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Which one of the following is the best example of unsystematic risk?


A) Inflation exceeding market expectations
B) A warehouse fire
C) Decrease in corporate tax rates
D) Decrease in the value of the dollar
E) Increase in consumer spending

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

Correct Answer

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You own a portfolio consisting of the securities listed below.The expected return for each security is as shown.What is the expected return on the portfolio? You own a portfolio consisting of the securities listed below.The expected return for each security is as shown.What is the expected return on the portfolio? A) 9.97 percent B) 10.86 percent C) 11.23 percent D) 12.09 percent E) 14.20 percent


A) 9.97 percent
B) 10.86 percent
C) 11.23 percent
D) 12.09 percent
E) 14.20 percent

F) A) and B)
G) None of the above

Correct Answer

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The stock of Wiley United has a beta of 0.92.The market risk premium is 8.4 percent and the risk-free rate is 3.2 percent.What is the expected return on this stock?


A) 8.87 percent
B) 10.69 percent
C) 11.11 percent
D) 11.52 percent
E) 12.01 percent

F) None of the above
G) B) and E)

Correct Answer

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Which one of the following is the vertical intercept of the security market line?


A) Market rate of return
B) Individual security rate of return
C) Market risk premium
D) Individual security beta multiplied by the market risk premium
E) Risk-free rate

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

Correct Answer

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A stock has a beta of 1.47 and an expected return of 16.6 percent.The risk-free rate is 4.8 percent.What is the slope of the security market line?


A) 6.49 percent
B) 7.28 percent
C) 8.03 percent
D) 9.03 percent
E) 9.99 percent

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

Correct Answer

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The beta of a risky portfolio cannot be less than _____ nor greater than ____.


A) 0; 1
B) 1; the market beta
C) the lowest individual beta in the portfolio; market beta
D) the market beta; the highest individual beta in the portfolio
E) the lowest individual beta in the portfolio; the highest individual beta in the portfolio

F) C) and E)
G) B) and C)

Correct Answer

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Given the following information,what is the standard deviation of the returns on this stock? Given the following information,what is the standard deviation of the returns on this stock? A) 7.38 percent B) 7.55 percent C) 7.80 percent D) 7.91 percent E) 8.06 percent


A) 7.38 percent
B) 7.55 percent
C) 7.80 percent
D) 7.91 percent
E) 8.06 percent

F) A) and B)
G) A) and C)

Correct Answer

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


A) Risk-free rate
B) Market risk premium
C) Beta coefficient
D) Risk premium on an individual asset
E) Market rate of return

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

Correct Answer

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Consider a portfolio comprised of four risky securities.Assume the economy has three states with varying probabilities of occurrence.Which one of the following will guarantee that the portfolio variance will equal zero?


A) The portfolio beta must be 1.0.
B) The portfolio expected rate of return must be the same for each economic state.
C) The portfolio risk premium must equal zero.
D) The portfolio expected rate of return must equal the expected market rate of return.
E) There must be equal probabilities that the state of the economy will be a boom or a bust.

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

Correct Answer

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Stock A has an expected return of 15.6 percent and a beta of 1.27.Stock B has an expected return of 11.4 percent and a beta of 0.89.Both stocks have the same reward-to-risk ratio.What is the risk-free rate?


A) 1.56 percent
B) 2.28 percent
C) 2.79 percent
D) 3.35 percent
E) 3.92 percent

F) D) and E)
G) A) and D)

Correct Answer

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Given the following information,what is the expected return on a portfolio that is invested 35 percent in Stock A,45 percent in Stock B,and the balance in Stock C? Given the following information,what is the expected return on a portfolio that is invested 35 percent in Stock A,45 percent in Stock B,and the balance in Stock C? A) 11.84 percent B) 12.53 percent C) 12.91 percent D) 13.46 percent E) 13.87 percent


A) 11.84 percent
B) 12.53 percent
C) 12.91 percent
D) 13.46 percent
E) 13.87 percent

F) B) and C)
G) C) and D)

Correct Answer

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Which one of the following is the best example of an announcement that is most apt to result in an unexpected return?


