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Homework answers / question archive / New Charter University BUISNESS BA521 Multiple Choice Questions 1)The return on a risky asset which is anticipated being earned in the future is called the                return

New Charter University BUISNESS BA521 Multiple Choice Questions 1)The return on a risky asset which is anticipated being earned in the future is called the                return

Accounting

New Charter University

BUISNESS BA521

Multiple Choice Questions

1)The return on a risky asset which is anticipated being earned in the future is called the                return.

    1. average
    2. historical

C. expected

d. geometric

e. required

 

  1. A group of assets, such as stocks and bonds, held by an investor is called a(n):
    1. index.

B. portfolio.

  1. collection.
  2. grouping.
  3. tranche.

 

  1. The percentage of a portfolio's total value invested in a particular asset is called that asset's:
    1. portfolio return.
  1. portfolio weight.
  1. degree of risk.
  2. composite value.
  3. index value.

 

  1. Risk that affects a large number of assets is called                             risk.
    1. idiosyncratic
    2. diversifiable
  1. systematic

d. asset-specific

e. total

 

  1. Risk that affects at most a small number of assets is called                               risk.
    1. portfolio
    2. nondiversifiable
    3. market
  1. unsystematic

e. total

 

  1. The principle of diversification tells us that:
    1. concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.
    2. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.
    3. spreading an investment across five diverse companies will not lower the total risk.
    4. spreading an investment across many diverse assets will eliminate all of the systematic risk.
  1. spreading an investment across many diverse assets will eliminate some of the total risk.

 

  1. The                 tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.
    1. efficient markets hypothesis

B. systematic risk principle

  1. open markets theorem
  2. law of one price
  3. principle of diversification

 

  1. The amount of systematic risk present in a particular risky asset relative to the systematic risk present in an average risky asset, is called the:

A. beta coefficient.

  1. reward-to-risk ratio.
  2. risk ratio.
  3. diversifiable risk.
  4. Treynor index.

 

  1. The positively sloped linear function which illustrates the relationship between an asset's expected return and its beta coefficient is the:
    1. reward-to-risk ratio.
    2. portfolio weight.
    3. portfolio risk.

D. security market line.

e. market risk premium.

 

  1. Which one of the following is the slope of the security market line?
  1. reward-to-risk ratio
  2. portfolio weight
  3. beta coefficient
  4. risk-free interest rate

E. market risk premium

 

  1. The equation of the SML which defines the relationship between the expected return and beta is the:

A. capital asset pricing model.

  1. time value of money equation.
  2. risk-return model.
  3. market equation.
  4. expected risk formula.

 

  1. The minimum required return on a new risky investment is called the:
  1. average arithmetic return.
  2. expected return.
  3. geometric average return.
  4. time value of money.

E. cost of capital.

 

  1. The expected return on a stock given various states of the economy is equal to the:
  1. highest expected return given any economic state.
  2. arithmetic average of the returns for each economic state.
  3. 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.

 

  1. The expected return on a stock computed using economic probabilities is:
  1. guaranteed to equal the actual average return on the stock for the next five years.
  2. guaranteed to be the minimal rate of return on the stock over the next two years.
  3. guaranteed to equal the actual return for the immediate twelve month period.

D. a mathematical expectation based on a weighted average and not an actual anticipated outcome.

e. the actual return you should anticipate as long as the economic forecast remains constant.

 

  1. The expected risk premium on a stock is equal to the expected return on the stock minus the:

a. expected market rate of return.

B. risk-free rate.

  1. inflation rate.
  2. standard deviation.
  3. variance.

 

  1. Standard deviation measures                       risk.

A. total

  1. nondiversifiable
  2. unsystematic
  3. systematic
  4. economic

 

  1. The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:
  1. number of shares owned of each stock.
  2. 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.

