Question 1

Which one of the following statements is correct concerning a portfolio beta?

Accepted Answer

A)   Portfolio betas range between −1.0 and +1.0.
B)   A portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio.
C)   A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification.
D)   A portfolio of U.S. Treasury bills will have a beta of +1.0.
E)   The beta of a market portfolio is equal to zero.F) C) and D)
G) A) and B)

Question 2

What is the standard deviation of the returns on a portfolio that is invested in Stocks A, B, and C? Twenty percent of the portfolio is invested in Stock A and 35 percent is invested in Stock C.    State of  Probability of  Rate of Return  Economy  State of Economy  if State Occurs  Stock A  Stock B  Stock C  Boom .04.17.09.09 Normal .81.08.06.08 Bust .15−.24−.02−.13\begin{array} { l ccccc }  { 	ext { State of } } &   { 	ext { Probability of } } &&	ext { Rate of Return }\	ext { Economy } & 	ext { State of Economy } &  &{ 	ext { if State Occurs } } \& & 	ext { Stock A } & 	ext { Stock B } & 	ext { Stock C } \	ext { Boom } & .04 & .17& .09 & .09 \	ext { Normal } & .81 & .08& .06 & .08 \	ext { Bust } &.15& - .24& - .02& -.13\end{array} State of  Economy  Boom  Normal  Bust ​ Probability of  State of Economy .04.81.15​ Stock A .17.08−.24​ Rate of Return  if State Occurs  Stock B .09.06−.02​ Stock C .09.08−.13​

Accepted Answer

A)   6.31 percent
B)   6.49 percent
C)   7.38 percent
D)   5.65 percent
E)   7.72 percent F) None of the above
G) B) and D)

Question 3

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?

Accepted Answer

A)   Arithmetic return
B)   Historical return
C)   Expected return
D)   Geometric return
E)   Required returnF) A) and B)
G) C) and E)

Question 4

Which one of the following stocks is correctly priced according to CAPM if the risk-free rate of return is 3.4 percent and the market risk premium is 7.4 percent?   Expected  Stock  Beta  Retumn A.87.096 B1.09.102C1.62.146D.98.107 F1.16.139\begin{array}{ccc}&& 	ext { Expected } \	ext { Stock } & 	ext { Beta } & 	ext { Retumn } \\mathrm{A} & .87 & .096 \\mathrm{~B} & 1.09 & .102 \\mathrm{C} & 1.62 & .146 \\mathrm{D} & .98 & .107 \\mathrm{~F} & 1.16 &. 139\end{array} Stock A BCD F​ Beta .871.091.62.981.16​ Expected  Retumn .096.102.146.107.139​

Accepted Answer

A)   A
B)   B
C)   C
D)   D
E)   E F) C) and D)
G) B) and E)

Question 5

What is the expected return on a portfolio that is invested 22 percent in Stock A, 36 percent in Stock B, and the remainder in Stock C?   State of  Probability of  Rate of Return  Economy  State of Economy  if State Occurs  Stock A  Stock B  Stock C  Boom .05.18.11.13 Normal .92.09.08.06 Bust .03−.07−.05−.14\begin{array} { l ccccc }  { 	ext { State of } } &   { 	ext { Probability of } } &&	ext { Rate of Return }\	ext { Economy } & 	ext { State of Economy } &  &{ 	ext { if State Occurs } } \& & 	ext { Stock A } & 	ext { Stock B } & 	ext { Stock C } \	ext { Boom } & .05 & .18 & .11 & .13 \	ext { Normal } & .92 & .09& .08 & .06 \	ext { Bust } &.03& - .07& - .05 & -.14\end{array} State of  Economy  Boom  Normal  Bust ​ Probability of  State of Economy .05.92.03​ Stock A .18.09−.07​ Rate of Return  if State Occurs  Stock B .11.08−.05​ Stock C .13.06−.14​

Accepted Answer

A)   7.06 percent
B)   7.38 percent
C)   6.99 percent
D)   7.29 percent
E)   6.84 percent F) A) and B)
G) None of the above

Question 6

Standard deviation measures which type of risk?

Accepted Answer

A)   Total
B)   Non-diversifiable
C)   Unsystematic
D)   Systematic
E)   EconomicF) A) and D)
G) A) and C)

Question 7

The common stock of Jensen Shipping has an expected return of 15.4 percent. The return on the market is 11.2 percent, the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6 percent. What is the beta of this stock?

