Deck 12: Systematic Risk and the Equity Risk Premium

Question 1

CSL, a pharmaceutical company, has a beta of 1.1, and Woolworths has a beta of 1.0. The risk-freerate of interest is 4% and the market risk premium is 6%. What is the expected return on a portfolio with 50% of its money in CSL and the balance in Woolworths?

A) 11.1%
B) 12.4%
C) 10.3%
D) 9.9%

Answer 1

10.3%

Question 2

Use the table for the question(s) below.
Consider the following returns:
$\begin{array} { l c c c } \hline \text { Year-End } & \begin{array} { c } \text { ANZ } \\\text { Realised } \\\text { Return }\end{array} & \begin{array} { c } \text { WOW } \\\text { Realised } \\\text { Return }\end{array} & \begin{array} { c } \text { BHP } \\\text { Realised } \\\text { Return }\end{array} \\\hline 2007 & 20.1 \% & - 14.6 \% & 0.2 \% \\\hline 2008 & 72.7 \% & 4.3 \% & - 3.2 \% \\\hline 2009& - 25.7 \% & - 58.1 \% & - 27.0 \% \\\hline 2010& 56.9 \% & 71.1 \% & 27.9 \% \\\hline 2011& 6.7 \% & 17.3 \% & - 5.1 \% \\\hline 2012 & 17.9 \% & 0.9 \% & - 11.3 \% \\\hline &\end{array}$

-The volatility on ANZ returns is closest to?

A) 42%
B) 10%
C) 13%
D) 35%

Answer 2

35%

Question 3

Suppose you invest in 100 shares of BHP at $40 per share and 200 shares of ANZ at $25 per share. If the price of BHP increases to $50 and the price of ANZ decreases to $20 per share, what is the return on your portfolio?

A) -10%
B) 12%
C) -5%
D) 0%

Answer 3

0%

Question 4

Companies that sell household products and food have very little relation to the state of the economy because such basic needs do not go away. These stocks tend to have betas.

A) low
B) negative
C) high
D) cannot say for sure

Question 5

Diversification reduces the risk of a portfolio because and some of the risks are averaged out of the portfolio.

A) firms have common risks
B) share prices are always affected by the market
C) share prices do not move identically
D) share prices are unpredictable

Question 6

Which of the following statements is FALSE?

A) A portfolio's risk premium and volatility are determined by the fraction that is invested in the market.
B) Because all investors should hold risky securities in the same proportions as the efficient portfolio, their combined portfolio will also reflect the same proportions as the efficient portfolio.
C) Graphically, when the tangent line goes through the market portfolio, it is called the security market line (SML).
D) When the Capital Asset Pricing Model (CAPM) assumptions hold, choosing an optimal portfolio is relatively straightforward; it is the combination of the risk-free investment and the market portfolio.

Question 7

Which of the following statements is FALSE?

A) Almost all of the correlations between shares are negative, illustrating the general tendency of shares to move together.
B) With a positive amount invested in each share, the more the shares move together and the higher their covariance or correlation, the more variable the portfolio will be.
C) Shares' returns will tend to move together if they are affected similarly by economic events.
D) Shares in the same industry tend to have more highly correlated returns than shares in different industries.

Question 8

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
$\begin{array}{lccccc}\hline&\text { Expected }&\text {Standard }&\text {Correlation with }&\text {Correlation with }&\text {Correlation with }\\\text { Stock } & \text { Return } & \text { Deviation } & \text { Data\#3 } & \text { Metcash } & \text { Webjet } \\\hline \text { Data\#3 } & 14 \% & 6 \% & 1.0 & -1.0 & 0.0 \\\hline \text { Metcash } & 44 \% & 24 \% & -1.0 & 1.0 & 0.7 \\\hline \text { Webjet } & 23 \% & 14 \% & 0.0 & 0.7 & 1.0\end{array}$

-The expected return of a portfolio that is equally invested in Data#3 and Metcash is closest to?

A) 29%
B) 44%
C) 15%
D) 14%

Question 9

A share market comprises 5000 shares of company A and 2000 shares of company B. Assume theshare prices for companies A and B are $20 and $35, respectively. If you have $15,000 to invest and you want to hold the market portfolio, how much of your money will you invest in company A?

