Question 1

The intercept point of the security market line is the rate of return that corresponds to

Accepted Answer

A) the market rate of return. 
B) the beta of the market. 
C) a value of one. 
D) a value of zero. 
E) the risk-free rate.

Question 2

KNF stock is quite cyclical.In a boom economy,the stock is expected to return 34 percent in comparison to 13 percent in a normal economy and a negative 22 percent in a recessionary period.The probability of a recession is 15 percent while the chance of a boom is 4 percent.What is the standard deviation of the returns this stock?

Accepted Answer

A) 14.15% 
B) 13.68/% 
C) 13.49% 
D) 14.46% 
E) 15.04%

Question 3

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

Accepted Answer

A) A poorly managed company suddenly goes out of business due to slow sales. 
B) An efficient company reduces its work force and automates several jobs. 
C) A key company employee suddenly resigns and accepts employment with a competitor. 
D) A well respected chairman of the Federal Reserve suddenly resigns. 
E) An unpopular president of a firm suddenly resigns.

Question 4

The stock of Martin Industries has a beta of 1.17.The risk-free rate of return is 2.9 percent,and the market risk premium is 6.93 percent.What is the expected rate of return on Martin Industries stock?

Accepted Answer

A) 11.01% 
B) 6.91% 
C) 16.42% 
D) 14.46% 
E) 10.19%

Question 5

A portfolio contains Stocks A,B,C,and D with betas of 0.92,1.28,1.07 and 1.52 for A through D,respectively.Stocks A and B have portfolio weights of 35 percent each.Stocks C and D have equal weights.What is the portfolio beta?

Accepted Answer

A) .1.2147 
B) 1.1585 
C) 1.1099 
D) 1.0822 
E) 1.0131

Question 6

Assume two securities are negatively correlated.If these two securities are combined into an equally weighted portfolio,the portfolio standard deviation must be

Accepted Answer

A) equal to the standard deviation of the overall market. 
B) equal to the arithmetic average of the standard deviations of the individual securities. 
C) equal to zero. 
D) less than the weighted average of the standard deviations of the individual securities. 
E) equal to or greater than the lowest standard deviation of the two securities.

Question 7

OLG stock has a beta of 0.98 and an expected return of 10.52 percent.The risk-free rate of return is 3.02 percent,and the market rate of return is 10.47 percent.Which one of the following statements is true given this information?

Accepted Answer

A) OLG stock is correctly priced. 
B) The return on OLG stock will graph above the security market line. 
C) The expected return on OLG stock based on the capital asset pricing model is 10.13 percent. 
D) OLG stock has more systematic risk than the overall market. 
E) OLG stock is overpriced.

Question 8

The expected return on a portfolio

Accepted Answer

A) can be greater than the expected return on the best performing security in the portfolio. 
B) can be less than the expected return on the worst performing security in the portfolio. 
C) is independent of the performance of the overall economy. 
D) is limited by the returns on the individual securities within the portfolio. 
E) is an arithmetic average of the returns of the individual securities when the weights of those securities are unequal.

Question 9

Assume the risk-free rate and the market risk premium are both positive.Trevor currently owns a portfolio consisting of risky and risk-free securities.The portfolio has an expected return of 11.2 percent,a standard deviation of 16.2 percent,and a beta of 1.21.He has decided that he would prefer a higher expected return.Which one of these actions should he take?

Accepted Answer

A) Replace a stock in his current portfolio with a beta of 1.34 with a stock that has a beta of 1.03 
B) Sell a portion of the risky assets and use the proceeds to purchase risk-free securities 
C) Lower both the portfolio standard deviation and beta 
D) Increase the portfolio weight of the risky assets without affecting the total portfolio value 
E) Increase the standard deviation of the portfolio without affecting the portfolio beta

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