Question 1

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 2

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?

Accepted Answer

A)  Given the unequal weights of both the securities and the economic states, the standard deviation of the portfolio must equal that of the overall market.
B)  The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved.
C)  Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio.
D)  The standard deviation of the portfolio will be greater than the highest standard deviation of any single security in the portfolio given that the individual securities are well diversified.
E)  Given both the unequal weights of the securities and the economic states, an investor might be able to create a portfolio that has an expected standard deviation of zero.F) A) and E)
G) C) and D)

Question 3

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) A) and D)
G) B) and D)

Question 4

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?

Accepted Answer

A)  5
B)  10
C)  25
D)  50
E)  75F) None of the above
G) A) and B)

Question 5

You have a $12,000 portfolio which is invested in stocks A and B,and a risk-free asset.$5,000 is invested in stock A.Stock A has a beta of 1.76 and stock B has a beta of 0.89.How much needs to be invested in stock B if you want a portfolio beta of 1.10?

Accepted Answer

A)   $3,750.00
B)   $4,333.33
C)   $4,706.20
D)   $4,943.82
E)   $5,419.27F) A) and C)
G) A) and D)

Question 6

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

Question 7

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 0.82 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 riskier than stock B.F) C) and D)
G) B) and D)

Question 8

Suppose you observe the following situation:  Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21.What is the expected market risk premium?

Accepted Answer

A)  8.8 percent
B)  9.5 percent
C)  12.6 percent
D)  17.9 percent
E)  20.0 percentF) B) and D)
G) C) and D)

Question 9

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 E)
G) A) and B)

Question 10

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

Accepted Answer

A)  income taxes are increased across the board
B)  a national sales tax is adopted
C)  inflation decreases at the national level
D)  an increased feeling of prosperity is felt around the globe
E)  consumer spending on entertainment decreased nationallyF) B) and C)
G) B) and D)

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) A) and E)
G) A) and B)

Question 12

Which one of the following is an example of systematic risk?

Accepted Answer

A)  investors panic causing security prices around the globe to fall precipitously
B)  a flood washes away a firm's warehouse
C)  a city imposes an additional one percent sales tax on all products
D)  a toymaker has to recall its top-selling toy
E)  corn prices increase due to increased demand for alternative fuelsF) A) and B)
G) B) and E)

Question 13

Your portfolio is comprised of 40 percent of stock X,15 percent of stock Y,and 45 percent of stock Z.Stock X has a beta of 1.16,stock Y has a beta of 1.47,and stock Z has a beta of 0.42.What is the beta of your portfolio?

Accepted Answer

A)  0.87
B)  1.09
C)  1.13
D)  1.18
E)  1.21F) A) and B)
G) B) and D)

Question 14

Suppose you observe the following situation:  Assume these securities are correctly priced.Based on the CAPM,what is the return on the market?

Accepted Answer

A)  13.99 percent
B)  14.42 percent
C)  14.67 percent
D)  14.78 percent
E)  15.01 percentF) All of the above
G) D) and E)

Question 15

Your portfolio has a beta of 1.12.The portfolio consists of 40 percent U.S.Treasury bills,30 percent stock A,and 30 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)   1.69
D)   1.84
E)   2.73F) B) and C)
G) A) and E)

Question 16

Consider the following information on three stocks: 
 A portfolio is invested 35 percent each in Stock A and Stock B and 30 percent in Stock C.What is the expected risk premium on the portfolio if the expected T-bill rate is 3.3 percent?

Accepted Answer

A)  11.47 percent
B)  12.38 percent
C)  16.67 percent
D)  24.29 percent
E)  25.82 percentF) A) and B)
G) A) and C) E

Question 17

What is the expected return on a portfolio comprised of $6,200 of stock M and $4,500 of stock N if the economy enjoys a boom period?

Accepted Answer

A)  10.93 percent
B)  11.16 percent
C)  12.55 percent
D)  12.78 percent
E)  13.69 percentF) A) and E)
G) A) and B)

Question 18

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

Question 19

What is the expected return of an equally weighted portfolio comprised of the following three stocks?

Accepted Answer

A)  16.33 percent
B)  18.60 percent
C)  19.67 percent
D)  20.48 percent
E)  21.33 percentF) A) and E)
G) B) and E) B

Question 20

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?

Accepted Answer

A)  reward-to-risk matrix
B)  portfolio weight graph
C)  normal distribution
D)  security market line
E)  market real returnsF) A) and D)
G) B) and D)

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

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

Correct AnswerverifiedShow Answer

Which one of the following statements is correct concerning a portfolio of 20 securities with multiple states of the economy when both the securities and the economic states have unequal weights?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?

Correct AnswerverifiedShow Answer

You have a $12,000 portfolio which is invested in stocks A and B,and a risk-free asset.$5,000 is invested in stock A.Stock A has a beta of 1.76 and stock B has a beta of 0.89.How much needs to be invested in stock B if you want a portfolio beta of 1.10?

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

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 0.82 and stock B has a beta of 1.29.This information implies that:

Correct AnswerverifiedShow Answer

Suppose you observe the following situation: Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21.What is the expected market risk premium?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which one of the following is an example of systematic risk?

Correct AnswerverifiedShow Answer

Your portfolio is comprised of 40 percent of stock X,15 percent of stock Y,and 45 percent of stock Z.Stock X has a beta of 1.16,stock Y has a beta of 1.47,and stock Z has a beta of 0.42.What is the beta of your portfolio?

Correct AnswerverifiedShow Answer

Suppose you observe the following situation: Assume these securities are correctly priced.Based on the CAPM,what is the return on the market?

Correct AnswerverifiedShow Answer

Your portfolio has a beta of 1.12.The portfolio consists of 40 percent U.S.Treasury bills,30 percent stock A,and 30 percent stock B.Stock A has a risk-level equivalent to that of the overall market.What is the beta of stock B?

Correct AnswerverifiedShow Answer

Consider the following information on three stocks: A portfolio is invested 35 percent each in Stock A and Stock B and 30 percent in Stock C.What is the expected risk premium on the portfolio if the expected T-bill rate is 3.3 percent?

Correct AnswerverifiedE

What is the expected return on a portfolio comprised of $6,200 of stock M and $4,500 of stock N if the economy enjoys a boom period?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedE

What is the expected return of an equally weighted portfolio comprised of the following three stocks?

Correct AnswerverifiedB

Which one of the following is a positively sloped linear function that is created when expected returns are graphed against security betas?

Correct AnswerverifiedShow Answer

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