Question 1

What matters to a diversiﬁed investor?

Accepted Answer

A)   Systematic risk.
B)   Unsystematic risk.
C)   Diversiﬁable risk.
D)   Global risk.
E)   Foreign exchange risk.F) B) and E)
G) B) and C)

Question 2

Which of the following is the best deﬁnition of beta coeﬃcient?

Accepted Answer

A)   Amount of systematic risk present in a particular risky asset relative to an average risky asset.
B)   Group of assets such as stocks and bonds held by an investor.
C)   The difference between the return on a risky investment and a risk-free investment
D)   Return on a risky asset expected in the future.
E)   Equation of the SML showing the relationship between expected return and beta.F) D) and E)
G) A) and D)

Question 3

Which of the following is the best deﬁnition of market risk premium?

Accepted Answer

A)   Percentage of a portfolio's total value in a particular asset.
B)   Group of assets such as stocks and bonds held by an investor.
C)   The difference between the return on a risky investment and a risk-free investment
D)   Return on a risky asset expected in the future.
E)   Equation of the SML showing the relationship between expected return and beta.F) B) and D)
G) C) and D)

Question 4

You want your portfolio beta to be 1.10. Currently, your portfolio consists of $3,000 invested in stock A with a beta of 1.65 and $2,000 in stock B with a beta of .72. You have another $5,000 to invest
And want to divide it between an asset with a beta of 1.48 and a risk-free asset. How much should
You invest in the risk-free asset?

Accepted Answer

A)   $0
B)   $775
C)   $1,885
D)   $3,115
E)   $5,000F) C) and D)
G) A) and C)

Question 5

What is the standard deviation of a portfolio that is invested 68% in stock Q and 32% in stock R?

Accepted Answer

A)   2.7%
B)   3.0%
C)   3.2%
D)   4.1%
E)   4.3%F) B) and E)
G) B) and D)

Question 6

The risk premium increases as the non-diversiﬁable risk increases.

Accepted Answer

A) True 
 B)False

Question 7

You own two risky assets, both of which plot on the security market line. Asset A has an expected return of 12% and a beta of 0.8. Asset B has an expected return of 18% and a beta of 1.4. If your
Portfolio beta is the same as the market portfolio, what proportion of your funds are invested in
Asset A?

Accepted Answer

A)   0.33
B)   0.50
C)   0.67
D)   1.33
E)   1.67F) B) and E)
G) All of the above

Question 8

Using the Capital Asset Pricing Model (CAPM), a decrease in the risk premium will increase the
expected rate of return on an individual security. Assume that the security's beta, the risk-free rate
of return, and the market rate of return are all positive.

Accepted Answer

A) True 
 B)False  False

Question 9

Assume you are looking at a graph depicting the security market line. A stock which is undervalued will plot on that graph:

Accepted Answer

A)   To the right of the overall market.
B)   To the left of the overall market.
C)   Above the security market line.
D)   On the security market line.
E)   Below the security market line.F) B) and E)
G) A) and D)

Question 10

A portfolio is comprised of ﬁve risky stocks. The standard deviations of these stocks are 5.6%, 12.8%, 2.3%, 8.9%, and 10.2%. The standard deviation of the portfolio:

Accepted Answer

A)   Is equal to the arithmetic average of the individual standard deviations.
B)   Must be greater than 2.3%.
C)   Must equal that of the market.
D)   Is equal to the weighted average of the individual standard deviations.
E)   Cannot be determined from the information provided.F) A) and C)
G) D) and E)

Question 11

The market risk premium of an individual security is dependent upon the security's systematic risk.

Accepted Answer

A) True 
 B)False  True

Question 12

What is the standard deviation of the returns on a stock given the following information?

Accepted Answer

A)   7.24%
B)   7.64%
C)   9.26%
D)   9.75%
E)   27.64%F) C) and D)
G) A) and D)

Question 13

No matter how much total risk an asset has, only the unsystematic portion is relevant in determining
the expected return on that asset.

Accepted Answer

A) True 
 B)False

Question 14

An investment ﬁrm is considering a portfolio with equal weighting in a cyclical stock and a countercyclical stock. It is expected that there will be three economic states; Good, Average and
Bad, each with equal probabilities of occurrence. The cyclical stock is expected to have returns of
12%, 5% and 1% in Good, Average and Bad economies respectively. The countercyclical stock is
Expected to have returns of -8%, 2% and 14% in Good, Average and Bad economies respectively.
Given this information, calculate portfolio variance.

Accepted Answer

A)   .00094
B)   .00084
C)   .00074
D)   .00064
E)   .00054F) A) and B)
G) A) and C) E

Question 15

Which one of the following would tend to indicate that a portfolio is being effectively diversiﬁed?

Accepted Answer

A)   An increase in the portfolio beta.
B)   A decrease in the portfolio beta.
C)   An increase in the portfolio rate of return.
D)   An increase in the portfolio standard deviation.
E)   A decrease in the portfolio standard deviation.F) A) and E)
G) D) and E)

Question 16

What is the standard deviation of a portfolio which is comprised of $9,000 invested in stock S and $6,000 in stock T?

Accepted Answer

A)   2.1%
B)   3.6%
C)   4.0%
D)   4.4%
E)   6.3%F) A) and D)
G) A) and E)

Question 17

What is the expected return for the following portfolio?

