Question 1

Which of the following stocks is (are)  incorrectly priced if the risk-free rate is 4% and the market risk premium is 6%?

Accepted Answer

A)   A only
B)   B only
C)   C only
D)   A and C only
E)   A, B, and CF) C) and D)
G) B) and C)

Question 2

Which of the following is correct regarding the CAPM?

Accepted Answer

A)   The expected return for a particular asset depends on the pure time value of money as measured by beta.
B)   The expected return for a particular asset depends on the amount of systematic risk as measured by the risk free rate.
C)   The standard deviation for a particular asset depends on the reward for bearing risk as measured by beta.
D)   Implicit in the CAPM is that all risky assets have the same reward to risk ratio.
E)   The SML and CAPM illustrate that the higher the beta, the lower the expected return.F) A) and B)
G) B) and E)

Question 3

We routinely assume that investors are risk-averse return-seekers; i.e., they like returns and dislike
risk. If so, why do we contend that only systematic risk is important? (Alternatively, why is total risk
not important to investors, in and of itself?)

Accepted Answer

This question, of course, gets to the po...

Question 4

The pure time value of money is called the:

Accepted Answer

A)   Market rate of return.
B)   Risk-free rate of return.
C)   Beta adjusted market rate of return.
D)   Beta adjusted market risk premium.
E)   Beta adjusted risk-free rate of return.F) A) and E)
G) A) and B)

Question 5

What is the portfolio weight of stock B given the following information?

Accepted Answer

A)   31%
B)   33%
C)   34%
D)   35%
E)   36%F) B) and E)
G) A) and B)

Question 6

Asset A has a reward to risk ratio of .075 and a beta of 1.5. The risk-free rate is 5%. What is the expected return on A?

Accepted Answer

A)   11.25%
B)   12.25%
C)   13.50%
D)   14.25%
E)   16.25%F) B) and E)
G) A) and B)

Question 7

Your portfolio is comprised of 25% of stock X, 65% of stock Y, and 10% of stock Z. Stock X has a beta of .79, stock Y has a beta of 1.23, and stock Z has a beta of 1.47. What is the beta of your
Portfolio?

Accepted Answer

A)   .93
B)   .99
C)   1.04
D)   1.09
E)   1.14F) B) and C)
G) A) and C)

Question 8

Beta is needed to estimate the amount of additional reward you will receive for purchasing a risky
asset instead of a risk-free asset.

Accepted Answer

A) True 
 B)False

Question 9

A portfolio beta can be deﬁned as the:

Accepted Answer

A)   Weighted average of the betas of the individual securities within the portfolio.
B)   Total of the betas of the individual securities within the portfolio.
C)   Amount of unsystematic risk remaining after the portfolio is diversiﬁed.
D)   Measure of the unsystematic risk of the portfolio relative to the level of market risk.
E)   Measure of the total risk of the portfolio in excess of the level of market risk.F) A) and D)
G) A) and B)

Question 10

All else the same, actions or events that cause ﬁrm returns to be less correlated with changes in the economy will _______ the ﬁrm's systematic risk.

Accepted Answer

A)   Increase.
B)   Decrease.
C)   Not affect.
D)   Affect (direction not determinable) .
E)   Increase the ﬁrm's unsystematic risk but not affect.F) A) and D)
G) All of the above

Question 11

The principle of diversiﬁcation tells us that:

Accepted Answer

A)   Concentrating an investment in two or three large stocks will eliminate all of your risk.
B)   Concentrating an investment in two large stocks will cut your risk exactly in half.
C)   Spreading an investment across many diverse assets cannot (in an eﬃcient market)  eliminate any risk.
D)   Spreading an investment across many diverse assets will eliminate all of the risk.
E)   Spreading an investment across many diverse assets will eliminate some of the risk.F) B) and D)
G) C) and D)

Question 12

The security market line:

Accepted Answer

A)   Is a quadratic function depicting the relationship between risk and return.
B)   Has a slope which is equal to the market risk premium.
C)   Has an intercept point which is equal to the market rate of return.
D)   Has a slope which is equal to the risk-free rate of return.
E)   Is a linear function of the relationship between total risk and the market rate of return.F) A) and B)
G) All of the above

Question 13

The CAPM shows that the expected return for a particular asset depends on the amount of
unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 14

You recently purchased a stock that is expected to earn 16% in a booming economy, 12% in a normal economy, and lose 8% in a recessionary economy. There is a 20% probability of a boom, a
70% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of
Return on this stock?

Accepted Answer

A)   6.00%
B)   6.67%
C)   8.60%
D)   10.80%
E)   12.40%F) C) and E)
G) B) and D)

Question 15

Diversiﬁable risks can be essentially eliminated by investing in several unrelated securities.

Accepted Answer

A) True 
 B)False

Question 16

What is the standard deviation of security A?