 

  1. The portfolio expected return considers which of the following factors?
  1. percentage of the portfolio invested in each individual security
  2. projected states of the economy
  3. the performance of each security given various economic states
  4. probability of occurrence for each state of the economy

 

  1. I and III only
  2. II and IV only
  3. I, III, and IV only
  4. II, III, and IV only

E. I, II, III, and IV

 

 

 

  1. The expected return on a portfolio:
  1. can never exceed the expected return of the best performing security in the portfolio.
  2. must be equal to or greater than the expected return of the worst performing security in the portfolio.
  3. is independent of the performance of the overall economy.
  4. is independent of the allocation of the portfolio amongst individual securities.

 

  1. I and III only
  2. II and IV only

C. I and II only

d. I, II, and III only

e. I, II, III, and IV

 

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

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.

  1. must be equal to or greater than the variance of the least risky stock in the portfolio.
  2. will be a weighted average of the variances of the individual securities in the portfolio.
  3. will be an arithmetic average of the variance of the individual securities in the portfolio.

 

  1. The standard deviation of a portfolio:
  1. is a weighted average of the standard deviations of the individual securities which comprise the portfolio.
  2. can never be less than the standard deviation of the most risky security in the portfolio.
  3. must be equal to or greater than the lowest standard deviation of any single security held in the portfolio.
  4. 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.

 

  1. Which of the following are included in the computation of a portfolio's standard deviation?
  1. weight assigned to each security comprising the portfolio
  2. weighted average of the standard deviations of the individual securities held in the portfolio
  3. probability of occurrence for each economic state of the economy
  4. rate of return for each individual security held in the portfolio for each economic state

 

  1. II only
  2. III and IV only

C. I, III, and IV only

d. I, II, and IV only

e. I, II, III, and IV

 

 

 

  1. Which one of the following statements is correct concerning a portfolio of multiple securities and multiple states of the economy when both the securities and the economic states have unequal weights?
  1. Given multiple economic states with unequal weights, it is impossible for the portfolio standard deviation to be less than the lowest standard deviation for any one security contained in the portfolio.
  2. The weights of the individual securities have no effect on the expected return of a portfolio when multiple states of the economy are involved.
  3. Changing the probabilities of occurrence for the various economic states will not affect the expected standard deviation of the portfolio.
  4. The standard deviation of the portfolio can be greater than the 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 unequal weights of the economic states, a portfolio can be created that has an expected standard deviation of zero.

 

  1. Which one of the following events would be included in the expected return on Delta stock?
  1. The directors of Delta just fired the CEO because of remarks he made this morning to one of the directors.
  2. A fire just destroyed Delta's main distribution warehouse which will directly impact the firm's sales for at least six months.

C. This morning, Delta confirmed that its CEO is retiring at the end of the year as anticipated.

d. The price of Delta stock suddenly dropped due to rumors concerning company fraud.

e. Delta's research department just announced that they accidentally discovered a new substance which could replace plastic in a few years.

 

  1. Which one of the following statements is correct?
  1. The unexpected return is always negative.
  2. The expected return minus the unexpected return is equal to the total return.
  3. Over time, the average return is equal to the unexpected return.
  4. The expected return includes the surprise portion of news announcements.

E. Over time, the average unexpected return will be zero.

 

  1. Which one of the following is true concerning unexpected returns?
  1. All announcements by a firm affect that firm's unexpected returns.
  2. Unexpected returns over time have a negative effect on the total return of a firm.
  3. Unexpected returns are relatively predictable in the short-term.
  4. 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.

 

 

 

  1. Which one of the following is an example of systematic risk?
  1. coal miners go on strike against Deep Vein Coal Company
  2. Baker's Dozen experiences a kitchen fire which halts operations

C. inflation unexpectedly increases by 1.5 percent in the U.S.

d. government inspectors stop production at a meat packing plant

e. localized flooding affects corn production

 

  1. Unsystematic risk:

A. can be effectively eliminated by portfolio diversification.

  1. is compensated for by the risk premium.
  2. is measured by beta.
  3. is measured by standard deviation.
  4. is related to the overall economy.