A) $8823.53
B) $6176.47
C) $5000
D) $10,000

Question 10

A share market comprises 1000 shares of company A and 3000 shares of company B. The share prices for companies A and B are $25 and $30, respectively. What is the capitalisation of the market portfolio?

A) $125,000
B) $98,000
C) $100,000
D) $115,000

Question 11

A share market comprises 2000 shares of company A and 2000 shares of company B. The shar? prices for companies A and B are $20 and $10, respectively. What is the capitalisation of the market portfolio?

A) $65,000
B) $70,000
C) $55,000
D) $60,000

Question 12

You expect Wesfarmers (WES) to have a beta of 1 over the next year and the beta of Qantas (QAN) to be 1.2 over the next year. Also, you expect the volatility of WES to be 30% and that of QAN to be 40% over the next year. Which company has more systematic risk? Which company has more total risk?

A) WES, WES
B) WES, QAN
C) QAN, WES
D) QAN, QAN

Question 13

The Capital Asset Pricing Model asserts that the return is equal to the risk-free rate plus a risk premium for systematic risk.

A) realised
B) ex-post
C) holding period
D) expected

Question 14

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
$\begin{array}{lccccc}\hline&\text { Expected }&\text {Standard }&\text {Correlation with }&\text {Correlation with }&\text {Correlation with }\\\text { Stock } & \text { Return } & \text { Deviation } & \text { Data\#3 } & \text { Metcash } & \text { Webjet } \\\hline \text { Data\#3 } & 14 \% & 6 \% & 1.0 & -1.0 & 0.0 \\\hline \text { Metcash } & 44 \% & 24 \% & -1.0 & 1.0 & 0.7 \\\hline \text { Webjet } & 23 \% & 14 \% & 0.0 & 0.7 & 1.0\end{array}$

-The volatility of a portfolio that is equally invested in Webjet and Data#3 is closest to?

A) 0.6%
B) 5.0%
C) 7.6%
D) 22.4%

Question 15

A portfolio has 40% of its value in ASX shares and the rest in Woodside Petroleum (WPL). The volatilities of ASX and WPL are 40% and 30%, respectively, and the correlation between ASX and WPL is -0.3. What is the standard deviation of the portfolio?

A) 22.17%
B) 18.65%
C) 20.18%
D) 19.95%

Question 16

Suppose you invest in 200 shares of CBA at $70 per share and 200 shares of WOW at $20 per share. If the price of CBA increases to $80 and the price of WOW decreases to $18 per share, what is the return on your portfolio?

A) 9.76%
B) 8.89%
C) 12.21%
D) 11.21%

Question 17

Which of the following statements is FALSE?

A) While the sign of the correlation is easy to interpret, its magnitude is not.
B) When the covariance equals 0, the returns are uncorrelated.
C) To find the risk of a portfolio, we need to know more than the risk and return of the component shares; we need to know the degree to which the shares' returns move together.
D) Independent risks are uncorrelated.

Question 18

A portfolio comprises Cochlear (beta of 1.4) and Westpac (beta of 1.0). The amount invested in Cochlear is $10,000 and in Westpac is $20,000. What is the beta of the portfolio?

A) 1.19
B) 1.13
C) 1.23
D) 1.03

Question 19

You observe that Telstra shares and the S&P/ASX 200 index have the following weekly returns: $$\begin{array} { c c c } \text { Week } & \text { Telstra return } & \text { S\&P/ASX 200 return } \\\hline 1 & 0.005 & 0.001 \\2 & 0.010 & 0.005 \\3 & - 0.003 & - 0.005 \\4 & - 0.005 & - 0.001\end{array}$$ If this pattern of returns is typical of Telstra shares, and you calculated a beta against the S&P/ASX 200, which of the following is true?

A) Telstra's beta is positive.
B) Telstra's beta is negative.
C) Telstra's beta is zero.
D) Cannot be determined from information given.

Question 20

Which of the following statements is FALSE?

