Question 1

When computing the expected return on a portfolio of stocks the portfolio weights are based on the:

Accepted Answer

A) number of shares owned in each stock. 
B) price per share of each stock. 
C) market value of the total shares held in each stock. 
D) original amount invested in each stock. 
E) cost per share of each stock held. 
A) number of shares owned in each stock. 
B) price per share of each stock. 
C) market value of the total shares held in each stock. 
D) original amount invested in each stock. 
E) cost per share of each stock held.

Question 2

Angelo has decided to invest $24,500 in a portfolio with an expected return of 9.8 percent and invest $10,000 in a risk-free asset that he expects to return 3.6 percent.What rate of return is he expecting on this portfolio?

Accepted Answer

A) 6.92 percent 
B) 8.00 percent 
C) 7.84 percent 
D) 8.59 percent 
E) 9.01 percent 
A) 6.92 percent 
B) 8.00 percent 
C) 7.84 percent 
D) 8.59 percent 
E) 9.01 percent

Question 3

You have a $1,250 portfolio which is invested in Stocks A and B plus a risk-free asset.$350 is invested in Stock A which has a beta of 1.36 and Stock B has a beta of .84.How much needs to be invested in Stock B if you want a portfolio beta of .95?

Accepted Answer

A) $803 
B) $951 
C) $782 
D) $847 
E) $791 
A) $803 
B) $951 
C) $782 
D) $847 
E) $791

Question 4

The stock of Big Joe's has a beta of 1.38 and an expected return of 16.26 percent.The risk-free rate of return is 3.42 percent.What is the expected return on the market?

Accepted Answer

A) 7.60 percent 
B) 8.04 percent 
C) 9.30 percent 
D) 12.72 percent 
E) 12.16 percent 
A) 7.60 percent 
B) 8.04 percent 
C) 9.30 percent 
D) 12.72 percent 
E) 12.16 percent

Question 5

A portfolio consists of Stocks A and B and has an expected return of 11.6 percent.Stock A has an expected return of 17.8 percent while Stock B is expected to return 8.4 percent.What is the portfolio weight of Stock A?

Accepted Answer

A) 29.87 percent 
B) 61.98 percent 
C) 32.58 percent 
D) 34.04 percent 
E) 67.42 percent 
A) 29.87 percent 
B) 61.98 percent 
C) 32.58 percent 
D) 34.04 percent 
E) 67.42 percent

Question 6

You would like to combine a highly risky stock with a beta of 2.6 with U.S.Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in Treasury bills?

Accepted Answer

A) 57.91 percent 
B) 61.54 percent 
C) 50.00 percent 
D) 38.46 percent 
E) 42.09 percent 
A) 57.91 percent 
B) 61.54 percent 
C) 50.00 percent 
D) 38.46 percent 
E) 42.09 percent

Question 7

You want to design a portfolio that has a beta of zero.Stock A has a beta of 1.69 and Stock B's beta is also greater than 1.You are willing to include both stocks as well as a risk-free security in your portfolio.If your portfolio will have a combined value of $5,000,how much should you invest in Stock B?

Accepted Answer

A) $2,630 
B) $0 
C) $2,959 
D) $3,008 
E) $1,487 
A) $2,630 
B) $0 
C) $2,959 
D) $3,008 
E) $1,487

Question 8

Which of these are squared values?

Accepted Answer

A) Variance,correlation,and covariance 
B) Variance and beta 
C) Covariance and variance 
D) Correlation,beta,variance 
E) Covariance and correlation 
A) Variance,correlation,and covariance 
B) Variance and beta 
C) Covariance and variance 
D) Correlation,beta,variance 
E) Covariance and correlation

Question 9

If the correlation between two stocks is −1,the returns on the stocks:

Accepted Answer

A) generally move in the same direction. 
B) move perfectly opposite to one another. 
C) are unrelated to one another. 
D) have standard deviations of equal size but opposite signs. 
E) totally offset each other producing a rate of return of zero. 
A) generally move in the same direction. 
B) move perfectly opposite to one another. 
C) are unrelated to one another. 
D) have standard deviations of equal size but opposite signs. 
E) totally offset each other producing a rate of return of zero.