 

  1. Which one of the following is an example of unsystematic risk?
  1. the exchange rate rises against the other major currencies
  2. a national sales tax is adopted

C. an explosion occurs at a chemical plant

d. the Federal Reserve surprisingly raises interest rates by one quarter of a percent

e. consumer spending decreases on a nationwide basis

 

  1. Which one of the following is least apt to reduce the unsystematic risk of a portfolio?
  1. adding additional shares of each stock in a portfolio to that portfolio
  1. adding bonds to a stock portfolio
  2. adding international securities into a portfolio of U.S. stocks
  3. adding U.S. Treasury bills to a risky portfolio
  4. adding technology stocks to a portfolio of utility stocks

 

  1. Which one of the following statements is correct concerning unsystematic risk?

a. Assuming unsystematic risk is rewarded by the market place.

  1. Eliminating unsystematic risk is the responsibility of the individual investor.
  1. Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk.
  2. The Capital Asset Pricing Model specifically rewards investors for assuming unsystematic risk via the application of beta in the formula.
  3. The higher the beta, the higher the unsystematic risk.

 

  1. Which one of the following is another name for systematic risk?
  1. diversifiable risk
  2. unique risk
  3. asset-specific risk

D. market risk

e. unrewarded risk

 

  1. Which one of the following risks is irrelevant to a well-diversified investor?

a. systematic risk

B. unsystematic risk

  1. market risk
  2. nondiversifiable risk
  3. systematic portion of a surprise

 

  1. Which of the following are examples of diversifiable risk?
  1. tornado strikes an industrial park in Kansas
  2. federal government imposes new workplace safety laws
  3. local government increases property tax rates
  4. cost of worker's compensation insurance increases nationwide

 

A. I and III only

  1. II and IV only
  2. II and III only
  3. I and IV only
  4. I, III, and IV only

 

  1. Which of the following statements are correct concerning diversifiable risks?
  1. Diversifiable risks can be essentially eliminated by investing in thirty unrelated securities.
  2. The market rewards investors for diversifiable risk by paying a risk premium.
  3. Diversifiable risks are generally associated with an individual firm or industry.
  4. Beta measures diversifiable risk.

 

A. I and III only

  1. II and IV only
  2. I and IV only
  3. II and III only
  4. I, II, and III only

 

  1. Which of the following are examples of diversifiable risks?
  1. the inflation rate spikes suddenly
  2. terrorists strike the United States
  3. the price of corn increases due to a nationwide drought
  4. taxes are increased on hotel room rentals

 

  1. I and III only
  2. II and IV only
  3. I and II only

D. III and IV only

e. I, II, and IV only

 

 

 

  1. Which of the following statements concerning risk are correct?
  1. Nondiversifiable risk is measured by beta.
  2. The risk premium increases as diversifiable risk increases.
  3. Systematic risk is another name for nondiversifiable risk.
  4. Diversifiable risks are those risks you cannot avoid if you are invested in the financial markets.

 

A. I and III only

  1. II and IV only
  2. I and II only
  3. III and IV only
  4. I, II, and III only

 

  1. The primary purpose of portfolio diversification is to:
  1. increase returns and risks.
  2. eliminate all risks.

C. eliminate asset-specific risk.

d. eliminate systematic risk.

e. lower both returns and risks.

 

  1. Which one of the following indicates a portfolio is being effectively diversified?
  1. an increase in the portfolio beta
  2. a decrease in the portfolio beta
  3. an increase in the portfolio rate of return
  4. an increase in the portfolio standard deviation

E. a decrease in the portfolio standard deviation

 

  1. How many diverse securities are required to eliminate the majority of the diversifiable risk from a portfolio?
  1. 3
  2. 5

C. 30

d. 40

e. 50

 

  1. Systematic risk is measured by:

a. the mean.