Accepted Answer

A)   10%
B)   11.5%
C)   12.25%
D)   15.5%
E)   18.5%F) C) and D)
G) All of the above

Question 18

The expected return on an individual asset depends only on that asset's ____ risk.

Accepted Answer

A)   Total.
B)   Incremental.
C)   Systematic.
D)   Unsystematic.
E)   Portfolio.F) None of the above
G) B) and E)

Question 19

Asset A, which has an expected return of 12% and a beta of 0.8, plots on the security market line. Which of the following is false about Asset B, another risky asset with a beta of 1.4?

Accepted Answer

A)   If the market is in equilibrium, Asset B also plots on the SML.
B)   If Asset B plots on the SML, then Asset B and Asset A have the same reward to risk ratio.
C)   Asset B has more systematic risk than both Asset A and the market portfolio.
D)   If Asset B plots on the SML with an expected return = 18%, then the risk-free rate must be 4%.
E)   If Asset B plots on the SML with an expected return = 18%, the expected return on the market must be 15%.F) C) and E)
G) A) and C)

Question 20

Systematic risk is considered important because ________________________.

Accepted Answer

A)   It is needed in order to measure the total risk of an asset.
B)   The risk premium depends only on this type of risk.
C)   The market does not provide a reward for this type of risk.
D)   The risk premium depends on both systematic and unsystematic risk.
E)   Investors are willing to pay more for stocks with high systematic risk components.F) A) and E)
G) All of the above

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

What matters to a diversiﬁed investor?

Correct Answer
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Which of the following is the best deﬁnition of beta coeﬃcient?

Correct Answer
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Which of the following is the best deﬁnition of market risk premium?

Correct Answer
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Correct Answer
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What is the standard deviation of a portfolio that is invested 68% in stock Q and 32% in stock R?

Correct Answer
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The risk premium increases as the non-diversiﬁable risk increases.

Correct Answer
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Correct Answer
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Using the Capital Asset Pricing Model (CAPM), a decrease in the risk premium will increase the expected rate of return on an individual security. Assume that the security's beta, the risk-free rate of return, and the market rate of return are all positive.

Correct Answer
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False

Assume you are looking at a graph depicting the security market line. A stock which is undervalued will plot on that graph:

Correct Answer
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A portfolio is comprised of ﬁve risky stocks. The standard deviations of these stocks are 5.6%, 12.8%, 2.3%, 8.9%, and 10.2%. The standard deviation of the portfolio:

Correct Answer
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The market risk premium of an individual security is dependent upon the security's systematic risk.

Correct Answer
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True

What is the standard deviation of the returns on a stock given the following information?

Correct Answer
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No matter how much total risk an asset has, only the unsystematic portion is relevant in determining the expected return on that asset.

Correct Answer
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Correct Answer
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E

Which one of the following would tend to indicate that a portfolio is being effectively diversiﬁed?

Correct Answer
verified

What is the standard deviation of a portfolio which is comprised of $9,000 invested in stock S and $6,000 in stock T?

Correct Answer
verified

What is the expected return for the following portfolio?

Correct Answer
verified

The expected return on an individual asset depends only on that asset's ____ risk.

Correct Answer
verified

Asset A, which has an expected return of 12% and a beta of 0.8, plots on the security market line. Which of the following is false about Asset B, another risky asset with a beta of 1.4?

Correct Answer
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Systematic risk is considered important because ________________________.

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

What matters to a diversiﬁed investor?

Correct AnswerverifiedShow Answer

Which of the following is the best deﬁnition of beta coeﬃcient?

Correct AnswerverifiedShow Answer

Which of the following is the best deﬁnition of market risk premium?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the standard deviation of a portfolio that is invested 68% in stock Q and 32% in stock R?

Correct AnswerverifiedShow Answer

The risk premium increases as the non-diversiﬁable risk increases.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Using the Capital Asset Pricing Model (CAPM), a decrease in the risk premium will increase the expected rate of return on an individual security. Assume that the security's beta, the risk-free rate of return, and the market rate of return are all positive.

Correct AnswerverifiedFalse

Assume you are looking at a graph depicting the security market line. A stock which is undervalued will plot on that graph:

Correct AnswerverifiedShow Answer

A portfolio is comprised of ﬁve risky stocks. The standard deviations of these stocks are 5.6%, 12.8%, 2.3%, 8.9%, and 10.2%. The standard deviation of the portfolio:

Correct AnswerverifiedShow Answer

The market risk premium of an individual security is dependent upon the security's systematic risk.

Correct AnswerverifiedTrue

What is the standard deviation of the returns on a stock given the following information?

Correct AnswerverifiedShow Answer

No matter how much total risk an asset has, only the unsystematic portion is relevant in determining the expected return on that asset.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedE

Which one of the following would tend to indicate that a portfolio is being effectively diversiﬁed?

Correct AnswerverifiedShow Answer

What is the standard deviation of a portfolio which is comprised of $9,000 invested in stock S and $6,000 in stock T?

Correct AnswerverifiedShow Answer

What is the expected return for the following portfolio?

Correct AnswerverifiedShow Answer

The expected return on an individual asset depends only on that asset's ____ risk.

Correct AnswerverifiedShow Answer

Asset A, which has an expected return of 12% and a beta of 0.8, plots on the security market line. Which of the following is false about Asset B, another risky asset with a beta of 1.4?

Correct AnswerverifiedShow Answer

Systematic risk is considered important because ________________________.

Correct AnswerverifiedShow Answer

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False

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True

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E

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