A) The variance of a portfolio depends only on the variance of the individual shares.
B) When the covariance equals 0, the shares have no tendency to move either together or in opposition of one another.
C) A share's return is perfectly positively correlated with itself.
D) The closer the correlation is to -1, the more the returns tend to move in opposite directions.

Question 21

The amount of a share's risk that is diversified awa?

A) is independent of the portfolio that you add it to.
B) depends on the portfolio that you add it to.
C) depends on risk-free rate of interest.
D) depends on market risk premium.

Question 22

The volatility of Woolworth's share price is 30% and that of Reckon's shares is 30%. When I hold both shares in my portfolio, the overall volatility of the portfolio is

A) 26%.
B) 30%.
C) 28%.
D) M+ore information needed

Question 23

You expect Wesfarmers (WES) to have a beta of 1.5 over the next year and the beta of Qantas (QAN) to be 1.9 over the next year. Also, you expect the volatility of WES to be 50% and that of QAN to be 35% over the next year. Which company has more systematic risk? Which company has more total risk?

A) QAN, QAN
B) WES, WES
C) WES, QAN
D) QAN, WES

Question 24

Suppose you invest in 100 shares of NAB at $40 per share and 100 shares of WES at $25 per share. If the price of NAB increases to $45 and the price of WES decreases to $22 per share, what is the return on your portfolio?

A) 3.08%
B) 9.45%
C) 5.39%
D) 4.12%

Question 25

A portfolio has shares in three firms-300 shares of Commonwealth Bank (CBA), 300 shares of Woolworths (WOW), and 100 shares of Rio Tinto (RIO). If the price of CBA is $20, the price of WOW is $30, and the price of RIO is $150, calculate the portfolio weight of CBA and WOW.

A) 10%, 20%
B) 15%, 25%
C) 20%, 40%
D) 20%, 30%

Question 26

The systematic risk (beta) of a portfolio is by holding shares in more firms, even if they each had the same systematic risk.

A) increased
B) decreased
C) unchanged
D) cannot say for sure

Question 27

The beta of the market portfolio is?

A) 1
B) 0
C) -1
D) 2

Question 28

You expect Wesfarmers (WES) to have a beta of 1.3 over the next year and the beta of Qantas (QAN) to be 0.9 over the next year. Also, you expect the volatility of WES to be 40% and that of QAN to be 30% over the next year. Which company has more systematic risk? Which company has more total risk?

A) QAN, QAN
B) WES, QAN
C) WES, WES
D) QAN, WES

Question 29

The price of BHP is $35 per share and that of RIO is $60 per share. The price of BHP increases to $37 per share after one year and to $40 after two years. Also, shares of RIO increase to $65 after one year and to $70 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return in year 1 and year 2? Assume no dividends are paid.

A) 7.37%, 7.84%
B) 9.62%, 11.34%
C) 11.21%, 8.81%
D) 9.01%, 13.62%

Question 30

Which of the following statements is FALSE?

A) The covariance of a share with itself is simply its variance.
B) The covariance allows us to gauge the strength of the relationship between shares.
C) If two shares move in opposite directions, one will tend to be above average when the other is below average, and the covariance will be negative.
D) The correlation between two shares has the same sign as their covariance, so it has a similar interpretation.

Question 31

For each 1% change in the market portfolio's excess return, the investment's excess return is expected to change by percent due to risks that it has in common with the market.

A) zero
B) alpha
C) beta
D) cannot say for sure

Question 32

A share market comprises 5000 shares of company A and 2000 shares of company B. Assume the share prices for companies A and B are $20 and $35, respectively. What is the capitalisation of the market portfolio?

A) $165,000
B) $170,000
C) $150,000
D) $185,000

Question 33

The price of BHP is $30 per share and that of RIO is $50 per share. The price of BHP increases to $35 per share after one year and to $40 after two years. Also, shares of RIO increase to $60 after one year and to $70 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return in year 1 and year 2? Assume no dividends are paid.

A) 18.75%, 15.79%
B) 18.01%, 14.52%
C) 18.62%, 17.75%
D) 19.97%, 17.85%

Question 34

Which of the following statements is FALSE?

