Question 1

If the correlation between two stocks is -1, the returns:

Accepted Answer

A) generally move in the same direction. 
B) move perfectly opposite one another. 
C) are unrelated to one another as it is < 0. 
D) have standard deviations of equal size but opposite signs. 
E) None of the above. 
A) generally move in the same direction. 
B) move perfectly opposite one another. 
C) are unrelated to one another as it is < 0. 
D) have standard deviations of equal size but opposite signs. 
E) None of the above. B

Question 2

A well-diversified portfolio has negligible:

Accepted Answer

A) expected return. 
B) systematic risk. 
C) unsystematic risk. 
D) variance. 
E) Both C and D. 
A) expected return. 
B) systematic risk. 
C) unsystematic risk. 
D) variance. 
E) Both C and D. C

Question 3

GenLabs has been a hot stock the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows:
$\begin{array} { l l l } 
 \underline{\text { State of Economy }} &  \underline{\text { Probability }} & \underline{ \text { GenLabs Returns } }\
 \text { Depression } & . \mathbf { 0 5 } & \mathbf { - 5 0 \% } \
\text { Recession } & .10 & \mathbf { - 1 5 \% } \
\text { Mild Slowdown } & .20 & \mathbf { 5 \% } \
\text { Normal } & .30 & \mathbf { 1 5 \% } \
\text { Broad Expansion } & .20 & \mathbf { 2 5 } \% \
\text { Strong Expansion } & .15 & \mathbf { 4 0 \% }
\end{array}$
-The standard deviation of GenLabs returns is

Accepted Answer

A) .0845 
B) .2069 
C) .3065 
D) .3358 
E) None of the above 
A) .0845 
B) .2069 
C) .3065 
D) .3358 
E) None of the above B

Question 4

The stock of Martin Industries has a beta of 1.43.The risk-free rate of return is 3.6% and the market risk premium is 9%.What is the expected rate of return on Martin Industries stock?

Accepted Answer

A) 11.3% 
B) 14.1% 
C) 16.5% 
D) 17.4% 
E) 18.0% 
A) 11.3% 
B) 14.1% 
C) 16.5% 
D) 17.4% 
E) 18.0%

Question 5

The variance of Stock A is .004, the variance of the market is .007 and the covariance between the two is .0026.What is the correlation coefficient?

Accepted Answer

A) .9285 
B) .8542 
C) .5010 
D) .4913 
E) .3510 
A) .9285 
B) .8542 
C) .5010 
D) .4913 
E) .3510

Question 6

According to the CAPM:

Accepted Answer

A) the expected return on a security is negatively and non-linearly related to the security's beta. 
B) the expected return on a security is negatively and linearly related to the security's beta. 
C) the expected return on a security is positively and linearly related to the security's variance. 
D) the expected return on a security is positively and non-linearly related to the security's beta. 
E) the expected return on a security is positively related to the security's beta. 
A) the expected return on a security is negatively and non-linearly related to the security's beta. 
B) the expected return on a security is negatively and linearly related to the security's beta. 
C) the expected return on a security is positively and linearly related to the security's variance. 
D) the expected return on a security is positively and non-linearly related to the security's beta. 
E) the expected return on a security is positively related to the security's beta.

Question 7

The stock of Big Joe's has a beta of 1.14 and an expected return of 11.6%.The risk-free rate of return is 4%.What is the expected return on the market?

Accepted Answer

A) 7.60% 
B) 8.04% 
C) 9.33% 
D) 10.67% 
E) 12.16% 
A) 7.60% 
B) 8.04% 
C) 9.33% 
D) 10.67% 
E) 12.16%

Question 8

The expected return on HiLo stock is 13.69% while the expected return on the market is 11.5%.The beta of HiLo is 1.3.What is the risk-free rate of return?

Accepted Answer

A) 2.8% 
B) 3.1% 
C) 3.7% 
D) 4.2% 
E) 4.5% 
A) 2.8% 
B) 3.1% 
C) 3.7% 
D) 4.2% 
E) 4.5%

Question 9

A portfolio has 50% of its funds invested in Security One and 50% of its funds invested in Security Two.Security One has a standard deviation of 6%.Security Two has a standard deviation of 12%.The securities have a coefficient of correlation of 0.5.Which of the following values is closest to portfolio variance?

Accepted Answer

A) .0027 
B) .0063 
C) .0095 
D) .0104 
E) One must have covariance to calculate expected value. 
A) .0027 
B) .0063 
C) .0095 
D) .0104 
E) One must have covariance to calculate expected value.

Question 10

The percentage of a portfolio's total value invested in a particular asset is called that asset's:

Accepted Answer

A) portfolio return. 
B) portfolio weight. 
C) portfolio risk. 
D) rate of return. 
E) investment value. 
A) portfolio return. 
B) portfolio weight. 
C) portfolio risk. 
D) rate of return. 
E) investment value.

Question 11

The correlation between two stocks:

Accepted Answer

A) can take on positive values. 
B) can take on negative values. 
C) cannot be greater than 1. 
D) cannot be less than -1. 
E) All of the above. 
A) can take on positive values. 
B) can take on negative values. 
C) cannot be greater than 1. 
D) cannot be less than -1. 
E) All of the above.

Question 12

Explain in words what beta is and why it is important.

Accepted Answer

This is a concept check question that re

Question 13

Diversification can effectively reduce risk.Once a portfolio is diversified, the type of risk remaining is:

Accepted Answer

A) individual security risk. 
B) riskless security risk. 
C) risk related to the market portfolio. 
D) total standard deviations. 
E) None of the above. 
A) individual security risk. 
B) riskless security risk. 
C) risk related to the market portfolio. 
D) total standard deviations. 
E) None of the above.