Question 10

Terry owns a stock that is expected to earn 8.7 percent in a booming economy,9.2 percent in a normal economy,and 12.6 percent in a recessionary economy.Each economic state is equally likely to occur.What is his expected rate of return on this stock?

Accepted Answer

A) 10.38 percent 
B) 11.90 percent 
C) 10.17 percent 
D) 9.98 percent 
E) 11.01 percent 
A) 10.38 percent 
B) 11.90 percent 
C) 10.17 percent 
D) 9.98 percent 
E) 11.01 percent

Question 11

Your portfolio has a beta of 1.18 and consists of 15 percent U.S.Treasury bills,30 percent Stock A,and 55 percent Stock B.Stock A has a risk level equivalent to that of the overall market.What is the beta of Stock B?

Accepted Answer

A) .55 
B) 1.10 
C) 1.24 
D) 1.40 
E) 1.60 
A) .55 
B) 1.10 
C) 1.24 
D) 1.40 
E) 1.60

Question 12

The intercept point of the security market line is the rate of return which corresponds to:

Accepted Answer

A) the risk-free rate of return. 
B) the market rate of return. 
C) a value of zero. 
D) a value of 1.0. 
E) the beta of the market. 
A) the risk-free rate of return. 
B) the market rate of return. 
C) a value of zero. 
D) a value of 1.0. 
E) the beta of the market.

Question 13

Stu has decided to invest $6,800 in a risky asset that has an expected return of 11.3 percent and a standard deviation of 21.2 percent.He will also invest $3,200 in a risk-free asset with an expected return of 4.2 percent.The market risk premium is 7.1 percent.What is the standard deviation of his portfolio?

Accepted Answer

A) 3.30 percent 
B) 11.94 percent 
C) 6.87 percent 
D) 9.25 percent 
E) 14.42 percent 
A) 3.30 percent 
B) 11.94 percent 
C) 6.87 percent 
D) 9.25 percent 
E) 14.42 percent

Question 14

Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?

Accepted Answer

A) The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers. 
B) The expected return is an arithmetic average of the individual returns for each state of the economy. 
C) The expected return is a weighted average where the probabilities of the economic states are used as the weights. 
D) The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state. 
E) As long as the total probabilities of the economic states equal 100 percent,then the expected return on the stock is a geometric average of the expected returns for each economic state. 
A) The expected return is a geometric average where the probabilities of the economic states are used as the exponential powers. 
B) The expected return is an arithmetic average of the individual returns for each state of the economy. 
C) The expected return is a weighted average where the probabilities of the economic states are used as the weights. 
D) The expected return is equal to the summation of the values computed by dividing the expected return for each economic state by the probability of the state. 
E) As long as the total probabilities of the economic states equal 100 percent,then the expected return on the stock is a geometric average of the expected returns for each economic state.

Question 15

A portfolio contains two securities and has a beta of 1.08.The first security comprises 54 percent of the portfolio and has a beta of 1.27.What is the beta of the second security?

Accepted Answer

A) .79 
B) .86 
C) .62 
D) .82 
E) .93 
A) .79 
B) .86 
C) .62 
D) .82 
E) .93

Question 16

A portfolio has 45 percent of its funds invested in Security One and 55 percent invested in Security Two.Security One has a standard deviation of 6 percent.Security Two has a standard deviation of 12 percent.The securities have a coefficient of correlation of .62.What is the portfolio variance?

Accepted Answer

A) .006946 
B) .007295 
C) .007157 
D) .008104 
E) .007506 
A) .006946 
B) .007295 
C) .007157 
D) .008104 
E) .007506

Question 17

The probability the economy will boom is 20 percent,while it is 70 percent for a normal economy,and 10 percent for a recession.Stock A will return 18 percent in a boom,11 percent in a normal economy,and lose 10 percent in a recession.Stock B will return 9 percent in boom,7 percent in a normal economy,and 4 percent in a recession.Stock C will return 6 percent in a boom,9 percent in a normal economy,and 13 percent in a recession.What is the expected return on a portfolio which is invested 20 percent in Stock A,50 percent in Stock B,and 30 percent in Stock C?