A) We refer to the beta of a security with the market portfolio simply as the securities beta.
B) There is a linear relationship between a share's beta and its expected return.
C) A security with a negative beta has a negative correlation with the market, which means that this security tends to perform well when the rest of the market is doing poorly.
D) The risk premium of a security is equal to the market risk premium (the amount by which the market's expected return exceeds the risk-free rate) divided by the amount of market risk present in the security's returns measured by its beta with the market.

Question 35

Which of the following statements is FALSE?

A) Because the prices of shares do not move identically, some of the risk is averaged out in a portfolio.
B) Correlation is the expected product of the deviations of two returns.
C) The covariance and correlation allow us to measure the co-movement of returns.
D) The amount of risk that is eliminated in a portfolio depends on the degree to which the shares face common risks and their prices move together.

Question 36

Use the information for the question(s) below.
Suppose you invest $20,000 by purchasing 200 shares of BHP Billiton (BHP) at $50 per share, 200 shares of ANZ Bank (ANZ)
at $30 per share, and 100 shares of Flight Centre (FLT) at $40 per share.
Suppose over the next year FLT has a return of 12.5%, ANZ has a return of 20%, and BHP has a return of -10%. The value of your portfolio over the year is

A) $21,000.
B) $20,000.
C) $21,500.
D) $20,700.

Question 37

Historically, the average excess return of the market portfolio over the return of Treasury bonds has been and is proxy for the market risk premium.

A) between 5% and 7%
B) between 10% and 12%
C) between 14% and 16%
D) between 11% and 13%

Question 38

A portfolio comprises Cochlear (beta of 1.3) and Westpac (beta of 0.8). The amount invested in Cochlear is $20,000 and in Westpac is $20,0000. What is the beta of the portfolio?

A) 1.14
B) 0.97
C) 1.05
D) 0.99

Question 39

A portfolio comprises Cochlear (beta of 1.2) and Westpac (beta of 0.9). The amount invested in Cochlear is $20,000 and in Westpac is $30,000. What is the beta of the portfolio?

A) 1.26
B) 1.15
C) 1.19
D) 1.02

Question 40

Your superannuation fund comprises 200 units of the Diversified Large Industrials fund (DLI) and 100 shares of Cochlear (COH). The price of DLI is $130 and that of COH is $105. If you expect the return on DLI to be 9% in the next year and the return on COH to be 7%, what is the expected return for your retirement portfolio?

A) 9.64%
B) 8.42%
C) 7.81%
D) 8.94%

Question 41

If you build a large enough portfolio, you can diversify away all risk, but you will be left with risk.

A) systematic, undiversifiable
B) diversifiable, diversifiable
C) unsystematic, systematic
D) diversifiable, unsystematic

Question 42

We can reduce volatility by investing in less than perfectly correlated assets through diversification because the expected return of a portfolio is the weighted average of the expected returns of its shares, but the volatility of a portfolio

A) depends on the expected return.
B) is higher than the weighted average volatility.
C) is less than the weighted average volatility.
D) is independent of weights in the shares.

Question 43

A linear regression was done to estimate the relation between Santos' share returns and the market's return. The intercept of the line was found to be 0.23 and the slope was 1.47. Which of the following statements is true regarding Santos shares?

A) The risk-free rate is 1.47%.
B) The standard deviation of Santos' excess returns is 23%.
C) Santos' beta is 1.47.
D) Santos' beta is 0.23.

Question 44

Which of the following statements is FALSE?

A) Without trading, the portfolio weights will decrease for the shares in the portfolio whose returns are above the overall portfolio return.
B) Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio.
C) A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.
D) The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio.

Question 45

The volatility of Woolworth's share price is 30% and that of Reckon's shares is 30%. When I hold both shares in my portfolio and the returns have a correlation of 1, the overall volatility of returns of the portfolio is

A) more than 30%.
B) unchanged at 30%.
C) less than 30%.
D) Cannot say for sure

Question 46

A portfolio has 30% of its value in ASX shares and the rest in Woodside Petroleum (WPL). The volatilities of ASX and WPL are 35% and 30%, respectively, and the correlation between ASX and WPL is 0.3. What is the standard deviation of the portfolio?