Accepted Answer

A)   1.46
B)   1.23
C)   1.33
D)   1.41
E)   1.55F) B) and D)
G) A) and E)

Question 8

According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

Accepted Answer

A)   amount of total risk assumed and the market risk premium.
B)   market risk premium and the amount of systematic risk inherent in the security.
C)   risk-free rate, the market rate of return, and the standard deviation of the security.
D)   beta of the security and the market rate of return.
E)   standard deviation of the security and the risk-free rate of return.F) A) and D)
G) B) and D)

Question 9

The reward-to-risk ratio for Stock A is less than the reward-to-risk ratio of Stock B. Stock A has a beta of .82 and Stock B has a beta of 1.29. This information implies that:

Accepted Answer

A)   Stock A is riskier than Stock B and both stocks are fairly priced.
B)   Stock A is less risky than Stock B and both stocks are fairly priced.
C)   either Stock A is underpriced or Stock B is overpriced or both.
D)   either Stock A is overpriced or Stock B is underpriced or both.
E)   both Stock A and Stock B are correctly priced since Stock A is less risky than Stock B.F) C) and D)
G) A) and D)

Question 10

Which of the following statements concerning risk are correct?
I.  Non-diversifiable risk is measured by beta.
II. The risk premium increases as diversifiable risk increases.
III. Systematic risk is another name for non-diversifiable risk.
IV. Diversifiable risks are market risks you cannot avoid.

Accepted Answer

A)   I and III only
B)   II and IV only
C)   I and II only
D)   III and IV only
E)   I, II, and III onlyF) A) and E)
G) All of the above

Question 11

If a stock portfolio is well diversified, then the portfolio variance:

Accepted Answer

A)   will equal the variance of the most volatile stock in the portfolio.
B)   may be less than the variance of the least risky stock in the portfolio.
C)   must be equal to or greater than the variance of the least risky stock in the portfolio.
D)   will be a weighted average of the variances of the individual securities in the portfolio.
E)   will be an arithmetic average of the variances of the individual securities in the portfolio.F) B) and E)
G) A) and D)

Question 12

The expected return on a portfolio:
I. can never exceed the expected return of the best performing security in the portfolio.
II. must be equal to or greater than the expected return of the worst performing security in the portfolio.
III. is independent of the unsystematic risks of the individual securities held in the portfolio.
IV. is independent of the allocation of the portfolio amongst individual securities.

Accepted Answer

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

Question 13

Unsystematic risk:

Accepted Answer

A)   can be effectively eliminated by portfolio diversification.
B)   is compensated for by the risk premium.
C)   is measured by beta.
D)   is measured by standard deviation.
E)   is related to the overall economy.F) A) and C)
G) A) and D)

Question 14

What is the expected return on a portfolio comprised of $9,750 of Stock X and $4,520 of Stock Y if the economy enjoys a boom period?   State of  Probability of  Rate of Return  Econony  State of Economy  if State Occurs  Stock X  Stock Y  Boom .25.108.156 Normal .65.087.097 Recession .10.024−.069\begin{array} { l c c }  { 	ext { State of } } & 	ext { Probability of } & 	ext { Rate of Return } \	ext { Econony } & 	ext { State of Economy } & 	ext { if State Occurs } \ &  &\begin{array}{ll}	ext {   Stock X } & 	ext { Stock Y }\end{array}\	ext { Boom } & .25& \begin{array}{ll}.108 &  \quad  \quad .156\end{array} \	ext { Normal } & .65 & \begin{array}{ll}.087 &  \quad  \quad.097\end{array} \	ext { Recession } & .10&\begin{array}{ll} .024 &  \quad  \quad -.069\end{array}\end{array} State of  Econony  Boom  Normal  Recession ​ Probability of  State of Economy .25.65.10​ Rate of Return  if State Occurs  Stock X ​ Stock Y ​.108​.156​.087​.097​.024​−.069​​

Accepted Answer

A)   11.93 percent
B)   11.67 percent
C)   12.55 percent
D)   12.78 percent
E)   12.32 percent F) C) and D)
G) B) and D)

Question 15

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

Accepted Answer

A)   number of shares owned of each stock.
B)   market price per share of each stock.
C)   market value of the investment in each stock.
D)   original amount invested in each stock.
E)   cost per share of each stock held.F) A) and C)
G) A) and E)

Question 16

What is the variance of the returns on a portfolio that is invested 40 percent in Stock S and 60 percent in Stock T?   State of  Probability of  Rate of Return  Econony  State of Economy  if State Occurs  Stock S  Stock T  Boom .06.22.18 Normal .92.15.14 Bust .02−.26−.09\begin{array} { l c c }  { 	ext { State of } } & 	ext { Probability of } & 	ext { Rate of Return } \	ext { Econony } & 	ext { State of Economy } & 	ext { if State Occurs } \ &  &\begin{array}{ll}	ext {   Stock S } & 	ext { Stock T }\end{array}\	ext { Boom } & .06& \begin{array}{ll}.22&  \quad  \quad .18\end{array} \	ext { Normal } & .92 & \begin{array}{ll}.15 &  \quad  \quad.14\end{array} \	ext { Bust  } & .02&\begin{array}{ll}-.26 &  \quad  \quad -.09\end{array}\end{array} State of  Econony  Boom  Normal  Bust ​ Probability of  State of Economy .06.92.02​ Rate of Return  if State Occurs  Stock S ​ Stock T ​.22​.18​.15​.14​−.26​−.09​​

Accepted Answer

A)   .00107
B)   .00091
C)   .00118
D)   .00136
E)   .00083 F) D) and E)
G) A) and E)

Question 17

You have a $15,000 portfolio which is invested in Stocks A and B, and a risk-free asset. $6,000 is invested in Stock A. Stock A has a beta of 1.63 and Stock B has a beta of .95. How much needs to be invested in Stock B if you want a portfolio beta of 1.10?

