Question 1

You own a portfolio which is invested equally in two stocks and a risk-free security. Beta is .89 for Stock A and 1.26 for Stock B. Which one of the following will increase the portfolio beta, all else being constant?

Accepted Answer

A) increasing the amount invested in the risk-free security 
B) decreasing the weight of Stock B and increasing the weight of Stock A 
C) replacing Stock A with a security that has a beta of .77 
D) increasing the weight of Stock A and decreasing the weight of the risk-free security 
E) replacing Stock B with Stock C, which has a beta equal to that of the market

Question 2

Which one of the following measures systematic risk?

Accepted Answer

A) beta 
B) alpha 
C) variance 
D) standard deviation 
E) correlation coefficient

Question 3

A stock has a standard deviation of 12.9% and a covariance with the market of .035. The market has a standard deviation of 9.93%. What is the beta of this stock?

Accepted Answer

A) 3.284 
B) 3.550 
C) 3.764 
D) 3.978 
E) 4.075

Question 4

All else held constant, which of the following will increase the expected return on a security based on CAPM? Assume the market return exceeds the risk-free rate and both values are positive. Also assume the beta exceeds 1.0.
I. decrease in the security beta
II. increase in the market risk premium
III. decrease in the risk-free rate
IV. increase in the market rate of return

Accepted Answer

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

Question 5

Home Interior's stock has an expected return of 13.25% and a beta of 1.4. The market return is 10.75% and the risk-free rate is 4.5%. This stock is ________ because the CAPM return for the stock is ________%.

Accepted Answer

A) greatly overvalued; 16.50 
B) slightly overvalued; 14.91 
C) priced correctly; 13.25 
D) slightly undervalued; 12.91 
E) greatly undervalued; 16.50

Question 6

Wilson Farms' stock has a beta of .73 and an expected return of 9.0%. The risk-free rate is 1.9% and the market risk premium is 7.3%. This stock is ________ because the CAPM return for the stock is ________%.

Accepted Answer

A) undervalued; 7.23 
B) undervalued; 7.53 
C) undervalued; 7.46 
D) overvalued; 7.23 
E) overvalued; 7.53

Question 7

Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases.

Accepted Answer

A) large market capitalization and high book-to-market ratio 
B) large market capitalization and low book-to-market ratio 
C) small market capitalization and high book-to-market ratio 
D) small market capitalization and a book-to-market ratio of 1.0 
E) small market capitalization and a low book-to-market ratio

Question 8

According to the capital asset pricing model, which of the following will increase the expected rate of return on a security that has a beta that is less than that of the market? Assume the market rate of return is greater than the risk-free rate and both rates are positive.
I. increase in the risk-free rate
II. decrease in the risk-free rate
III. increase in the market risk premium
IV. decrease in the market rate of return

Accepted Answer

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

Question 9

What is the beta of a portfolio that consists of the following?
$\begin{array}{ccc}
\text { Security } &\$ \text { Invested}& \text {  Beta }\
\text { A } & \$ 2,000 & 1.38 \
\text { B } & 5,000 & .47 \
\text { C } & 9,000 & 1.70 \
\text { D } & 4,000 & 1.08
\end{array}$

Accepted Answer

A) 1.18 
B) 1.22 
C) 1.24 
D) 1.32 
E) 1.37

Question 10

The security market line depicts the graphical relationship between which of the following pairs?
I. expected return
II. surprise return
III. systematic risk
IV. unsystematic risk

Accepted Answer

A) I and III 
B) I and IV 
C) II and III 
D) II and IV 
E) I and II

Question 11

Which of the following will affect the beta value of an individual security?
I. interval of time frequency used for the data sample
II. length of time period used for the data sample
III. particular time period selected for the sampling
IV. choice of index used as the measure of the market

Accepted Answer

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

Question 12

What is the beta of a portfolio that consists of the following?
$$\begin{array} { c r r } 
\text { Security } & \text { Invested } & \text { Beta } \
\text { E } & \$ 14,000 & .59 \
\text { F } & \$ 22,000 & 1.46 \
\text { G } & \$ 25,000 & 2.20 \
\text { H } & \$ 19,000 & 1.67
\end{array}$$

Accepted Answer

A) 1.21 
B) 1.34 
C) 1.36 
D) 1.49 
E) 1.59

Exam 12: Return, Risk, and the Security Market Line

You own a portfolio which is invested equally in two stocks and a risk-free security. Beta is .89 for Stock A and 1.26 for Stock B. Which one of the following will increase the portfolio beta, all else being constant?

Which one of the following measures systematic risk?

A stock has a standard deviation of 12.9% and a covariance with the market of .035. The market has a standard deviation of 9.93%. What is the beta of this stock?

Home Interior's stock has an expected return of 13.25% and a beta of 1.4. The market return is 10.75% and the risk-free rate is 4.5%. This stock is because the CAPM return for the stock is %.

Wilson Farms' stock has a beta of .73 and an expected return of 9.0%. The risk-free rate is 1.9% and the market risk premium is 7.3%. This stock is because the CAPM return for the stock is %.

Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases.

What is the beta of a portfolio that consists of the following? $\begin{array}{ccc}\text { Security } &\$ \text { Invested}& \text { Beta }\\\text { A } & \$ 2,000 & 1.38 \\\text { B } & 5,000 & .47 \\\text { C } & 9,000 & 1.70 \\\text { D } & 4,000 & 1.08\end{array}$

The security market line depicts the graphical relationship between which of the following pairs? I. expected return II. surprise return III. systematic risk IV. unsystematic risk

Which of the following will affect the beta value of an individual security? I. interval of time frequency used for the data sample II. length of time period used for the data sample III. particular time period selected for the sampling IV. choice of index used as the measure of the market

What is the beta of a portfolio that consists of the following? $\begin{array} { c r r } \text { Security } & \text { Invested } & \text { Beta } \\\text { E } & \$ 14,000 & .59 \\\text { F } & \$ 22,000 & 1.46 \\\text { G } & \$ 25,000 & 2.20 \\\text { H } & \$ 19,000 & 1.67\end{array}$