A) 29.67%
B) 26.15%
C) 30.23%
D) 22.35%

Question 47

CSL, a pharmaceutical company, has a beta of 1.5, and Woolworths has a beta of 0.9. The risk-free rate of interest is 4% and the market risk premium is 7%. What is the expected return on a portfolio with 30% of its money in CSL and the balance in Woolworths?

A) 11.23%
B) 11.07%
C) 11.56%
D) 11.98%

Question 48

A portfolio has shares in three firms-100 shares of Commonwealth Bank (CBA), 200 shares of Woolworths (WOW), and 50 shares of Rio Tinto (RIO). If the price of CBA is $20, the price of WOW is $20, and the price of RIO is $130, calculate the portfolio weight of CBA and WOW.

A) 16%, 32%
B) 11%, 31%
C) 15%, 29%
D) 12%, 17%

Question 49

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
$\begin{array}{lccccc}\hline&\text { Expected }&\text {Standard }&\text {Correlation with }&\text {Correlation with }&\text {Correlation with }\\\text { Stock } & \text { Return } & \text { Deviation } & \text { Data\#3 } & \text { Metcash } & \text { Webjet } \\\hline \text { Data\#3 } & 14 \% & 6 \% & 1.0 & -1.0 & 0.0 \\\hline \text { Metcash } & 44 \% & 24 \% & -1.0 & 1.0 & 0.7 \\\hline \text { Webjet } & 23 \% & 14 \% & 0.0 & 0.7 & 1.0\end{array}$

-Which of the following combinations of two stocks would give you the biggest reduction in risk?

A) Metcash and Data#3
B) Webjet and Metcash
C) Data#3 and Webjet
D) No combination will reduce risk.

Question 50

CSL, a pharmaceutical company, has a beta of 1.2, and Woolworths has a beta of 0.8. The risk-free rate of interest is 4% and the market risk premium is 7%. What is the expected return on a portfolio with 40% of its money in CSL and the balance in Woolworths?

A) 10.01%
B) 11.85%
C) 10.72%
D) 9.91%

Question 51

Which of the following statements is FALSE?

A) The beta of a portfolio is the weighted average beta of the securities in the portfolio.
B) By holding a negative-beta security, an investor can reduce the overall market risk of her portfolio.
C) The expected return of a portfolio should correspond to the portfolio's beta.
D) Graphically, the line through the risk-free investment and the market portfolio is called the capital market line (CML).

Question 52

The S&P 500 index traditionally is a(n?

A) value weighted
B) chain weighted
C) price weighted
D) equally weighted

Question 53

A share market comprises 2000 shares of company A and 2000 shares of company B. The share prices for companies A and B are $20 and $10, respectively. What proportion of the market portfolio is comprised of each company?

A) Company A is 33.3% and company B is 66.7%.
B) Company A is 66.7% and company B is 33.3%.
C) Company A is 200% and company B is 100%.
D) Company A is $40,000 and company B is $20,000.

Question 54

The price of BHP is $40 per share and that of RIO is $45 per share. The price of BHP increases to $45 per share after one year and to $50 after two years. Also, shares of RIO increase to $50 after one year and to $60 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return in year 1 and year 2? Assume no dividends are paid.

A) 9.91%, 17.96%
B) 11.76%, 15.79%
C) 10.05%, 18.76%
D) 11.21%, 14.53%

Question 55

As we add more uncorrelated shares to a portfolio where the shares are held in equal weights, the benefit of diversification is most dramatic

A) when there are more than 500 shares.
B) when there are more than 1000 shares.
C) after 20 shares have been added.
D) at the outset.

Question 56

A portfolio has shares in three firms-200 shares of Commonwealth Bank (CBA), 100 shares of Woolworths (WOW), and 50 shares of Rio Tinto (RIO). If the price of CBA is $30, the price of WOW is $30, and the price of RIO is $130, calculate the portfolio weight of CBA and WOW.

A) 21.3%, 35.2%
B) 36.2%, 21.6%
C) 11.7%, 12.7%
D) 38.7%, 19.4%

Question 57

Which of the following statements is FALSE?