Accepted Answer

A)   0.02%
B)   0.06%
C)   4.9%
D)   5.45%
E)   6%F) A) and C)
G) D) and E)

Question 17

Risk premium = Expected return - Risk-free rate

Accepted Answer

A) True 
 B)False

Question 18

You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return?

Accepted Answer

A)   7.71%
B)   9.60%
C)   12.76%
D)   13.25%
E)   14.88%F) A) and E)
G) A) and D)

Question 19

The realized return on an asset can be broken down into an expected component and a discounted
component.

Accepted Answer

A) True 
 B)False

Question 20

What is the expected return on this portfolio?

Accepted Answer

A)   10.84%
B)   11.67%
C)   12.39%
D)   12.91%
E)   13.16%F) B) and E)
G) B) and D)

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

What is the portfolio weight of stock B given the following information?

Correct Answer
verified

Which of the following is correct regarding the CAPM?

Correct Answer
verified

Asset A has a reward to risk ratio of .075 and a beta of 1.5. The risk-free rate is 5%. What is the expected return on A?

Correct Answer
verified

What is the expected return on this portfolio?

Correct Answer
verified

Correct Answer
verified

What is the standard deviation of security A?

Correct Answer
verified

The security market line:

Correct Answer
verified

The pure time value of money is called the:

Correct Answer
verified

The principle of diversiﬁcation tells us that:

Correct Answer
verified

The CAPM shows that the expected return for a particular asset depends on the amount of unsystematic risk.

Correct Answer
verified

You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return?

Correct Answer
verified

Beta is needed to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset.

Correct Answer
verified

Risk premium = Expected return - Risk-free rate

Correct Answer
verified

A portfolio beta can be deﬁned as the:

Correct Answer
verified

Diversiﬁable risks can be essentially eliminated by investing in several unrelated securities.

Correct Answer
verified

Which of the following stocks is (are) incorrectly priced if the risk-free rate is 4% and the market risk premium is 6%?

Correct Answer
verified

The realized return on an asset can be broken down into an expected component and a discounted component.

Correct Answer
verified

We routinely assume that investors are risk-averse return-seekers; i.e., they like returns and dislike risk. If so, why do we contend that only systematic risk is important? (Alternatively, why is total risk not important to investors, in and of itself?)

Correct Answer
verified
This question, of course, gets to the po...
View Answer

Your portfolio is comprised of 25% of stock X, 65% of stock Y, and 10% of stock Z. Stock X has a beta of .79, stock Y has a beta of 1.23, and stock Z has a beta of 1.47. What is the beta of your Portfolio?

Correct Answer
verified

All else the same, actions or events that cause ﬁrm returns to be less correlated with changes in the economy will _______ the ﬁrm's systematic risk.

Correct Answer
verified

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

What is the portfolio weight of stock B given the following information?

Correct AnswerverifiedShow Answer

Which of the following is correct regarding the CAPM?

Correct AnswerverifiedShow Answer

Asset A has a reward to risk ratio of .075 and a beta of 1.5. The risk-free rate is 5%. What is the expected return on A?

Correct AnswerverifiedShow Answer

What is the expected return on this portfolio?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the standard deviation of security A?

Correct AnswerverifiedShow Answer

The security market line:

Correct AnswerverifiedShow Answer

The pure time value of money is called the:

Correct AnswerverifiedShow Answer

The principle of diversiﬁcation tells us that:

Correct AnswerverifiedShow Answer

The CAPM shows that the expected return for a particular asset depends on the amount of unsystematic risk.

Correct AnswerverifiedShow Answer

You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return?

Correct AnswerverifiedShow Answer

Beta is needed to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset.

Correct AnswerverifiedShow Answer

Risk premium = Expected return - Risk-free rate

Correct AnswerverifiedShow Answer

A portfolio beta can be deﬁned as the:

Correct AnswerverifiedShow Answer

Diversiﬁable risks can be essentially eliminated by investing in several unrelated securities.

Correct AnswerverifiedShow Answer

Which of the following stocks is (are) incorrectly priced if the risk-free rate is 4% and the market risk premium is 6%?

Correct AnswerverifiedShow Answer

The realized return on an asset can be broken down into an expected component and a discounted component.

Correct AnswerverifiedShow Answer

We routinely assume that investors are risk-averse return-seekers; i.e., they like returns and dislike risk. If so, why do we contend that only systematic risk is important? (Alternatively, why is total risk not important to investors, in and of itself?)

Correct AnswerverifiedThis question, of course, gets to the po...View AnswerShow Answer

Your portfolio is comprised of 25% of stock X, 65% of stock Y, and 10% of stock Z. Stock X has a beta of .79, stock Y has a beta of 1.23, and stock Z has a beta of 1.47. What is the beta of your Portfolio?

Correct AnswerverifiedShow Answer

All else the same, actions or events that cause ﬁrm returns to be less correlated with changes in the economy will _______ the ﬁrm's systematic risk.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
This question, of course, gets to the po...
View Answer

Correct Answer
verified

Correct Answer
verified