B. beta.

  1. the geometric average.
  2. the standard deviation.
  3. the arithmetic average.

 

 

 

  1. The systematic risk principle implies the                            an asset depends on that asset's systematic risk.
  1. variance of the returns on
  2. standard deviation of the returns on

C. expected return on

d. total risk assumed by owning

e. diversification benefits of

 

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

 

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.

  1. A portfolio beta cannot be computed from the betas of the individual securities comprising the portfolio because some risk is eliminated via diversification.
  2. A portfolio of U.S. Treasury bills will have a beta of +1.0.
  3. The beta of a market portfolio is equal to zero.

 

  1. The systematic risk of the market is measured by:
  1. a beta of 1.0.
  1. a beta of 0.0.
  2. a standard deviation of 1.0.
  3. a standard deviation of 0.0.
  4. a variance of 1.0.

 

  1. Which of the following variables do you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset?
  1. asset standard deviation
  2. asset beta
  3. risk-free rate of return
  4. market risk premium

 

a. I and III only

  1. II and IV only
  1. III and IV only
  2. I, III, and IV only
  3. I, II, III, and IV

 

  1. Total risk is measured by                        and systematic risk is measured by                        .
  1. beta; epsilon
  2. beta; standard deviation
  3. epsilon; beta

D. standard deviation; beta

e. standard deviation; variance

 

  1. The intercept point of the security market line is the rate of return which corresponds to:

A. the risk-free rate.

  1. the market rate.
  2. a return of zero.
  3. a return of 1.0 percent.
  4. the market risk premium.

 

  1. A stock with an actual return that lies above the security market line has:
  1. more systematic risk than the overall market.
  2. more risk than warranted based on the realized rate of return.

C. yielded a higher return than expected for the level of risk assumed.

d. less systematic risk than the overall market.

e. yielded a return equivalent to the level of risk assumed.

 

  1. The market rate of return is eleven percent and the risk-free rate of return is four percent. Treynak stock has three percent more risk than the market and has an actual return of eleven percent. This stock:
  1. is underpriced.
  2. is correctly priced.

C. will plot below the security market line.

d. will plot on the security market line.

e. will plot to the left of the overall market on a security market line graph.

 

  1. If the market is efficient and securities are priced fairly then the                                 will be constant for all securities.
  1. systematic risk
  2. standard deviation

C. reward-to-risk ratio

d. beta

e. risk premium

 

  1. The reward-to-risk ratio for stock A exceeds the reward-to-risk ratio of stock B. Stock A has a beta of 1.4 and stock B has a beta of .90. This information implies that:
  1. stock A is riskier than stock B and both stocks are fairly priced.
  2. 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. both stock A and stock B are correctly priced since stock A is riskier than stock B.

e. either stock A is overpriced or stock B is underpriced or both.

 

  1. The market risk premium is computed by:
  1. adding the risk-free rate of return to the inflation rate.
  2. adding the risk-free rate of return to the market rate of return.
  3. subtracting the risk-free rate of return from the inflation rate.

D. subtracting the risk-free rate of return from the market rate of return.

e. multiplying the risk-free rate of return by a beta of 1.0.

 

  1. The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-free asset is referred to as the:

a. market rate of return.

B. market risk premium.

  1. systematic return.
  2. total return.
  3. real rate of return.

 

  1. 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.
  1. real return
  2. actual return
  3. nominal return

D. risk premium

e. expected return

 

  1. The capital asset pricing model (CAPM) assumes:
  1. a risk-free asset has no systematic risk.
  2. beta is a reliable estimate of total risk.
  3. the risk-to-reward ratio is constant.
  4. the market rate of return can be approximated.

 

  1. I and III only
  2. II and IV only

C. I, III, and IV only

d. II, III, and IV only

e. I, II, III, and IV

 

  1. According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the:

a. amount of total risk assumed and the market risk premium.