Question 14

The opportunity set of portfolios is:

Accepted Answer

A) all possible return combinations of those securities. 
B) all possible risk combinations of those securities. 
C) all possible risk-return combinations of those securities. 
D) the best or highest risk-return combination. 
E) the lowest risk-return combination. 
A) all possible return combinations of those securities. 
B) all possible risk combinations of those securities. 
C) all possible risk-return combinations of those securities. 
D) the best or highest risk-return combination. 
E) the lowest risk-return combination.

Question 15

The expected return on a stock that is computed using economic probabilities is:

Accepted Answer

A) guaranteed to equal the actual average return on the stock for the next five years. 
B) guaranteed to be the minimal rate of return on the stock over the next two years. 
C) guaranteed to equal the actual return for the immediate twelve month period. 
D) a mathematical expectation based on a weighted average and not an actual anticipated outcome. 
E) the actual return you will receive. 
A) guaranteed to equal the actual average return on the stock for the next five years. 
B) guaranteed to be the minimal rate of return on the stock over the next two years. 
C) guaranteed to equal the actual return for the immediate twelve month period. 
D) a mathematical expectation based on a weighted average and not an actual anticipated outcome. 
E) the actual return you will receive.

Question 16

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 17

What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal? 
$\begin{array}{llcc}
  \text { State of } & \text { Probability of } & \underline{\text { Returns if State Occurs }}  \
\underline{ \text { Economy }} & \underline{\text { State of Economy }} & \underline{\text {Stock K\quad  Stock L}} \
 \text {Boom  } &  20\%  &14\% \quad \quad 10\%\
 \text {  Normal} & 80\%& 5\%\quad \quad6\%\

\end{array}$

Accepted Answer

A) 3.75% 
B) 5.25% 
C) 5.63% 
D) 5.88% 
E) 6.80% 
A) 3.75% 
B) 5.25% 
C) 5.63% 
D) 5.88% 
E) 6.80%

Question 18

The Inferior Goods Co.stock is expected to earn 14% in a recession, 6% in a normal economy, and lose 4% in a booming economy.The probability of a boom is 20% while the probability of a normal economy is 55% and the chance of a recession is 25%.What is the expected rate of return on this stock?

Accepted Answer

A) 6.00% 
B) 6.72% 
C) 6.80% 
D) 7.60% 
E) 11.33% 
A) 6.00% 
B) 6.72% 
C) 6.80% 
D) 7.60% 
E) 11.33%

Question 19

Which of the following statements is/are true?

Accepted Answer

A) Both APT and CAPM argue that expected excess return must be proportional to the beta(s). 
B) APT and CAPM are the only approaches to measure expected returns in risky assets. 
C) Both CAPM and APT are risk-based models. 
D) Both A and B. 
E) Both A and C. 
A) Both APT and CAPM argue that expected excess return must be proportional to the beta(s). 
B) APT and CAPM are the only approaches to measure expected returns in risky assets. 
C) Both CAPM and APT are risk-based models. 
D) Both A and B. 
E) Both A and C.

Question 20

You own the following portfolio of stocks.What is the portfolio weight of stock C? $$\begin{array} { c l c } 
\underline{\text { Stock } }& \begin{array} { l } 
\text { Number } \
\underline{\text { of Shares }}
\end{array} & \begin{array} { l } 
\text { Price } \
\underline{\text { per Share }}
\end{array} \
 \text { A } & 100 & \$ 22 \
\text { B } & 600 & \$ 17 \
\text { C } & 400 & \$ 46 \
\text { D } & 200 & \$ 38
\end{array}$$

Accepted Answer

A) 30.8% 
B) 37.4% 
C) 42.3% 
D) 45.2% 
E) 47.9% 
A) 30.8% 
B) 37.4% 
C) 42.3% 
D) 45.2% 
E) 47.9%

Exam 11: Return and Risk: the Capital Asset Pricing Model

If the correlation between two stocks is -1, the returns:

A well-diversified portfolio has negligible:

The stock of Martin Industries has a beta of 1.43.The risk-free rate of return is 3.6% and the market risk premium is 9%.What is the expected rate of return on Martin Industries stock?

The variance of Stock A is .004, the variance of the market is .007 and the covariance between the two is .0026.What is the correlation coefficient?

According to the CAPM:

The stock of Big Joe's has a beta of 1.14 and an expected return of 11.6%.The risk-free rate of return is 4%.What is the expected return on the market?

The expected return on HiLo stock is 13.69% while the expected return on the market is 11.5%.The beta of HiLo is 1.3.What is the risk-free rate of return?

The percentage of a portfolio's total value invested in a particular asset is called that asset's:

The correlation between two stocks:

Explain in words what beta is and why it is important.

Diversification can effectively reduce risk.Once a portfolio is diversified, the type of risk remaining is:

The opportunity set of portfolios is:

The expected return on a stock that is computed using economic probabilities is:

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

What is the expected return on a portfolio comprised of $3,000 in stock K and $5,000 in stock L if the economy is normal? State of Probability of Boom 20\% 14\%10\% Normal 80\% 5\%6\%

The Inferior Goods Co.stock is expected to earn 14% in a recession, 6% in a normal economy, and lose 4% in a booming economy.The probability of a boom is 20% while the probability of a normal economy is 55% and the chance of a recession is 25%.What is the expected rate of return on this stock?

Which of the following statements is/are true?

You own the following portfolio of stocks.What is the portfolio weight of stock C? Number Price A 100 \ 22 B 600 \ 17 C 400 \ 46 D 200 \ 38

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

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

Risk and Return: Lessons From Market History

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

Risk, Cost of Capital, and Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

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

Dividends and Other Payouts

Issuing Securities to the Public

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 and Acquisitions

Financial Distress

International Corporate Finance

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