Question 1

A fund that attempts to mimic the S&P 500

Accepted Answer

A)   An efficient portfolio
B)   A passive portfolio
C)   An active portfolio
D)   An index portfolio D

Question 2

A particular asset has a beta of 1.2 and an expected return of 10%.The expected return on the market portfolio is 13% and the risk-free is 5%.The stock is

Accepted Answer

A)   overpriced
B)   underpriced
C)   appropriately priced
D)   Cannot tell from the given information A

Question 3

According to the CAPM (capital asset pricing model),the security market line is a straight line.The slope of this line should be equal to

Accepted Answer

A)   zero
B)   the expected risk premium on the market portfolio
C)   the risk-free rate
D)   the expected return on the market portfolio B

Question 4

NARRBEGIN: Exhibit 7-5
Exhibit 7-5
 
-Given Exhibit 7-5,what is the weight of Security 3?

Accepted Answer

A)   42.9%
B)   33.3%
C)   23.8%
D)   Cannot be determined with the data given

Question 5

A particular stock has an expected return of 11%.If the expected risk premium on the market portfolio is 8%,and the risk-free rate is 5%,what's the stock's CAPM beta?

Accepted Answer

A)   1.375
B)   0.750
C)   0.846
D)   0.462

Question 6

The risk-free rate is 5% and the expected return on the market portfolio is 13%.A stock has a beta of 0,what is its expected return?

Accepted Answer

A)   0%
B)   5%
C)   13%
D)   none of the above

Question 7

You have the following data on the securities of three firms:  If the risk-free rate last year was 3%,and the return on the market was 11%,which firm had the best performance on a risk-adjusted basis?

Accepted Answer

A)   Firm A
B)   Firm B
C)   Firm C
D)   There is no difference in performance on a risk-adjusted basis

Question 8

Modern financial markets are:

Accepted Answer

A)   competitive.
B)   transparent.
C)   efficient.
D)   all of the above.

Question 9

According to the CAPM (capital asset pricing model),the security market line is a straight line.The intercept of this line should be equal to

Accepted Answer

A)   zero
B)   the expected risk premium on the market portfolio
C)   the risk-free rate
D)   the expected return on the market portfolio

Question 10

The expected possible outcomes for Roxy Stock are below; what is the expected standard deviation of Roxy Stock?

Accepted Answer

A)   2.308%
B)   0.053%
C)   2.362%
D)   0.056%

Question 11

The expected outcomes of Emma Stock are below; what is the expected variance of Emma Stock?

Accepted Answer

A)   2.252%
B)   0.051%
C)   2.303%
D)   0.053%

Question 12

Investors can eliminate what type of risk by diversifying?

Accepted Answer

A)   systematic risk
B)   unsystematic risk
C)   beta risk
D)   total risk

Question 13

The slope of the security market line is:

Accepted Answer

A)   the return on the market.
B)   beta.
C)   the market risk premium.
D)   the risk-free rate.

Question 14

Suppose David can borrow and lend at the risk-free rate of 5%.Which of the following three risky portfolios should he hold in combination with a position in the risk-free asset?

Accepted Answer

A)   portfolio with a standard deviation of 16% and an expected return of 12%
B)   portfolio with a standard deviation of 20% and an expected return of 16%
C)   portfolio with a standard deviation of 30% and an expected return of 20%
D)   he should be indifferent in holding any of the three portfolios

Question 15

A portfolio has 40% invested in Asset 1,50% invested in Asset 2 and 10% invested in Asset 3.Asset 1 has a beta of 1.2,Asset 2 has a beta of 0.8 and Asset 3 has a beta of 1.8,what's the beta of the portfolio?

Accepted Answer

A)   1.27
B)   0.80
C)   1.06
D)   1.20
E)   Cannot tell from given information

Question 16

A fund based on the efficient market hypothesis is most likely

Accepted Answer

A)   A passive portfolio
B)   An Active portfolio
C)   An Index portfolio
D)   none of the above

Question 17

The hypothesis that states that it is nearly impossible to predict exactly when stocks will do well relative to bonds is known as the:

Accepted Answer

A)   fair price hypothesis.
B)   efficient market hypothesis.
C)   full information hypothesis.
D)   full price hypothesis.

Question 18

The expected outcomes for Louis Stock are below; what is the expected variance of Louis Stock?

Accepted Answer

A)   2.885%
B)   0.083%
C)   2.968%
D)   0.088%

Question 19

NARRBEGIN: Exhibit 7-2
Exhibit 7-2
 
-Given Exhibit 7-2,what is the expected return?

Accepted Answer

A)   10.75%
B)   13.00%
C)   16.00%
D)   17.75%

Question 20

Suppose that over the last 20 years,company XYZ has averaged a return of 13%.Over the same period,the Treasury bond rate has averaged 4%.The current estimate of the Treasury bond rate is 6.5%.Using the historical approach,what is the estimate of XYZ's expected return.

Accepted Answer

A)   13.0%
B)   16.5%
C)   15.5%
D)   19.5%

Exam 7: Risk,return,and the Capital Asset Pricing Model