A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility.
B) Correlation has no effect on the expected return on a portfolio.
C) The volatility of the portfolio will differ, depending on the correlation between the securities in the portfolio.
D) We can rule out inefficient portfolios because they represent inferior investment choices.

Question 58

Your superannuation fund comprises 100 units of the Diversified Large Industrials fund (DLI) and 100 shares of Cochlear (COH). The price of DLI is $120 and that of COH is $98. If you expect the return on DLI to be 10% in the next year and the return on COH to be 5%, what is the expected return for your retirement portfolio?

A) 7.01%
B) 8.82%
C) 6.65%
D) 7.75%

Question 59

The expected return is usually the baseline risk-free rate of return that we demand to compensate for inflation and the time value of money.

A) higher than
B) lower than
C) similar to
D) none of the above

Question 60

Which of the following equations is INCORRECT?

A) Cov(Ri,Rj) = E[(Ri - E[Ri])(Rj - E[Rj])] Cov(Ri,Rj)
B) Corr(Ri,Rj) = Var(Ri)Var(Rj)
C) Var(Rp) = x12Var(R1) + x22Var(R2) + 2X1X2Cov(R1,R2)
D) Cov(R ,R ) = 1 i T - 1
F(Ri - Ri)(Rj - Rj)

Question 61

When we form an equally weighted portfolio of shares and keep increasing the number of shares in the portfolio, the volatility of the portfolio also increases.

Question 62

Your superannuation fund comprises 300 units of the Diversified Large Industrials fund (DLI) and 100 shares of Cochlear (COH). The price of DLI is $140 and that of COH is $95. If you expect the return on DLI to be 15% in the next year and the return on COH to be 8%, what is the expected return for your retirement portfolio?

A) 12.25%
B) 11.67%
C) 12.52%
D) 13.71%

Question 63

A share market comprises 5000 shares of company A and 2000 shares of company B. Assume the share prices for companies A and B are $20 and $35, respectively. What proportion of the market portfolio is comprised of company A?

A) $100,000
B) 58.8%
C) $70,000
D) 41.2%

Question 64

Use the table for the question(s) below.
Consider the following expected returns, volatilities, and correlations:
$\begin{array}{lccccc}\hline&\text { Expected }&\text {Standard }&\text {Correlation with }&\text {Correlation with }&\text {Correlation with }\\\text { Stock } & \text { Return } & \text { Deviation } & \text { Data\#3 } & \text { Metcash } & \text { Webjet } \\\hline \text { Data\#3 } & 14 \% & 6 \% & 1.0 & -1.0 & 0.0 \\\hline \text { Metcash } & 44 \% & 24 \% & -1.0 & 1.0 & 0.7 \\\hline \text { Webjet } & 23 \% & 14 \% & 0.0 & 0.7 & 1.0\end{array}$

-The volatility of a portfolio that is equally invested in Data#3 and Metcash is closest to?

A) 11%
B) 6%
C) 9%
D) 8%

Question 65

If two shares are perfectly negatively correlated, a portfolio with equal weighting in each share will always have a volatility (standard deviation) of 0.

Question 66

The volatility of Woolworth's share price is 30% and that of Reckon's shares is 30%. When I hold both shares in my portfolio with an equal amount in each, and the returns have a correlation of minus 1, the overall volatility of returns of the portfolio is

A) unchanged at 30%.
B) more than 30%.
C) zero.
D) Cannot say for sure

Question 67

Which of the following statements is FALSE?

A) Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.
B) When shares are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them.
C) An investor seeking high returns and low volatility should only invest in an efficient portfolio.
D) When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification.

Question 68

A portfolio has 50% of its value in ASX shares and the rest in Woodside Petroleum (WPL). The volatilities of ASX and WPL are 39% and 35%, respectively, and the correlation between ASX and WPL is 0. What is the standard deviation of the portfolio?

A) 37.5%
B) 22..7%
C) 26.2%
D) 29.5%

Question 69

Your estimate of the market risk premium is 5%. The risk-free rate of return is 4%, and JB Hi-Fi has a beta of 1.5. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

A) 11.9%
B) 11.0%
C) 11.5%
D) 10.4%

Question 70

Which of the following equations is INCORRECT?

