Question 1

Stock A has the following returns for various states of the economy:
State of
 Stock A's expected return is

Accepted Answer

A)   5.4%.
B)   7.2%.
C)   8.2%.
D)   9.6% C

Question 2

An all-stock portfolio is more risky than a portfolio consisting of all bonds.

Accepted Answer

A) True 
 B)False  True

Question 3

A stock's beta is a measure of its

Accepted Answer

A)   unsystematic risk.
B)   systematic risk.
C)   company-unique risk.
D)   diversifiable risk. B

Question 4

Portfolio risk is typically measured by ________ while the risk of a single investment is measured by ________.

Accepted Answer

A)   standard deviation; beta
B)   security market line; standard deviation
C)   beta; standard deviation
D)   beta; slope of the characteristic line

Question 5

Redesign Corp is considering a new strategy that would increase its expected return from 12% to 13.9%,but would also increase its beta from 1.2 to 1.8.If the risk free rate is 5% and the return on the market is expected to be 10%,should Redesign change its strategy?

Accepted Answer

The answer of Redesign Corp is considering a new strategy...

Question 6

For a well-diversified investor,an investment with an expected return of 10% with a standard deviation of 3% dominates an investment with an expected return of 10% with a standard deviation of 5%.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is the slope of the security market line?

Accepted Answer

A)   beta
B)   one
C)   it varies, and is steeper for riskier securities
D)   the market risk premium

Question 8

Beta is a statistical measure of

Accepted Answer

A)   unsystematic risk.
B)   total risk.
C)   the standard deviation.
D)   the relationship between an investment's returns and the market return.

Question 9

The slope of the characteristic line of a security is that security's Beta.

Accepted Answer

A) True 
 B)False

Question 10

You hold a portfolio made up of the following stocks:
 If the market's expected return is 14%,and the risk free rate of return is 5%,what is the expected return of the portfolio?

Accepted Answer

A)   17.010%
B)   16.700%
C)   15.935%
D)   14.698%

Question 11

You hold a portfolio with the following securities:
 What is the expected return for the portfolio?

Accepted Answer

A)   17.60%
B)   20.67%
C)   23.54%
D)   28.59%

Question 12

Assume that you expect to hold a $20,000 investment for one year.It is forecasted to have a yearend value of $21,000 with a 30% probability; a yearend value of $24,000 with a 45% probability; and a yearend value of $30,000 with a 25% probability.What is the standard deviation of the holding period return for this investment?

Accepted Answer

A)   12.06%
B)   14.36%
C)   16.36%
D)   33.45%

Question 13

The relevant risk to an investor is that portion of the variability of returns that cannot be diversified away.

Accepted Answer

A) True 
 B)False

Question 14

You are considering the three securities listed below.
  a.Calculate the expected return for each security.
b.Calculate the standard deviation of returns for each security.
c.Compare Stock A with Stocks B and C.Is Stock A preferred over the others?

Accepted Answer

The answer of You are considering the three securities listed...

Question 15

The Beta of a T-bill is one.

Accepted Answer

A) True 
 B)False

Question 16

Asset allocation is not recommended by financial planners because mixing different types of assets,such as stocks with bonds,makes it more difficult to track performance and adjust portfolios to changing market conditions.

Accepted Answer

A) True 
 B)False

Question 17

Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $10,500 return.What is the expected amount of return this investment will produce?

Accepted Answer

A)   $6,167
B)   $7,640
C)   $12,890
D)   $18,500

Question 18

Beta represents the average movement of a company's stock returns in response to a movement in the market's returns.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is most correct concerning diversification and risk?

Accepted Answer

A)   Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.
B)   Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk.
C)   Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification.
D)   Proper diversification generally results in the elimination of risk.

Question 20

Investment A and Investment B both have the same expected return,but Investment A is more risky than Investment B.In the technical jargon of modern portfolio theory,Investment A is said to "dominate" Investment B.

Accepted Answer

A) True 
 B)False

Exam 6: The Meaning and Measurement of Risk and Return

Stock A has the following returns for various states of the economy: State of Stock A's expected return is

An all-stock portfolio is more risky than a portfolio consisting of all bonds.

A stock's beta is a measure of its

Portfolio risk is typically measured by while the risk of a single investment is measured by .

Redesign Corp is considering a new strategy that would increase its expected return from 12% to 13.9%,but would also increase its beta from 1.2 to 1.8.If the risk free rate is 5% and the return on the market is expected to be 10%,should Redesign change its strategy?

For a well-diversified investor,an investment with an expected return of 10% with a standard deviation of 3% dominates an investment with an expected return of 10% with a standard deviation of 5%.

Which of the following is the slope of the security market line?

Beta is a statistical measure of

The slope of the characteristic line of a security is that security's Beta.

You hold a portfolio made up of the following stocks: If the market's expected return is 14%,and the risk free rate of return is 5%,what is the expected return of the portfolio?

You hold a portfolio with the following securities: What is the expected return for the portfolio?

The relevant risk to an investor is that portion of the variability of returns that cannot be diversified away.

You are considering the three securities listed below. a.Calculate the expected return for each security. b.Calculate the standard deviation of returns for each security. c.Compare Stock A with Stocks B and C.Is Stock A preferred over the others?

The Beta of a T-bill is one.

Asset allocation is not recommended by financial planners because mixing different types of assets,such as stocks with bonds,makes it more difficult to track performance and adjust portfolios to changing market conditions.

Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $10,500 return.What is the expected amount of return this investment will produce?

Beta represents the average movement of a company's stock returns in response to a movement in the market's returns.

Which of the following statements is most correct concerning diversification and risk?

Investment A and Investment B both have the same expected return,but Investment A is more risky than Investment B.In the technical jargon of modern portfolio theory,Investment A is said to "dominate" Investment B.