B. market risk premium and the amount of systematic risk inherent in the security.

  1. risk free rate, the market rate of return, and the standard deviation of the security.
  2. beta of the security and the market rate of return.
  3. beta of the security and the risk-free rate of return.

 

  1. Which one of the following should earn the most risk premium based on CAPM?

a. diversified portfolio with returns similar to the overall market

B. stock with a beta of 1.23

  1. stock with a beta of .98
  2. U.S. Treasury bill
  3. portfolio with a beta of 1.16

 

 

 

  1. 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?

a. $0

b. $775 C. $1,885 d. $3,115

e. $5,000

 

  1. You have a $9,000 portfolio which is invested in stocks A, B, and a risk-free asset. $4,000 is invested in stock A. Stock A has a beta of 1.84 and stock B has a beta of 0.68. How much needs to be invested in stock B if you want a portfolio beta of .95?

a. $0

B. $1,750

c. $3,279

d. $5,000

e. $7,279

 

  1. You recently purchased a stock that is expected to earn 16 percent in a booming economy, 12 percent in a normal economy, and lose 8 percent in a recessionary economy. There is a 20 percent probability of a boom, a 70 percent chance of a normal economy, and a 10 percent chance of a recession. What is your expected rate of return on this stock?
  1. 6.00 percent
  2. 6.67 percent
  3. 8.60 percent

D. 10.80 percent

e. 12.40 percent

 

  1. The common stock of Low Cost Foods is expected to earn 15 percent in a recession, 7 percent in a normal economy, and lose 6 percent in a booming economy. The probability of a boom is 5 percent, the probability of a normal economy is 80 percent, and the chance of a recession is 15 percent. What is the expected rate of return on this stock?
  1. 5.45 percent
  2. 7.25 percent

C. 7.55 percent

d. 8.15 percent

e. 8.45 percent

 

 

 

  1. You are comparing stock A to stock B. Given the following information, which one of these two stocks should you prefer and why?

 

 
 
 

 

  1. Stock A; Stock A has a slightly lower expected return but appears to be significantly less risky than stock B.
  2. Stock A; Stock A has an expected return of 10.2 percent and appears to be less risky.

C. Stock A; Stock A has a higher expected return and appears to be less risky than stock B.

d. Stock B; Stock B has a higher expected return and appears to be just slightly more risky than stock A.

e. Stock B; Stock B has a much higher return which compensates for the additional risk.

 

  1. Winston Brothers stock has a beta of 1.36. The risk-free rate of return is 5.25 percent and the market rate of return is 11.70 percent. What is the risk premium on this stock?

a. 6.45 percent

B. 8.77 percent

  1. 10.99 percent
  2. 14.37 percent
  3. 16.95 percent

 

  1. If the economy booms, Frank's Welding Supply stock is expected to return 19 percent. If the economy falls into a recession, the stock's return is projected at 5 percent. The probability of a boom is 80 percent while the probability of a recession is 20 percent. What is the variance of the returns on this stock?

A. .003136

b. .006727

c. .009864

d. .010192

e. .013328

 

  1. The rate of return on the common stock of FIDF is expected to be 15 percent in a boom economy, 12 percent in a normal economy, and only 7 percent in a recessionary economy. The probabilities of these economic states are 15 percent for a boom, 80 percent for a normal economy, and 5 percent for a recession. What is the variance of the returns on this common stock?

a. .000118

B. .000256

c. .001876

d. .003492

e. .016000

 

  1. The returns on the common stock of Cycles, Inc. are quite cyclical. In a boom economy, the stock is expected to return 27 percent in comparison to 13 percent in a normal economy and a negative 20 percent in a recessionary period. The probability of a recession is 30 percent while the probability of a boom is 5 percent. The remainder of the time the economy will be at normal levels. What is the standard deviation of the returns on this stock?
  1. 11.40 percent
  2. 14.79 percent

C. 15.87 percent

d. 18.27 percent

e. 22.46 percent

 

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

 

 
 
 

 

A. 7.24 percent

  1. 7.64 percent
  2. 9.26 percent
  3. 9.75 percent
  4. 27.64 percent

 

  1. You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected return of

10.8 percent. Stock A has an expected return of 13 percent while stock B is expected to return 8 percent. What is the portfolio weight of stock A?