Accepted Answer

A)   $8,998.90
B)   $8,333.33
C)   $7,706.20
D)   $7,073.68
E)   $9,419.27F) B) and E)
G) All of the above

Question 18

Which of the following are examples of diversifiable risk?
I.  An earthquake damages an entire town
II. The federal government imposes a $100 fee on all business entities
III. Employment taxes increase nationally
IV. All toymakers are required to improve their safety standards

Accepted Answer

A)   I and III only
B)   II and IV only
C)   II and III only
D)   I and IV only
E)   I, III, and IV onlyF) A) and B)
G) All of the above

Question 19

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?

Accepted Answer

A)   Variance
B)   Standard deviation
C)   Reward-to-risk ratio
D)   Beta
E)   Risk premiumF) A) and C)
G) C) and D)

Question 20

The expected return on a stock computed using economic probabilities is:

Accepted Answer

A)   guaranteed to equal the actual average return on the stock for the next five years.
B)   guaranteed to be the minimal rate of return on the stock over the next two years.
C)   guaranteed to equal the actual return for the immediate twelve month period.
D)   a mathematical expectation based on a weighted average and not an actual anticipated outcome.
E)   the actual return you should anticipate as long as the economic forecast remains constant.F) A) and B)
G) A) and E)

Exam 13: Return, Risk, and the Security Market Line

Which one of the following statements is correct concerning a portfolio beta?

Correct Answer
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The reward-to-risk ratio for Stock A is less than the reward-to-risk ratio of Stock B. Stock A has a beta of .82 and Stock B has a beta of 1.29. This information implies that:

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The common stock of Jensen Shipping has an expected return of 15.4 percent. The return on the market is 11.2 percent, the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6 percent. What is the beta of this stock?

Correct Answer
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Correct Answer
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The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

Correct Answer
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If a stock portfolio is well diversified, then the portfolio variance:

Correct Answer
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Standard deviation measures which type of risk?

Correct Answer
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Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?

Correct Answer
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Unsystematic risk:

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Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.

Correct Answer
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You have a $15,000 portfolio which is invested in Stocks A and B, and a risk-free asset. $6,000 is invested in Stock A. Stock A has a beta of 1.63 and Stock B has a beta of .95. How much needs to be invested in Stock B if you want a portfolio beta of 1.10?

Correct Answer
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According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

Correct Answer
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The expected return on a stock computed using economic probabilities is:

Correct Answer
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Correct Answer
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Which of the following are examples of diversifiable risk? I. An earthquake damages an entire town II. The federal government imposes a $100 fee on all business entities III. Employment taxes increase nationally IV. All toymakers are required to improve their safety standards

Correct Answer
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Exam 13: Return, Risk, and the Security Market Line

Which one of the following statements is correct concerning a portfolio beta?

Correct AnswerverifiedShow Answer

The reward-to-risk ratio for Stock A is less than the reward-to-risk ratio of Stock B. Stock A has a beta of .82 and Stock B has a beta of 1.29. This information implies that:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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The common stock of Jensen Shipping has an expected return of 15.4 percent. The return on the market is 11.2 percent, the inflation rate is 3.1 percent, and the risk-free rate of return is 3.6 percent. What is the beta of this stock?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:

Correct AnswerverifiedShow Answer

If a stock portfolio is well diversified, then the portfolio variance:

Correct AnswerverifiedShow Answer

Standard deviation measures which type of risk?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following will be constant for all securities if the market is efficient and securities are priced fairly?

Correct AnswerverifiedShow Answer

Unsystematic risk:

Correct AnswerverifiedShow Answer

Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.

Correct AnswerverifiedShow Answer

You have a $15,000 portfolio which is invested in Stocks A and B, and a risk-free asset. $6,000 is invested in Stock A. Stock A has a beta of 1.63 and Stock B has a beta of .95. How much needs to be invested in Stock B if you want a portfolio beta of 1.10?

Correct AnswerverifiedShow Answer

According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

Correct AnswerverifiedShow Answer

The expected return on a stock computed using economic probabilities is:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following are examples of diversifiable risk? I. An earthquake damages an entire town II. The federal government imposes a $100 fee on all business entities III. Employment taxes increase nationally IV. All toymakers are required to improve their safety standards

Correct AnswerverifiedShow Answer

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