Question 1

The principle of diversification tells us that:

Accepted Answer

A) concentrating an investment in two or three large stocks will eliminate all of your risk. 
B) concentrating an investment in three companies all within the same industry will greatly reduce your overall risk. 
C) spreading an investment across five diverse companies will not lower your overall risk at all. 
D) spreading an investment across many diverse assets will eliminate all of the risk. 
E) spreading an investment across many diverse assets will eliminate some of the risk. 
A) concentrating an investment in two or three large stocks will eliminate all of your risk. 
B) concentrating an investment in three companies all within the same industry will greatly reduce your overall risk. 
C) spreading an investment across five diverse companies will not lower your overall risk at all. 
D) spreading an investment across many diverse assets will eliminate all of the risk. 
E) spreading an investment across many diverse assets will eliminate some of the risk.

Question 2

The characteristic line is graphically depicted as:

Accepted Answer

A) the plot of the relationship between beta and expected return. 
B) the plot of the returns of the security against the beta. 
C) the plot of the security returns against the market index returns. 
D) the plot of the beta against the market index returns. 
E) None of the above. 
A) the plot of the relationship between beta and expected return. 
B) the plot of the returns of the security against the beta. 
C) the plot of the security returns against the market index returns. 
D) the plot of the beta against the market index returns. 
E) None of the above.

Question 3

You want your portfolio beta to be 1.20.Currently,your portfolio consists of $100 invested in stock A with a beta of 1.4 and $300 in stock B with a beta of .6.You have another $400 to invest and want to divide it between an asset with a beta of 1.6 and a risk-free asset.How much should you invest in the risk-free asset?

Accepted Answer

A) $0 
B) $140 
C) $200 
D) $320 
E) $400 
A) $0 
B) $140 
C) $200 
D) $320 
E) $400

Question 4

A stock with a beta of zero would be expected to have a rate of return equal to:

Accepted Answer

A) the risk-free rate. 
B) the market rate. 
C) the prime rate. 
D) the average AAA bond. 
E) None of the above. 
A) the risk-free rate. 
B) the market rate. 
C) the prime rate. 
D) the average AAA bond. 
E) None of the above.

Question 5

The standard deviation of Quantpiks 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

Question 6

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 7

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

Accepted Answer

A) Efficient Markets Hypothesis (EMH) 
B) systematic risk principle 
C) Open Markets Theorem 
D) Law of One Price 
E) principle of diversification 
A) Efficient Markets Hypothesis (EMH) 
B) systematic risk principle 
C) Open Markets Theorem 
D) Law of One Price 
E) principle of diversification

Question 8

According to the CAPM,the expected return on a risky asset depends on three components.
Describe each component,and explain its role in determining expected return.

Accepted Answer

The CAPM suggests that the expected retu

Question 9

The linear relation between an asset's expected return and its beta coefficient is the:

Accepted Answer

A) reward-to-risk ratio. 
B) portfolio weight. 
C) portfolio risk. 
D) security market line. 
E) market risk premium. 
A) reward-to-risk ratio. 
B) portfolio weight. 
C) portfolio risk. 
D) security market line. 
E) market risk premium.

Question 10

Kali's Ski Resort,Inc.stock is quite cyclical.In a boom economy,the stock is expected to return 30% in comparison to 12% in a normal economy and a negative 20% in a recessionary period.The probability of a recession is 15%.There is a 30% chance of a boom economy.The remainder of the time,the economy will be at normal levels.What is the standard deviation of the returns on Kali's Ski Resort,Inc.stock?

Accepted Answer

A) 10.05% 
B) 12.60% 
C) 15.83% 
D) 17.46% 
E) 25.04% 
A) 10.05% 
B) 12.60% 
C) 15.83% 
D) 17.46% 
E) 25.04%

Question 11

The market has an expected rate of return of 10.2%.The long-term government bond is expected to yield 4.2% and the U.S.Treasury bill is expected to yield 3.8%.The inflation rate is 3.1%.What is the market risk premium?

Accepted Answer

A) 2.9% 
B) 3.3% 
C) 6.0% 
D) 6.4% 
E) 6.9% 
A) 2.9% 
B) 3.3% 
C) 6.0% 
D) 6.4% 
E) 6.9%

Question 12

The risk-free rate of return is 5% and the market risk premium is 7%.What is the expected rate of return on a stock with a beta of 1.56?

Accepted Answer

A) 10.23% 
B) 11.08% 
C) 12.00% 
D) 15.92% 
E) 16.36% 
A) 10.23% 
B) 11.08% 
C) 12.00% 
D) 15.92% 
E) 16.36%

Question 13

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 14

The market has an expected rate of return of 9.8%.The long-term government bond is expected to yield 4.5% and the U.S.Treasury bill is expected to yield 3.4%.The inflation rate is 3.1%.What is the market risk premium?