  1. 38 percent
  2. 44 percent

C. 56 percent

d. 64 percent

e. 78 percent

 

  1. You own the following portfolio of stocks. What is the portfolio weight of stock C?

 

 
 
 

 

  1. 2.6 percent
  2. 3.2 percent

C. 5.6 percent

d. 6.0 percent

e. 7.8 percent

 

  1. You own a portfolio with the following expected returns given the various states of the economy.

What is the overall portfolio expected return?

 

 
 
 

 

  1. 7.71 percent
  2. 9.60 percent
  3. 12.76 percent

D. 13.25 percent

e. 14.88 percent

 

  1. What is the expected return on a portfolio which is invested 30 percent in stock A, 40 percent in stock B, and 30 percent in stock C?

 

 
 
 

 

A. 8.56 percent

  1. 8.62 percent
  2. 8.76 percent
  3. 8.79 percent
  4. 8.82 percent

 

  1. What is the expected return on this portfolio?

 

 
 
 

 

  1. 10.84 percent
  1. 11.67 percent
  2. 12.39 percent
  3. 12.91 percent
  4. 13.16 percent

 

 

  1. What is the expected return on a portfolio comprised of $4,000 in stock K and $6,000 in stock L if the economy is normal?

 

 
 
 

 

a. 4.65 percent

  1. 6.20 percent
  1. 8.95 percent
  2. 13.35 percent
  3. 17.80 percent

 

  1. What is the expected return on a portfolio comprised of $7,500 in stock M and $2,500 in stock N if the economy enjoys a boom period?

 

 
 
 

 

  1. 6.93 percent
  2. 8.16 percent
  3. 8.25 percent
  4. 12.25 percent

E. 15.75 percent

 

  1. What is the portfolio variance if 55 percent is invested in stock S and 45 percent is invested in stock T?

 

 
 
 

 

A. .001314

b. .003148

c. .009128

d. .036250

e. .056106

 

  1. What is the variance of a portfolio consisting of $5,500 in stock G and $4,500 in stock H?

 

 
 
 

 

A. .000387

b. .000778

c. .001482

d. .019677

e. .038496

 

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

 

 
 
 

 

a. 2.7 percent

B. 3.0 percent

  1. 3.2 percent
  2. 4.1 percent
  3. 4.3 percent

 

  1. What is the standard deviation of a portfolio which is comprised of $9,000 invested in stock S and

$6,000 in stock T?

 

 
 
 

 

A. 2.1 percent

  1. 3.6 percent
  2. 4.0 percent
  3. 4.4 percent
  4. 6.3 percent

 

  1. What is the standard deviation of a portfolio which is invested 15 percent in stock A, 45 percent in stock B and 40 percent in stock C?

 

 
 
 

 

  1. 1.0 percent
  2. 2.5 percent

C. 5.0 percent

d. 7.6 percent

e. 9.5 percent

 

 

 

  1. What is the beta of a portfolio comprised of the following securities?

 

 
 
 

 

A. .98

b. 1.04

c. 1.09

d. 1.15

e. 1.32

 

  1. Your portfolio is comprised of 35 percent of stock X, 25 percent of stock Y, and 40 percent of stock

Z. Stock X has a beta of 0.82, stock Y has a beta of 1.09, and stock Z has a beta of 1.63. What is the beta of your portfolio?

a. .76

b. 1.18

C. 1.21

d. 3.50

e. 3.54

 

