Question 1

For a highly diversified equally weighted portfolio with a large number of securities,the portfolio variance is:

Accepted Answer

A) the average covariance. 
B) the average expected value. 
C) the average variance. 
D) the weighted average expected value. 
E) the weighted average variance. 
A) the average covariance. 
B) the average expected value. 
C) the average variance. 
D) the weighted average expected value. 
E) the weighted average variance.

Question 2

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 3

If the correlation between two stocks is +1,then a portfolio combining these two stocks will have a variance that is:

Accepted Answer

A) less than the weighted average of the two individual variances. 
B) greater than the weighted average of the two individual variances. 
C) equal to the weighted average of the two individual variances. 
D) less than or equal to average variance of the two weighted variances,depending on other information. 
E) None of the above. 
A) less than the weighted average of the two individual variances. 
B) greater than the weighted average of the two individual variances. 
C) equal to the weighted average of the two individual variances. 
D) less than or equal to average variance of the two weighted variances,depending on other information. 
E) None of the above.

Question 4

What is the standard deviation of a portfolio that is invested 40% in stock Q and 60% in stock R?

Accepted Answer

A) 0.7% 
B) 1.4% 
C) 2.6% 
D) 6.8% 
E) 8.1% 
A) 0.7% 
B) 1.4% 
C) 2.6% 
D) 6.8% 
E) 8.1%

Question 5

What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy enjoys a boom period?

Accepted Answer

A) 6.4% 
B) 6.8% 
C) 10.4% 
D) 13.2% 
E) 14.0% 
A) 6.4% 
B) 6.8% 
C) 10.4% 
D) 13.2% 
E) 14.0%

Question 6

The diagram below represents an opportunity set for a two asset combination.Indicate the correct efficient set with labels;explain why it is so.

Accepted Answer

Efficient set is portion of op

Question 7

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 8

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 9

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%?

Accepted Answer

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

Question 10

You have plotted the data for two securities over time on the same graph,i.e. ,the monthly return of each security for the last 5 years.If the pattern of the movements of each of the two securities rose and fell as the other did,these two securities would have:

Accepted Answer

A) no correlation at all. 
B) a weak negative correlation. 
C) a strong negative correlation. 
D) a strong positive correlation. 
E) one cannot get any idea of the correlation from a graph. 
A) no correlation at all. 
B) a weak negative correlation. 
C) a strong negative correlation. 
D) a strong positive correlation. 
E) one cannot get any idea of the correlation from a graph.

Question 11

If the economy booms,RTF,Inc.stock is expected to return 10%.If the economy goes into a recessionary period,then RTF is expected to only return 4%.The probability of a boom is 60% while the probability of a recession is 40%.What is the variance of the returns on RTF,Inc.stock?

Accepted Answer

A) .000200 
B) .000760 
C) .000864 
D) .001594 
E) .029394 
A) .000200 
B) .000760 
C) .000864 
D) .001594 
E) .029394

Question 12

The Rotor 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 13

The common stock of Chai Tea Inc has an expected return of 14.4%.The return on the market is 10% and the risk-free rate of return is 3.5%.What is the beta of this stock?

Accepted Answer

A) .65 
B) 1.09 
C) 1.32 
D) 1.44 
E) 1.68 
A) .65 
B) 1.09 
C) 1.32 
D) 1.44 
E) 1.68

Question 14

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 15

Risk that affects at most a small number of assets is called _____ risk.

Accepted Answer

A) portfolio 
B) nondiversifiable 
C) market 
D) unsystematic 
E) total 
A) portfolio 
B) nondiversifiable 
C) market 
D) unsystematic 
E) total

Question 16

A security that is fairly priced will have a return _____ the Security Market Line.

Accepted Answer

A) below 
B) on or below 
C) on 
D) on or above 
E) above 
A) below 
B) on or below 
C) on 
D) on or above 
E) above

Question 17

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 18

The Capital Market Line is the pricing relationship between:

Accepted Answer

A) efficient portfolios and beta. 
B) the risk-free asset and standard deviation of the portfolio return. 
C) the optimal portfolio and the standard deviation of portfolio return. 
D) beta and the standard deviation of portfolio return. 
E) None of the above. 
A) efficient portfolios and beta. 
B) the risk-free asset and standard deviation of the portfolio return. 
C) the optimal portfolio and the standard deviation of portfolio return. 
D) beta and the standard deviation of portfolio return. 
E) None of the above.

Question 19

What is the standard deviation of a portfolio which is invested 20% in stock A,30% in stock B and 50% in stock C?

Accepted Answer

A) 0.6% 
B) 0.9% 
C) 1.8% 
D) 2.2% 
E) 4.9% 
A) 0.6% 
B) 0.9% 
C) 1.8% 
D) 2.2% 
E) 4.9%

Question 20

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

For a highly diversified equally weighted portfolio with a large number of securities,the portfolio variance is:

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

If the correlation between two stocks is +1,then a portfolio combining these two stocks will have a variance that is:

What is the standard deviation of a portfolio that is invested 40% in stock Q and 60% in stock R?

What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy enjoys a boom period?

The diagram below represents an opportunity set for a two asset combination.Indicate the correct efficient set with labels;explain why it is so.

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

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%?

You have plotted the data for two securities over time on the same graph,i.e. ,the monthly return of each security for the last 5 years.If the pattern of the movements of each of the two securities rose and fell as the other did,these two securities would have:

If the economy booms,RTF,Inc.stock is expected to return 10%.If the economy goes into a recessionary period,then RTF is expected to only return 4%.The probability of a boom is 60% while the probability of a recession is 40%.What is the variance of the returns on RTF,Inc.stock?

The Rotor 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?

The common stock of Chai Tea Inc has an expected return of 14.4%.The return on the market is 10% and the risk-free rate of return is 3.5%.What is the beta of this stock?

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?

Risk that affects at most a small number of assets is called _____ risk.

A security that is fairly priced will have a return _____ the Security Market Line.

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

The Capital Market Line is the pricing relationship between:

What is the standard deviation of a portfolio which is invested 20% in stock A,30% in stock B and 50% in stock C?

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?

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

For a highly diversified equally weighted portfolio with a large number of securities,the portfolio variance is:

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

If the correlation between two stocks is +1,then a portfolio combining these two stocks will have a variance that is:

What is the standard deviation of a portfolio that is invested 40% in stock Q and 60% in stock R?

What is the expected return on a portfolio comprised of $4,000 in stock M and $6,000 in stock N if the economy enjoys a boom period?

The diagram below represents an opportunity set for a two asset combination.Indicate the correct efficient set with labels;explain why it is so.

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

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%?

You have plotted the data for two securities over time on the same graph,i.e. ,the monthly return of each security for the last 5 years.If the pattern of the movements of each of the two securities rose and fell as the other did,these two securities would have:

If the economy booms,RTF,Inc.stock is expected to return 10%.If the economy goes into a recessionary period,then RTF is expected to only return 4%.The probability of a boom is 60% while the probability of a recession is 40%.What is the variance of the returns on RTF,Inc.stock?

The Rotor 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?

The common stock of Chai Tea Inc has an expected return of 14.4%.The return on the market is 10% and the risk-free rate of return is 3.5%.What is the beta of this stock?

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?

Risk that affects at most a small number of assets is called _____ risk.

A security that is fairly priced will have a return _____ the Security Market Line.

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

The Capital Market Line is the pricing relationship between:

What is the standard deviation of a portfolio which is invested 20% in stock A,30% in stock B and 50% in stock C?

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?

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