A) E[R } = E[Z x R ]
B) x = Total value of portfolio Value of investment i
C) Rp = Zi xiRi
D) Rp = x1R1 + x2R2 + ... + xnRn

Question 71

Your estimate of the market risk premium is 6%. The risk-free rate of return is 5%, and JB HI-Fi has a beta of 1.2. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

A) 10.5%
B) 9.1%
C) 12.0%
D) 12.2%

Question 72

Use the table for the question(s) below.
Consider the following returns:
$\begin{array} { l c c c } \hline \text { Year-End } & \begin{array} { c } \text { ANZ } \\\text { Realised } \\\text { Return }\end{array} & \begin{array} { c } \text { WOW } \\\text { Realised } \\\text { Return }\end{array} & \begin{array} { c } \text { BHP } \\\text { Realised } \\\text { Return }\end{array} \\\hline 2007 & 20.1 \% & - 14.6 \% & 0.2 \% \\\hline 2008 & 72.7 \% & 4.3 \% & - 3.2 \% \\\hline 2009& - 25.7 \% & - 58.1 \% & - 27.0 \% \\\hline 2010& 56.9 \% & 71.1 \% & 27.9 \% \\\hline 2011& 6.7 \% & 17.3 \% & - 5.1 \% \\\hline 2012 & 17.9 \% & 0.9 \% & - 11.3 \% \\\hline &\end{array}$

-The volatility on WOW returns is closest to?

A) 18%
B) 42%
C) 35%
D) 31%

Question 73

A linear regression to estimate the relation between Domino's Pizza share returns and the market's return gives the best fitting line that represents the relation between the share and the market. The slope of this line is our estimate of

A) volatility.
B) alpha.
C) beta.
D) risk-free rate.

Question 74

Your estimate of the market risk premium is 7%. The risk-free rate of return is 3.5% and JB Hi-Fi has a beta of 1.3. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

A) 12.1%
B) 12.6%
C) 12.9%
D) 11.3%

Question 75

The weight of BHP in your portfolio i?

A) 20%.
B) 50%.
C) 30%.
D) 40%.

Question 76

Use the table for the question(s) below.
Consider the following returns:
$\begin{array} { l c c c } \hline \text { Year-End } & \begin{array} { c } \text { ANZ } \\\text { Realised } \\\text { Return }\end{array} & \begin{array} { c } \text { WOW } \\\text { Realised } \\\text { Return }\end{array} & \begin{array} { c } \text { BHP } \\\text { Realised } \\\text { Return }\end{array} \\\hline 2007 & 20.1 \% & - 14.6 \% & 0.2 \% \\\hline 2008 & 72.7 \% & 4.3 \% & - 3.2 \% \\\hline 2009& - 25.7 \% & - 58.1 \% & - 27.0 \% \\\hline 2010& 56.9 \% & 71.1 \% & 27.9 \% \\\hline 2011& 6.7 \% & 17.3 \% & - 5.1 \% \\\hline 2012 & 17.9 \% & 0.9 \% & - 11.3 \% \\\hline &\end{array}$

-The covariance between ANZ and WOW's returns is closest to?

A) 0.12
B) 0.29
C) 0.10
D) 0.69

Question 77

The market portfolio is the portfolio of all risky investments hel?

A) in descending weights.
B) in ascending weights.
C) based on previous year performance.
D) in proportion to their value.

Question 78

The volatility of Woolworth's share price is 30% and that of Reckon's shares is 30%. When I hold both shares in my portfolio and the returns have zero correlation, the overall volatility of returns of the portfolio is

A) unchanged at 30%.
B) more than 30%.
C) less than 30%.
D) Cannot say for sure

Question 79

Share prices tend to move together if they are affected b?

A) common economic events.
B) company specific events.
C) events unrelated to the economy.
D) idiosyncratic shocks.

Question 80

Shares have both diversifiable risk and undiversifiable risk, but only diversifiable risk is rewarded with higher expected returns.