressed as "E(R_M) - R_f"?

Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent. The risk-free rate is 2.6 percent and the market risk premium is 6 percent. This stock is _ because the CAPM return for the stock is _ percent.

Home Interior's stock has an expected return of 12.89 percent and a beta of 1.28. The market return is 10.7 percent and the risk-free rate is 2.8 percent. This stock is _ because the CAPM return for the stock is _ percent.