  1. Your portfolio has a beta of 1.24. The portfolio consists of 10 percent U.S. Treasury bills, 55 percent in stock A, and 35 percent in stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B?

a. 0

b. .69

c. 1.00

d. 1.24

E. 1.97

 

  1. You would like to combine a risky stock with a beta of 1.68 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in Treasury bills?

a. .32

B. .40

c. .50

d. .60

e. .68

 

  1. The market has an expected rate of return of 11.4 percent. The long-term government bond is expected to yield 5.4 percent and the U.S. Treasury bill is expected to yield 4.6 percent. The inflation rate is

3.9 percent. What is the market risk premium?

a. 6.0 percent

B. 6.8 percent

  1. 7.5 percent
  2. 8.5 percent
  3. 9.3 percent

 

  1. The risk-free rate of return is 5.2 percent and the market risk premium is 8.4 percent. What is the expected rate of return on a stock with a beta of 1.34?
  1. 8.29 percent
  2. 9.49 percent
  3. 13.60 percent

D. 16.46 percent

e. 18.22 percent

 

  1. The common stock of Abbott International has an expected return of 15.6 percent. The return on the market is 12.7 percent and the risk-free rate of return is 3.9 percent. What is the beta of this stock?

a. .92

b. 1.23

C. 1.33

d. 1.67

e. 1.77

 

  1. The common stock of GO Limited has a beta of 1.23 and an expected return of 12.84 percent. The risk- free rate of return is 4.2 percent. What is the expected return on the market?
  1. 7.02 percent
  2. 8.64 percent
  3. 10.63 percent

D. 11.22 percent

e. 17.04 percent

 

  1. The expected return on Joseph's Restaurant's stock is 14.25 percent while the expected return on the market is 12.38 percent. The stock's beta is 1.18. What is the risk-free rate of return?

A. 1.99 percent

  1. 2.04 percent
  2. 2.48 percent
  3. 3.23 percent
  4. 3.68 percent

 

  1. The stock of Markley Toys has a beta of 1.37. The risk-free rate of return is 3.90 percent and the market risk premium is 8.75 percent. What is the expected rate of return on Markley Toys stock?
  1. 10.59 percent
  2. 12.72 percent
  3. 14.60 percent

D. 15.89 percent

e. 17.33 percent

 

  1. The common stock of PDS has a beta of .98 and an expected return of 12.34 percent. The risk-free rate of return is 4.1 percent and the market rate of return is 11.65 percent. Which one of the following statements is true given this information?

a. The return on PDS stock will graph below the Security Market Line.

B. PDS stock is underpriced.

  1. The expected return on PDS stock based on the Capital Asset Pricing Model is 15.52 percent.
  2. PDS stock has more systematic risk than the overall market.
  3. PDS stock is correctly priced.

 

  1. Which one of the following stocks is correctly priced if the risk-free rate of return is 3.2 percent and the market risk premium is 8.4 percent?

 

 
 
 

 

  1. A
  2. B

C. C

d. D

e. E

 

  1. Which one of the following stocks is correctly priced if the risk-free rate of return is 3.5 percent and the market rate of return is 12.56 percent?

 

 
 
 

 

a. A

B. B

  1. C
  2. D
  3. E

 

  1. According to CAPM, the expected return on a risky asset depends on three components. Describe each component, and explain its role in determining expected return.

 

 

 

 

  1. Explain how the slope of the security market line is determined and why every stock that is correctly priced will lie on this line.

 

 

  1. Explain how the beta of a portfolio can equal the market beta if 50 percent of the portfolio is invested in a risky security that has twice the amount of systematic risk as an average risky security.

 

 

  1. Discuss the various types of risk and explain which types are rewarded with a risk premium.

 

 

  1. A portfolio beta is a weighted average of the betas of the individual securities which comprise the portfolio. However, the standard deviation is not a weighted average of the standard deviations of the individual securities which comprise the portfolio. Explain why.

 

 

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