Question 1

Diversifying among different kinds of assets is called asset allocation.

Accepted Answer

A) True 
 B)False

Question 2

In an efficient market,a stock with a standard deviation of returns of 12% could have a higher expected return than a stock with a standard deviation of 10% because the beta for the higher standard deviation stock could be lower than the beta for the lower standard deviation stock.

Accepted Answer

A) True 
 B)False

Question 3

Use the following data:
Market risk premium = 10%
Risk free rate = 2%
Beta of XYZ stock = 1.6
Beta of PDQ stock = 2.4
Investment in XYZ stock = $15,000
Investment in PDQ stock = $60,000
You have no assets other than your investments in XYZ and PDQ stock.
What is the expected return of your portfolio?
 Show all work.

Accepted Answer

Portfolio Beta method: B_p = (15/75 × 1.6)

Question 4

Portfolio performance is determined mainly by stock selection and market timing,with less emphasis on asset allocation.

Accepted Answer

A) True 
 B)False

Question 5

Discuss whether the standard deviation of a portfolio is,or is not,a weighted average of the standard deviations of the assets in the portfolio.Fully explain your answer.

Accepted Answer

The standard deviation of a portfolio is

Question 6

Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds.

Accepted Answer

A) True 
 B)False

Question 7

Small company stocks have historically had higher average annual returns than large company stocks,and also a higher risk premium.

Accepted Answer

A) True 
 B)False

Question 8

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

Accepted Answer

A) True 
 B)False

Question 9

The return on the market portfolio is currently 12%.Mobile Phone Corporation stockholders require a rate of return of 30% and the stock has a beta of 3.2.According to CAPM,determine the risk-free rate.

Accepted Answer

A)  9.80% 
B)  6.50% 
C)  4.64% 
D)  3.82% 
A)  9.80% 
B)  6.50% 
C)  4.64% 
D)  3.82%

Question 10

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the least risky investment?

Accepted Answer

A)  Common stock of large firms 
B)  U.S. Treasury bills 
C)  Common stock of small firms 
D)  Long-term government bonds 
A)  Common stock of large firms 
B)  U.S. Treasury bills 
C)  Common stock of small firms 
D)  Long-term government bonds

Question 11

A stock with a beta of 1.4 has 40% more variability in returns than the average stock.

Accepted Answer

A) True 
 B)False

Question 12

You are considering investing in Ford Motor Company.Which of the following are examples of diversifiable risk?
I.Risk resulting from possibility of a stock market crash.
II.Risk resulting from uncertainty regarding a possible strike against Ford.
III.Risk resulting from an expensive recall of a Ford product.
IV.Risk resulting from interest rates decreasing.

Accepted Answer

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

Question 13

You are thinking of adding one of two investments to an already well- diversified portfolio.   If you are a risk-averse investor,which one is the better choice?

Accepted Answer

A)  Security A 
B)  Security B 
C)  Either security would be acceptable because they have the same beta. 
D)  Security B, but only if Security B's required return is greater than 12%. 
A)  Security A 
B)  Security B 
C)  Either security would be acceptable because they have the same beta. 
D)  Security B, but only if Security B's required return is greater than 12%.

Question 14

Billings,Inc.common stock has a beta of 1.2.If the expected risk free return is 4% and the expected market risk premium is 9%,what is the expected return on Billing's stock?

Accepted Answer

A)  10.0% 
B)  12.0% 
C)  13.8% 
D)  14.8% 
A)  10.0% 
B)  12.0% 
C)  13.8% 
D)  14.8%

Question 15

The S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate.

Accepted Answer

A) True 
 B)False

Question 16

You hold a portfolio with the following securities:
  What is the expected return for the market,according to the CAPM?

Accepted Answer

A)  14.0% 
B)  13.8% 
C)  12.0% 
D)  10.0% 
A)  14.0% 
B)  13.8% 
C)  12.0% 
D)  10.0%

Question 17

Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?

Accepted Answer

A)  0.97 
B)  1.02 
C)  1.12 
D)  1.21 
A)  0.97 
B)  1.02 
C)  1.12 
D)  1.21

Question 18

You are given the following probability distribution for XYZ common stock's returns during the next year,which are assumed to be normally distributed.Show all work below,and complete the following:
   a.Calculate the standard deviation of the returns,and round to the nearest one-half percent.
b.Draw a graphical representation of XYZ's normal distribution below (ye old bell-shaped curve).LABEL THE AXES OF THE GRAPH OR THE FOLLOWING RESULTS WILL BE MEANINGLESS.Using your result in part A for the standard deviation (rounded to the nearest one-half percent)explain and indicate on the graph,the probability that XYZ will return more than 13.5%,assuming a normal distribution.

