Question 1

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

Accepted Answer

A)   Reward-to-risk ratio
B)   Market standard deviation
C)   Beta coefficient
D)   Risk-free interest rate
E)   Market risk premiumF) A) and E)
G) D) and E)

Question 2

What is the expected return on a portfolio that is equally weighted between Stocks M and N given the following information?   State of  Probability of  Rate of Return  Econony  State of Economy  if State Occurs  Stock M  Stock N  Boom .13.18−.14 Normal .82.06.06 Recession .05−.14.18\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 M } & 	ext { Stock N }\end{array}\	ext { Boom } & .13& \begin{array}{ll}.18 &  \quad  \quad -.14\end{array} \	ext { Normal } & .82 & \begin{array}{ll}.06 &  \quad  \quad.06\end{array} \	ext { Recession } & .05 &\begin{array}{ll} -.14 &  \quad  \quad .18\end{array}\end{array} State of  Econony  Boom  Normal  Recession ​ Probability of  State of Economy .13.82.05​ Rate of Return  if State Occurs  Stock M ​ Stock N ​.18​−.14​.06​.06​−.14​.18​​

Accepted Answer

A)   5.28 percent
B)   5.87 percent
C)   6.00 percent
D)   6.32 percent
E)   6.40 percent F) A) and B)
G) B) and D)

Question 3

The standard deviation of a portfolio:

Accepted Answer

A)   is a weighted average of the standard deviations of the individual securities held in the portfolio.
B)   can never be less than the standard deviation of the most risky security in the portfolio.
C)   must be equal to or greater than the lowest standard deviation of any single security held in the portfolio.
D)   is an arithmetic average of the standard deviations of the individual securities which comprise the portfolio.
E)   can be less than the standard deviation of the least risky security in the portfolio.F) B) and C)
G) A) and D)

Question 4

The ________ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.

Accepted Answer

A)   real return
B)   actual return
C)   nominal return
D)   risk premium
E)   expected returnF) B) and C)
G) B) and E)

Question 5

The common stock of Manchester & Moore is expected to earn 14 percent in a recession, 7 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 15 percent while the probability of a recession is 5 percent. What is the expected rate of return on this stock?

Accepted Answer

A)   8.5 percent
B)   8.7 percent
C)   5.7 percent
D)   7.5 percent
E)   6.2 percentF) C) and D)
G) B) and C)

Question 6

You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.46 and the total portfolio is equally as risky as the market. What is the beta of the second stock?

Accepted Answer

A)   1.38
B)   .87
C)   1.94
D)   1.72
E)   1.54F) A) and D)
G) B) and C)

Question 7

Your portfolio has a beta of 1.28. The portfolio consists of 35 percent U.S. Treasury bills, 31 percent Stock A, and 34 percent Stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of Stock B?

Accepted Answer

A)   1.47
B)   1.52
C)   2.04
D)   1.84
E)   2.85F) All of the above
G) C) and D)

Question 8

The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:

Accepted Answer

A)   market risk premium.
B)   risk premium.
C)   systematic return.
D)   total return.
E)   real rate of return.F) B) and C)
G) A) and E)

Question 9

The expected return on a stock given various states of the economy is equal to the:

Accepted Answer

A)   highest expected return given any economic state.
B)   arithmetic average of the returns for each economic state.
C)   summation of the individual expected rates of return.
D)   weighted average of the returns for each economic state.
E)   return for the economic state with the highest probability of occurrence.F) A) and D)
G) B) and E)

Question 10

Your portfolio is comprised of 36 percent of Stock X, 18 percent of Stock Y, and 46 percent of Stock Z. Stock X has a beta of 1.19, Stock Y has a beta of .87, and Stock Z has a beta of 1.26. What is the beta of your portfolio?

Accepted Answer

A)   1.16
B)   1.09
C)   1.13
D)   1.18
E)   1.11F) B) and C)
G) A) and B)

Question 11

What is the expected return on this portfolio?   Expected  Number  Price  Stock  Return  of Shares  per Share  A .11200$18.6C B 06400$12.85 C .17300$43.90\begin{array} { c c c c }  & 	ext { Expected } & 	ext { Number } & 	ext { Price } \	ext { Stock } & 	ext { Return } & 	ext { of Shares } & 	ext { per Share } \	ext { A }& .11 & 200 & \$ 18.6 \mathrm { C } \	ext { B }  & 06 & 400 & \$ 12.85 \	ext { C }& .17 & 300 & \$ 43.90\end{array} Stock  A  B  C ​ Expected  Return .1106.17​ Number  of Shares 200400300​ Price  per Share $18.6C$12.85$43.90​

Accepted Answer

A)   11.48 percent
B)   13.42 percent
C)   12.03 percent
D)   11.56 percent
E)   13.97 percent F) A) and B)
G) A) and C)

Question 12

Which one of the following statements related to unexpected returns is correct?

Accepted Answer

A)   All announcements by a firm affect that firm's unexpected returns.
B)   Unexpected returns over time have a negative effect on the total return of a firm.
C)   Unexpected returns are relatively predictable in the short-term.
D)   Unexpected returns generally cause the actual return to vary significantly from the expected return over the long-term.
E)   Unexpected returns can be either positive or negative in the short term but tend to be zero over the long-term.F) A) and D)
G) A) and B)

Question 13

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

Accepted Answer

A)   Portfolio return
B)   Portfolio weight
C)   Degree of risk
D)   Price-earnings ratio
E)   Index valueF) A) and E)
G) B) and C)

Question 14

Which of the following statements are correct concerning diversifiable risks?
I. Diversifiable risks can be essentially eliminated by investing in 30 unrelated securities.
II. There is no reward for accepting diversifiable risks.
III. Diversifiable risks are generally associated with an individual firm or industry.
IV. Beta measures diversifiable risk.