A) A news bulletin that the anticipated layoffs by a firm will occur as expected on December 1
B) Announcement that the CFO of the firm is retiring June 1 as previously announced
C) Announcement that a firm will continue its practice of paying a $3 a share annual dividend
D) Statement by a firm that it has just discovered a manufacturing defect and is recalling its product
E) The verification by senior management that the firm is being acquired as had been rumored

F) A) and C)
G) None of the above

Correct Answer

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Which one of the following is the computation of the risk premium for an individual security? E(R) is the expected return on the security,Rf is the risk-free rate,β is the security's beta,and E(RM) is the expected rate of return on the market.


A) E(RM) - Rf
B) E(R) - E(RM)
C) E(R) - [E(RM) + Rf]
D) β[E(RM) - Rf]
E) β[E(R) - Rf]

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

Correct Answer

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You own a portfolio that is invested as follows: $11,400 of Stock A,$8,800 of Stock B,$14,900 of Stock C,and $3,200 of Stock D.What is the portfolio weight of Stock C?


A) 38.47 percent
B) 38.90 percent
C) 39.80 percent
D) 41.94 percent
E) 43.08 percent

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

Correct Answer

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Which one of the following describes systemic risk?


A) Risk that affects a large number of assets
B) An individual security's total risk
C) Diversifiable risk
D) Asset specific risk
E) Risk unique to a firm's management

F) None of the above
G) A) and E)

Correct Answer

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Consider the following information on a portfolio of three stocks: Consider the following information on a portfolio of three stocks: The portfolio is invested 35 percent in each Stock A and Stock B and 30 percent in Stock C.If the expected T-bill rate is 3.90 percent,what is the expected risk premium on the portfolio? A) 6.19 percent B) 6.90 percent C) 7.38 percent D) 7.72 percent E) 8.68 percent The portfolio is invested 35 percent in each Stock A and Stock B and 30 percent in Stock C.If the expected T-bill rate is 3.90 percent,what is the expected risk premium on the portfolio?


A) 6.19 percent
B) 6.90 percent
C) 7.38 percent
D) 7.72 percent
E) 8.68 percent

F) C) and E)
G) C) and D)

Correct Answer

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Assume you own a portfolio of diverse securities which are each correctly priced.Given this,the reward-to-risk ratio:


A) for the portfolio must equal 1.0.
B) for the portfolio must be less than the market risk premium.
C) for each security must equal zero.
D) of each security is equal to the risk-free rate.
E) of each security must equal the slope of the security market line.

F) A) and B)
G) B) and C)

Correct Answer

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A stock has a beta of 1.86,the expected return on the market is 14.72,and the risk-free rate is 4.65.What must the expected return on this stock be?


A) 15.67 percent
B) 16.75 percent
C) 17.10 percent
D) 20.46 percent
E) 23.38 percent

F) A) and E)
G) A) and C)

Correct Answer

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Systematic risk is:


A) totally eliminated when a portfolio is fully diversified.
B) defined as the total risk associated with surprise events.
C) risk that affects a limited number of securities.
D) measured by beta.
E) measured by standard deviation.

F) C) and D)
G) A) and C)

Correct Answer

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The expected rate of return on Delaware Shores,Inc.stock is based on three possible states of the economy.These states are boom,normal,and recession which have probabilities of occurrence of 20 percent,75 percent,and 5 percent,respectively.Which one of the following statements is correct concerning the variance of the returns on this stock?


A) The variance must decrease if the probability of occurrence for a boom increases.
B) The variance will remain constant as long as the sum of the economic probabilities is 100 percent.
C) The variance can be positive, zero, or negative, depending on the expected rate of return assigned to each economic state.
D) The variance must be positive provided that each state of the economy produces a different expected rate of return.
E) The variance is independent of the economic probabilities of occurrence.

F) A) and B)
G) A) and C)

Correct Answer

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