Question 1

A portfolio consists of 200 shares of Stock A,300 shares of Stock B,500 shares of Stock C,and 700 shares of Stock D.The prices of these stocks are $19,$36,$21,and $15 for Stocks A through D,respectively.What is the portfolio weight of Stock C?

Accepted Answer

A) 31.08% 
B) 32.20% 
C) 29.49% 
D) 25.72% 
E) 36.89%

Question 2

The risk premium for an individual security is computed by

Accepted Answer

A) adding the risk-free rate to the security's expected return. 
B) multiplying the security's beta by the market risk premium. 
C) multiplying the security's beta by the risk-free rate of return. 
D) dividing the market risk premium by the beta of the security. 
E) dividing the market risk premium by the quantity (1 − Beta).

Question 3

A portfolio consists of $38,312 of Stock A,$42,509 of Stock B,and $11,516 of Stock C.The expected returns on Stocks A,B,and C are 6.85 percent,12.08 percent,and 15.92 percent,respectively.What is the portfolio expected rate of return?

Accepted Answer

A) 9.98% 
B) 11.21% 
C) 11.88% 
D) 10.39% 
E) 12.07%

Question 4

Which one of these measures the interrelationship between two securities?

Accepted Answer

A) Standard deviation 
B) Variance 
C) Beta 
D) Covariance 
E) Alpha

Question 5

The separation principle states that an investor will

Accepted Answer

A) choose any efficient portfolio and invest some amount in the riskless asset to generate the expected return. 
B) never choose to invest in the riskless asset because the expected return on the riskless asset is lower over time. 
C) invest only in the riskless asset and tangency portfolio,choosing the weights of each based on his/her individual risk tolerance. 
D) randomly select any efficient portfolio. 
E) select a portfolio based solely on his/her desired rate of return while ignoring the associated risks of their selection.

Question 6

Mr.Rhoades is the CEO of Daily News.The majority of stockholders do not approve of the decisions made by Mr.Rhoades and have repeatedly requested that he be ousted.Over the last couple of months,it has become apparent that the CEO is going to be replaced by a member of the board,Mr.Bentley,who is highly respected.This morning,the official announcement was made that Mr.Rhoades has stepped down and will be replaced immediately by Mr.Bentley.How is the stock price of the Daily News most apt to react to this announcement?

Accepted Answer

A) Highly positive and immediate reaction 
B) A slow but positive reaction 
C) An immediate negative reaction 
D) Middling reaction over multiple days 
E) No reaction

Question 7

Alpha stock has a beta of 1.29.The risk-free rate of return is 3.2 percent,and the market rate of return is 10.7 percent.What is the Alpha stock risk premium?

Accepted Answer

A) 7.24% 
B) 9.30% 
C) 7.59% 
D) 8.77% 
E) 9.68%

Question 8

Over time,the unexpected return on a company's stock is expected to equal

Accepted Answer

A) zero. 
B) the risk-free rate. 
C) the company's average rate of return. 
D) the market risk premium. 
E) the average return on the overall market.

Question 9

A portfolio consists of two stocks with Stock A having a weight of 41 percent.Stock A has a standard deviation of 16.78 percent,and Stock B's standard deviation is 8.44 percent.The stocks have a covariance of −0.0063.What is the portfolio variance?

Accepted Answer

A) 0.001253 
B) 0.004165 
C) 0.004961 
D) 0.019097 
E) 0.034141

Question 10

Well-diversified portfolios have negligible

Accepted Answer

A) systematic risks. 
B) unsystematic risks. 
C) expected returns. 
D) variances. 
E) market risks.

Question 11

A portfolio worth $5,500 is invested in Stocks A and B plus a risk-free asset.A total of $2,500 is invested in Stock A with a beta of 1.27.Stock B has a beta of 0.89.How much needs to be invested in Stock B if the goal is to create a portfolio that will mimic the entire market?

Accepted Answer

A) −$894.20 
B) $2,266.67 
C) $1,482.08 
D) $2,612.36 
E) $3,408.15

Question 12

The Inferior Goods Co.stock is expected to earn 18 percent in a recession,10 percent in a normal economy,and lose 21 percent in a booming economy.The probability of a boom is 22 percent while the probability of a normal economy is 75 percent.What is the expected rate of return on this stock?

Accepted Answer

A) 3.42% 
B) 3.15% 
C) 3.67% 
D) 10.83% 
E) 10.41%

Question 13

A portfolio consists of $18,740 of Stock K and $31,910 of Stock L.Stock K is expected to return 17 percent in a booming economy,lose 6 percent in a recession,and gain 9 percent in a normal economy.Stock L is expected to return 4 percent in a booming economy,13 percent in a recession,and 10 percent in a normal economy.The probability of the economy booming is 16 percent.What is the expected rate of return on the portfolio if the economy enters a recession?

Accepted Answer

A) -4.59% 
B) -2.62% 
C) 5.97% 
D) 3.71% 
E) 0.74%

Question 14

What is the first step an investor takes when making an investment decision according to the separation principle?

Accepted Answer

A) Determine the mix of risky and risk-free assets he/she will hold 
B) Quantify the amount of risk he/she is willing to accept 
C) Estimate future inflation and risk-free rates 
D) Determine the portfolio of risky assets that he/she will hold 
E) Specify a desired rate of return

Question 15

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 occurring

Accepted Answer

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

Question 16

The expected return on HiLo stock is 13.36 percent while the expected return on the market is 11.87 percent.The beta of HiLo is 1.14.What is the risk-free rate of return?

Accepted Answer

A) 1.23% 
B) 3.21% 
C) 3.67% 
D) 4.28% 
E) 4.82%

Question 17

The capital market line

Accepted Answer

A) assumes investors can borrow,but not lend,at the risk-free rate. 
B) depicts the highest rate of return for every level of risk given only a single portfolio of risky assets. 
C) intersects its graph at the origin and is linear in nature. 
D) intersects the vertical axis at the risk-free rate. 
E) intersects the risky portfolio at that portfolio's lowest risk point.

Question 18

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

Accepted Answer

A) the prime rate. 
B) the average AAA bond. 
C) the market rate. 
D) the risk-free rate. 
E) zero.

Question 19

Stock Q is expected to return 14 percent in a boom and 8 percent in a normal economy.Assume Stock R will return 11 percent in a boom and 10 percent in a normal economy.The probability of a boom is 13 percent.Otherwise,the economy will be normal.What is the standard deviation of a portfolio that is invested 48 percent in stock Q and 52 percent in stock R?

Accepted Answer

A) 0.78% 
B) 1.42% 
C) 1.14% 
D) 0.67% 
E) 1.61%

Question 20

The variance of Stock A is 0.007242,the variance of Stock B is 0.020504,and the covariance between the two is 0.0019.What is the correlation coefficient?

Accepted Answer

A) 0.1487 
B) 0.0929 
C) 0.0891 
D) 0.1559 
E) 0.1643

Exam 11: Return and Risk: The Capital Asset Pricing Model Capm