Question 1

A risk that affects a large number of assets, each to a greater or lesser degree is called:

Accepted Answer

A) total risk. 
B) systematic risk. 
C) unsystematic risk. 
D) economic risk. 
E) standard error. 
A) total risk. 
B) systematic risk. 
C) unsystematic risk. 
D) economic risk. 
E) standard error.

Question 2

If a stock portfolio is well diversified, then the portfolio variance:

Accepted Answer

A) will equal the variance of the most volatile stock in the portfolio. 
B) may be less than the variance of the least risky stock in the portfolio. 
C) must be equal to or greater than the variance of the least risky stock in the portfolio. 
D) will be a weighted average of the variances of the individual securities in the portfolio. 
E) will be an arithmetic average of the variances of the individual securities in the portfolio. 
A) will equal the variance of the most volatile stock in the portfolio. 
B) may be less than the variance of the least risky stock in the portfolio. 
C) must be equal to or greater than the variance of the least risky stock in the portfolio. 
D) will be a weighted average of the variances of the individual securities in the portfolio. 
E) will be an arithmetic average of the variances of the individual securities in the portfolio.

Question 3

As we add more securities to a portfolio, the ____ will decrease:

Accepted Answer

A) total risk. 
B) systematic risk. 
C) unsystematic risk. 
D) economic risk. 
E) standard error. 
A) total risk. 
B) systematic risk. 
C) unsystematic risk. 
D) economic risk. 
E) standard error.

Question 4

The portfolio expected return considers which of the following factors?
I.the amount of money currently invested in each individual security
II.various levels of economic activity
III.the performance of each stock given various economic scenarios
IV.the probability of various states of the economy

Accepted Answer

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

Question 5

Which one of the following is an example of unsystematic risk?

Accepted Answer

A) the inflation rate increases unexpectedly 
B) the federal government lowers income taxes 
C) an oil tanker runs aground and spills its cargo 
D) interest rates decline by one-half of one percent 
E) the GDP rises by 2% more than anticipated 
A) the inflation rate increases unexpectedly 
B) the federal government lowers income taxes 
C) an oil tanker runs aground and spills its cargo 
D) interest rates decline by one-half of one percent 
E) the GDP rises by 2% more than anticipated

Question 6

A typical investor is assumed to be:

Accepted Answer

A) a fair gambler. 
B) a gambler. 
C) a single security holder. 
D) risk averse. 
E) risk neutral. 
A) a fair gambler. 
B) a gambler. 
C) a single security holder. 
D) risk averse. 
E) risk neutral.

Question 7

Which one of the following stocks is correctly priced if the risk-free rate of return is 2.5% and the market risk premium is 8%? $$\begin{array} { l r c } 
 \underline{\text { Stock } }& \underline{ \text { Beta } }&  \underline{\text { Expected Return } }\
\text { A } & .68 & 8.2 \% \
\text { B } & 1.42 & 13.9 \% \
\text { C } & 1.23 & 11.8 \% \
\text { D } & 1.31 & 12.6 \% \
\text { E } & .94 & 9.7 \%
\end{array}$$

Accepted Answer

A) A 
B) B 
C) C 
D) D 
E) E 
A) A 
B) B 
C) C 
D) D 
E) E

Question 8

The elements along the diagonal of the variance/covariance matrix are:

Accepted Answer

A) covariances. 
B) security weights. 
C) security selections. 
D) variances. 
E) None of the above. 
A) covariances. 
B) security weights. 
C) security selections. 
D) variances. 
E) None of the above.

Question 9

Which one of the following is an example of systematic risk?

Accepted Answer

A) the price of lumber declines sharply 
B) airline pilots go on strike 
C) the Federal Reserve increases interest rates 
D) a hurricane hits a tourist destination 
E) people become diet conscious and avoid fast food restaurants 
A) the price of lumber declines sharply 
B) airline pilots go on strike 
C) the Federal Reserve increases interest rates 
D) a hurricane hits a tourist destination 
E) people become diet conscious and avoid fast food restaurants

Question 10

Zelo, Inc.stock has a beta of 1.23.The risk-free rate of return is 4.5% and the market rate of return is 10%.What is the amount of the risk premium on Zelo stock?

Accepted Answer

A) 4.47% 
B) 5.50% 
C) 5.54% 
D) 6.77% 
E) 12.30% 
A) 4.47% 
B) 5.50% 
C) 5.54% 
D) 6.77% 
E) 12.30%

Question 11

When stocks with the same expected return are combined into a portfolio:

Accepted Answer

A) the expected return of the portfolio is less than the weighted average expected return of the stocks. 
B) the expected return of the portfolio is greater than the weighted average expected return of the stocks. 
C) the expected return of the portfolio is equal to the weighted average expected return of the stocks. 
D) there is no relationship between the expected return of the portfolio and the expected return of the stocks. 
E) None of the above. 
A) the expected return of the portfolio is less than the weighted average expected return of the stocks. 
B) the expected return of the portfolio is greater than the weighted average expected return of the stocks. 
C) the expected return of the portfolio is equal to the weighted average expected return of the stocks. 
D) there is no relationship between the expected return of the portfolio and the expected return of the stocks. 
E) None of the above.

Question 12

The rate of return on the common stock of Flowers by Flo is expected to be 14% in a boom economy, 8% in a normal economy, and only 2% in a recessionary economy.The probabilities of these economic states are 20% for a boom, 70% for a normal economy, and 10% for a recession.What is the variance of the returns on the common stock of Flowers by Flo?