Accepted Answer

A) 2.2% 
B) 3.3% 
C) 5.3% 
D) 6.4% 
E) 6.7% 
A) 2.2% 
B) 3.3% 
C) 5.3% 
D) 6.4% 
E) 6.7%

Question 15

You recently purchased a stock that is expected to earn 25% in a booming economy,9% in a normal economy and lose 8% in a recessionary economy.There is a 15% probability of a boom,a 65% chance of a normal economy,and a 10% chance of a recession.What is your expected rate of return on this stock?

Accepted Answer

A) 7.65% 
B) 8.05% 
C) 8.67% 
D) 8.83% 
E) 9.00% 
A) 7.65% 
B) 8.05% 
C) 8.67% 
D) 8.83% 
E) 9.00%

Question 16

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?

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 17

The beta of a security is calculated by:

Accepted Answer

A) dividing the covariance of the security with the market by the variance of the market. 
B) dividing the correlation of the security with the market by the variance of the market. 
C) dividing the variance of the market by the covariance of the security with the market. 
D) dividing the variance of the market by the correlation of the security with the market. 
E) None of the above. 
A) dividing the covariance of the security with the market by the variance of the market. 
B) dividing the correlation of the security with the market by the variance of the market. 
C) dividing the variance of the market by the covariance of the security with the market. 
D) dividing the variance of the market by the correlation of the security with the market. 
E) None of the above.

Question 18

The market risk premium is computed by:

Accepted Answer

A) adding the risk-free rate of return to the inflation rate. 
B) adding the risk-free rate of return to the market rate of return. 
C) subtracting the risk-free rate of return from the inflation rate. 
D) subtracting the risk-free rate of return from the market rate of return. 
E) multiplying the risk-free rate of return by a beta of 1.0. 
A) adding the risk-free rate of return to the inflation rate. 
B) adding the risk-free rate of return to the market rate of return. 
C) subtracting the risk-free rate of return from the inflation rate. 
D) subtracting the risk-free rate of return from the market rate of return. 
E) multiplying the risk-free rate of return by a beta of 1.0.

Question 19

The variance of Quantpiks returns is:

Accepted Answer

A) .0207 
B) .0428 
C) .0643 
D) .0733 
E) None of the above. 
A) .0207 
B) .0428 
C) .0643 
D) .0733 
E) None of the above.

Question 20

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.

The principle of diversification tells us that:

The characteristic line is graphically depicted as:

A stock with a beta of zero would be expected to have a rate of return equal to:

The standard deviation of Quantpiks returns is

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

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

According to the CAPM,the expected return on a risky asset depends on three components. Describe each component,and explain its role in determining expected return.

The linear relation between an asset's expected return and its beta coefficient is the:

The market has an expected rate of return of 10.2%.The long-term government bond is expected to yield 4.2% and the U.S.Treasury bill is expected to yield 3.8%.The inflation rate is 3.1%.What is the market risk premium?

The risk-free rate of return is 5% and the market risk premium is 7%.What is the expected rate of return on a stock with a beta of 1.56?

The market has an expected rate of return of 9.8%.The long-term government bond is expected to yield 4.5% and the U.S.Treasury bill is expected to yield 3.4%.The inflation rate is 3.1%.What is the market risk premium?

You recently purchased a stock that is expected to earn 25% in a booming economy,9% in a normal economy and lose 8% in a recessionary economy.There is a 15% probability of a boom,a 65% chance of a normal economy,and a 10% chance of a recession.What is your expected rate of return on this stock?

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?

The beta of a security is calculated by:

The market risk premium is computed by:

The variance of Quantpiks returns is:

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

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

Net Present Value and Other Investment Rules

Interest Rates and Bond Valuation

Risk and Return: Lessons From Market History

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

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing: an Introduction

Raising Capital

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

International Corporate Finance

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

The principle of diversification tells us that:

The characteristic line is graphically depicted as:

A stock with a beta of zero would be expected to have a rate of return equal to:

The standard deviation of Quantpiks returns is

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

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

According to the CAPM,the expected return on a risky asset depends on three components. Describe each component,and explain its role in determining expected return.

The linear relation between an asset's expected return and its beta coefficient is the:

The market has an expected rate of return of 10.2%.The long-term government bond is expected to yield 4.2% and the U.S.Treasury bill is expected to yield 3.8%.The inflation rate is 3.1%.What is the market risk premium?

The risk-free rate of return is 5% and the market risk premium is 7%.What is the expected rate of return on a stock with a beta of 1.56?

The market has an expected rate of return of 9.8%.The long-term government bond is expected to yield 4.5% and the U.S.Treasury bill is expected to yield 3.4%.The inflation rate is 3.1%.What is the market risk premium?

You recently purchased a stock that is expected to earn 25% in a booming economy,9% in a normal economy and lose 8% in a recessionary economy.There is a 15% probability of a boom,a 65% chance of a normal economy,and a 10% chance of a recession.What is your expected rate of return on this stock?

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?

The beta of a security is calculated by:

The market risk premium is computed by:

The variance of Quantpiks returns is:

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

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

Net Present Value and Other Investment Rules

Interest Rates and Bond Valuation

Risk and Return: Lessons From Market History

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

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing: an Introduction

Raising Capital

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

International Corporate Finance

Filters