Accepted Answer

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

Question 18

Explain in words what beta is and why it is an important tool of security valuation.

Accepted Answer

Beta is a measure of systematic risk,whi

Question 19

A stock with an actual return that lies above the security market line has:

Accepted Answer

A) more systematic risk than the overall market. 
B) more risk than warranted based on the realized rate of return. 
C) yielded a higher return than expected for the level of risk assumed. 
D) less systematic risk than the overall market. 
E) yielded a return equivalent to the level of risk assumed. 
A) more systematic risk than the overall market. 
B) more risk than warranted based on the realized rate of return. 
C) yielded a higher return than expected for the level of risk assumed. 
D) less systematic risk than the overall market. 
E) yielded a return equivalent to the level of risk assumed.

Question 20

Zoom stock has a beta of 1.46.The risk-free rate of return is 3.07 percent and the market rate of return is 11.81 percent.What is the amount of the risk premium on Zoom stock?

Accepted Answer

A) 8.09 percent 
B) 12.76 percent 
C) 9.59 percent 
D) 10.25 percent 
E) 17.24 percent 
A) 8.09 percent 
B) 12.76 percent 
C) 9.59 percent 
D) 10.25 percent 
E) 17.24 percent

Exam 11: Return, risk, and the Capital Asset Pricing Model Capm

When computing the expected return on a portfolio of stocks the portfolio weights are based on the:

Angelo has decided to invest $24,500 in a portfolio with an expected return of 9.8 percent and invest $10,000 in a risk-free asset that he expects to return 3.6 percent.What rate of return is he expecting on this portfolio?

You have a $1,250 portfolio which is invested in Stocks A and B plus a risk-free asset.$350 is invested in Stock A which has a beta of 1.36 and Stock B has a beta of .84.How much needs to be invested in Stock B if you want a portfolio beta of .95?

The stock of Big Joe's has a beta of 1.38 and an expected return of 16.26 percent.The risk-free rate of return is 3.42 percent.What is the expected return on the market?

A portfolio consists of Stocks A and B and has an expected return of 11.6 percent.Stock A has an expected return of 17.8 percent while Stock B is expected to return 8.4 percent.What is the portfolio weight of Stock A?

You would like to combine a highly risky stock with a beta of 2.6 with U.S.Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market.What percentage of the portfolio should be invested in Treasury bills?

Which of these are squared values?

If the correlation between two stocks is −1,the returns on the stocks:

Terry owns a stock that is expected to earn 8.7 percent in a booming economy,9.2 percent in a normal economy,and 12.6 percent in a recessionary economy.Each economic state is equally likely to occur.What is his expected rate of return on this stock?

Your portfolio has a beta of 1.18 and consists of 15 percent U.S.Treasury bills,30 percent Stock A,and 55 percent Stock B.Stock A has a risk level equivalent to that of the overall market.What is the beta of Stock B?

The intercept point of the security market line is the rate of return which corresponds to:

Which one of the following statements is correct concerning the expected rate of return on an individual stock given various states of the economy?

A portfolio contains two securities and has a beta of 1.08.The first security comprises 54 percent of the portfolio and has a beta of 1.27.What is the beta of the second security?

A portfolio has 45 percent of its funds invested in Security One and 55 percent invested in Security Two.Security One has a standard deviation of 6 percent.Security Two has a standard deviation of 12 percent.The securities have a coefficient of correlation of .62.What is the portfolio variance?

Explain in words what beta is and why it is an important tool of security valuation.

A stock with an actual return that lies above the security market line has:

Zoom stock has a beta of 1.46.The risk-free rate of return is 3.07 percent and the market rate of return is 11.81 percent.What is the amount of the risk premium on Zoom stock?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers,acquisitions,and Divestitures

Financial Distress

International Corporate Finance

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