Accepted Answer

A) .001044 
B) .001280 
C) .001863 
D) .002001 
E) .002471 
A) .001044 
B) .001280 
C) .001863 
D) .002001 
E) .002471

Question 13

A portfolio is entirely invested into Buzz's Bauxite Boring equity, which is expected to return 16%, and Zum's Inc.bonds, which are expected to return 8%.60% of the funds are invested in Buzz's and the rest in Zum's.What is the expected return on the portfolio?

Accepted Answer

A) 6.4% 
B) 9.6% 
C) 12.8% 
D) 24.2% 
E) Need additional information 
A) 6.4% 
B) 9.6% 
C) 12.8% 
D) 24.2% 
E) Need additional information

Question 14

A portfolio is:

Accepted Answer

A) a group of assets, such as stocks and bonds, held as a collective unit by an investor. 
B) the expected return on a risky asset. 
C) the expected return on a collection of risky assets. 
D) the variance of returns for a risky asset. 
E) the standard deviation of returns for a collection of risky assets. 
A) a group of assets, such as stocks and bonds, held as a collective unit by an investor. 
B) the expected return on a risky asset. 
C) the expected return on a collection of risky assets. 
D) the variance of returns for a risky asset. 
E) the standard deviation of returns for a collection of risky assets.

Question 15

Which one of the following measures is relevant to the systematic risk principle?

Accepted Answer

A) variance 
B) alpha 
C) standard deviation 
D) theta 
E) beta 
A) variance 
B) alpha 
C) standard deviation 
D) theta 
E) beta

Question 16

A portfolio contains four assets.Asset 1 has a beta of .8 and comprises 30% of the portfolio.Asset 2 has a beta of 1.1 and comprises 30% of the portfolio.Asset 3 has a beta of 1.5 and comprises 20% of the portfolio.Asset 4 has a beta of 1.6 and comprises the remaining 20% of the portfolio.If the riskless rate is expected to be 3% and the market risk premium is 6%, what is the beta of the portfolio?

Accepted Answer

A) 0.80 
B) 1.10 
C) 1.19 
D) 1.25 
E) 1.40 
A) 0.80 
B) 1.10 
C) 1.19 
D) 1.25 
E) 1.40

Question 17

What is the expected return on a portfolio which is invested 20% in stock A, 50% in stock B, and 30% in stock C? 
$\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 A\quad  Stock B\quad  Stock C}} \
 \text {Boom  } &  20\%  &18\% \quad \quad 9\%\quad \quad 6\%\
 \text {  Normal} & 70\%& 11\%\quad \quad 7\%\quad \quad 9\%\
 \text { Recession  } & 10\%&-10\%\quad \quad 4\%\quad \quad 13\% \

\end{array}$

Accepted Answer

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

Question 18

Which one of the following would indicate a portfolio is being effectively diversified?

Accepted Answer

A) an increase in the portfolio beta 
B) a decrease in the portfolio beta 
C) an increase in the portfolio rate of return 
D) an increase in the portfolio standard deviation 
E) a decrease in the portfolio standard deviation 
A) an increase in the portfolio beta 
B) a decrease in the portfolio beta 
C) an increase in the portfolio rate of return 
D) an increase in the portfolio standard deviation 
E) a decrease in the portfolio standard deviation

Question 19

Draw the SML and plot asset C such that it has less risk than the market but plots above the
SML, and asset D such that it has more risk than the market and plots below the SML.(Be sure to indicate where the market portfolio is on your graph.) Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium.

Accepted Answer

The student should correctly draw a SML

Question 20

What is the variance of a portfolio consisting of $3,500 in stock G and $6,500 in stock H? 
$\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 G\quad  Stock H}} \
 \text {Boom  } & 15\%  &15\% \quad \quad 9\%\
 \text {  Normal} & 85\%&8\%\quad \quad6\%\

\end{array}$

Accepted Answer

A) .000209 
B) .000247 
C) .002098 
D) .037026 
E) .073600 
A) .000209 
B) .000247 
C) .002098 
D) .037026 
E) .073600

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

A risk that affects a large number of assets, each to a greater or lesser degree is called:

If a stock portfolio is well diversified, then the portfolio variance:

As we add more securities to a portfolio, the ____ will decrease:

The portfolio expected return considers which of the following factors? I.the amount of money currently invested in each individual security II.various levels of economic activity III.the performance of each stock given various economic scenarios IV.the probability of various states of the economy

Which one of the following is an example of unsystematic risk?

A typical investor is assumed to be:

Which one of the following stocks is correctly priced if the risk-free rate of return is 2.5% and the market risk premium is 8%? A .68 8.2\% B 1.42 13.9\% C 1.23 11.8\% D 1.31 12.6\% E .94 9.7\%

The elements along the diagonal of the variance/covariance matrix are:

Which one of the following is an example of systematic risk?

Zelo, Inc.stock has a beta of 1.23.The risk-free rate of return is 4.5% and the market rate of return is 10%.What is the amount of the risk premium on Zelo stock?

When stocks with the same expected return are combined into a portfolio:

A portfolio is entirely invested into Buzz's Bauxite Boring equity, which is expected to return 16%, and Zum's Inc.bonds, which are expected to return 8%.60% of the funds are invested in Buzz's and the rest in Zum's.What is the expected return on the portfolio?

A portfolio is:

Which one of the following measures is relevant to the systematic risk principle?

What is the expected return on a portfolio which is invested 20% in stock A, 50% in stock B, and 30% in stock C? State of Probability of Boom 20\% 18\%9\%6\% Normal 70\% 11\%7\%9\% Recession 10\% -10\%4\%13\%

Which one of the following would indicate a portfolio is being effectively diversified?

What is the variance of a portfolio consisting of $3,500 in stock G and $6,500 in stock H? State of Probability of Boom 15\% 15\%9\% Normal 85\% 8\%6\%

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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