Accepted Answer

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

Question 15

Which one of the following is a risk that applies to most securities?

Accepted Answer

A)   Unsystematic
B)   Diversifiable
C)   Systematic
D)   Asset-specific
E)   IndustryF) A) and E)
G) None of the above

Question 16

A stock with an actual return that lies above the security market line has:

Accepted Answer

A)   more systematic risk than the overall market.
B)   more risk than that warranted by CAPM.
C)   a higher return than expected for the level of risk assumed.
D)   less systematic risk than the overall market.
E)   a return equivalent to the level of risk assumed.F) C) and D)
G) B) and C)

Question 17

You want your portfolio beta to be .95. Currently, your portfolio consists of $4,000 invested in Stock A with a beta of 1.26 and $7,000 in Stock B with a beta of .94. You have another $8,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in the risk-free asset?

Accepted Answer

A)   $3,966
B)   $4,425
C)   $4,902
D)   $4,305
E)   $5,083F) B) and D)
G) None of the above

Question 18

What is the standard deviation of the returns on a $30,000 portfolio that consists of Stocks S and T? Stock S is valued at $18,000.   State of  Probability of  Rate of Return  Econony  State of Economy  if State Occurs  Stock S  Stock T  Boom .05.11.09 Normal .85.08.07 Bust .10−.05.04\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 } & .05& \begin{array}{ll}.11&  \quad  \quad .09\end{array} \	ext { Normal } & .85 & \begin{array}{ll}.08 &  \quad  \quad.07\end{array} \	ext { Bust  } & .10&\begin{array}{ll}-.05&  \quad  \quad .04\end{array}\end{array} State of  Econony  Boom  Normal  Bust ​ Probability of  State of Economy .05.85.10​ Rate of Return  if State Occurs  Stock S ​ Stock T ​.11​.09​.08​.07​−.05​.04​​

Accepted Answer

A)   2.07 percent
B)   2.80 percent
C)   3.36 percent
D)   2.49 percent
E)   3.63 percent F) All of the above
G) C) and D)

Question 19

Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock:

Accepted Answer

A)   is underpriced.
B)   is correctly priced.
C)   will plot below the security market line.
D)   will plot on the security market line.
E)   will plot to the right of the overall market on a security market line graph.F) A) and E)
G) A) and C)

Question 20

The risk-free rate of return is 2.7 percent, the inflation rate is 3.1 percent, and the market risk premium is 6.9 percent. What is the expected rate of return on a stock with a beta of 1.08?

Accepted Answer

A)   10.92 percent
B)   10.15 percent
C)   12.22 percent
D)   11.47 percent
E)   11.79 percentF) B) and D)
G) A) and C)

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

The standard deviation of a portfolio:

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Which one of the following is a risk that applies to most securities?

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You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.46 and the total portfolio is equally as risky as the market. What is the beta of the second stock?

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The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:

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Your portfolio is comprised of 36 percent of Stock X, 18 percent of Stock Y, and 46 percent of Stock Z. Stock X has a beta of 1.19, Stock Y has a beta of .87, and Stock Z has a beta of 1.26. What is the beta of your portfolio?

Correct Answer
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Which one of the following statements related to unexpected returns is correct?

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A stock with an actual return that lies above the security market line has:

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

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Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

Correct Answer
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Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock:

Correct Answer
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The ________ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.

Correct Answer
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The common stock of Manchester & Moore is expected to earn 14 percent in a recession, 7 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 15 percent while the probability of a recession is 5 percent. What is the expected rate of return on this stock?

Correct Answer
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Your portfolio has a beta of 1.28. The portfolio consists of 35 percent U.S. Treasury bills, 31 percent Stock A, and 34 percent Stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of Stock B?

Correct Answer
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The risk-free rate of return is 2.7 percent, the inflation rate is 3.1 percent, and the market risk premium is 6.9 percent. What is the expected rate of return on a stock with a beta of 1.08?

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The expected return on a stock given various states of the economy is equal to the:

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

The standard deviation of a portfolio:

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Which one of the following is a risk that applies to most securities?

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You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.46 and the total portfolio is equally as risky as the market. What is the beta of the second stock?

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The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the:

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Your portfolio is comprised of 36 percent of Stock X, 18 percent of Stock Y, and 46 percent of Stock Z. Stock X has a beta of 1.19, Stock Y has a beta of .87, and Stock Z has a beta of 1.26. What is the beta of your portfolio?

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Which one of the following statements related to unexpected returns is correct?

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A stock with an actual return that lies above the security market line has:

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following?

Correct AnswerverifiedShow Answer

Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock:

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The ________ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly.

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The common stock of Manchester & Moore is expected to earn 14 percent in a recession, 7 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 15 percent while the probability of a recession is 5 percent. What is the expected rate of return on this stock?

Correct AnswerverifiedShow Answer

Your portfolio has a beta of 1.28. The portfolio consists of 35 percent U.S. Treasury bills, 31 percent Stock A, and 34 percent Stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of Stock B?

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The risk-free rate of return is 2.7 percent, the inflation rate is 3.1 percent, and the market risk premium is 6.9 percent. What is the expected rate of return on a stock with a beta of 1.08?

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The expected return on a stock given various states of the economy is equal to the:

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