Accepted Answer

GRAPH:
a.Exp.Return = (.12 × .2)+ (.16 ×

Question 19

Assume that you have $200,000 invested in a stock that is returning 14%,$300,000 invested in a stock that is returning 18%,and $400,000 invested in a stock that is returning 15%.What is the expected return of your portfolio?

Accepted Answer

A)  13.25% 
B)  14.97% 
C)  15.67% 
D)  15.78% 
A)  13.25% 
B)  14.97% 
C)  15.67% 
D)  15.78%

Question 20

The expected return for the market portfolio is 13%,the expected return on U.S.Treasury Bills is 2%,and the expected return on AAA-rated short-term corporate bonds is 7%.Calculate the required return for a stock with a beta equal to 1.5.

Accepted Answer

2% + (13%

Diversifying among different kinds of assets is called asset allocation.

In an efficient market,a stock with a standard deviation of returns of 12% could have a higher expected return than a stock with a standard deviation of 10% because the beta for the higher standard deviation stock could be lower than the beta for the lower standard deviation stock.

Portfolio performance is determined mainly by stock selection and market timing,with less emphasis on asset allocation.

Discuss whether the standard deviation of a portfolio is,or is not,a weighted average of the standard deviations of the assets in the portfolio.Fully explain your answer.

Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds.

Small company stocks have historically had higher average annual returns than large company stocks,and also a higher risk premium.

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

The return on the market portfolio is currently 12%.Mobile Phone Corporation stockholders require a rate of return of 30% and the stock has a beta of 3.2.According to CAPM,determine the risk-free rate.

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the least risky investment?

A stock with a beta of 1.4 has 40% more variability in returns than the average stock.

You are thinking of adding one of two investments to an already well- diversified portfolio. If you are a risk-averse investor,which one is the better choice?

Billings,Inc.common stock has a beta of 1.2.If the expected risk free return is 4% and the expected market risk premium is 9%,what is the expected return on Billing's stock?

The S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate.

You hold a portfolio with the following securities: What is the expected return for the market,according to the CAPM?

Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?

Assume that you have $200,000 invested in a stock that is returning 14%,$300,000 invested in a stock that is returning 18%,and $400,000 invested in a stock that is returning 15%.What is the expected return of your portfolio?

The expected return for the market portfolio is 13%,the expected return on U.S.Treasury Bills is 2%,and the expected return on AAA-rated short-term corporate bonds is 7%.Calculate the required return for a stock with a beta equal to 1.5.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

Filters

Exam 6: The Meaning and Measurement of Risk and Return

Diversifying among different kinds of assets is called asset allocation.

In an efficient market,a stock with a standard deviation of returns of 12% could have a higher expected return than a stock with a standard deviation of 10% because the beta for the higher standard deviation stock could be lower than the beta for the lower standard deviation stock.

Portfolio performance is determined mainly by stock selection and market timing,with less emphasis on asset allocation.

Discuss whether the standard deviation of a portfolio is,or is not,a weighted average of the standard deviations of the assets in the portfolio.Fully explain your answer.

Adding stocks to a bond portfolio will increase the riskiness of the portfolio because stocks have higher standard deviations of returns than bonds.

Small company stocks have historically had higher average annual returns than large company stocks,and also a higher risk premium.

Stocks that plot above the security market line are underpriced because their expected returns exceed their risk-adjusted required returns.

The return on the market portfolio is currently 12%.Mobile Phone Corporation stockholders require a rate of return of 30% and the stock has a beta of 3.2.According to CAPM,determine the risk-free rate.

If you were to use the standard deviation as a measure of investment risk,which of the following has historically been the least risky investment?

A stock with a beta of 1.4 has 40% more variability in returns than the average stock.

You are thinking of adding one of two investments to an already well- diversified portfolio. If you are a risk-averse investor,which one is the better choice?

Billings,Inc.common stock has a beta of 1.2.If the expected risk free return is 4% and the expected market risk premium is 9%,what is the expected return on Billing's stock?

The S&P 500 index must be used as the measure of market return in the CAPM or the results are not theoretically accurate.

You hold a portfolio with the following securities: What is the expected return for the market,according to the CAPM?

Assume that you have $100,000 invested in a stock whose beta is .85,$200,000 invested in a stock whose beta is 1.05,and $300,000 invested in a stock whose beta is 1.25.What is the beta of your portfolio?

Assume that you have $200,000 invested in a stock that is returning 14%,$300,000 invested in a stock that is returning 18%,and $400,000 invested in a stock that is returning 15%.What is the expected return of your portfolio?

The expected return for the market portfolio is 13%,the expected return on U.S.Treasury Bills is 2%,and the expected return on AAA-rated short-term corporate bonds is 7%.Calculate the required return for a stock with a beta equal to 1.5.

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

Filters