Question 1

At a minimum, which of the following would 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?
I. asset's standard deviation
II. asset's beta
III. risk-free rate of return
IV. market risk premium

Accepted Answer

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

Question 2

The common stock of Alpha Manufacturers has a beta of 1.47 and an actual expected return of 15.26 percent. The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 percent. Which one of the following statements is true given this information?

Accepted Answer

A)  The actual expected stock return will graph above the Security Market Line.
B)  The stock is underpriced.
C)  To be correctly priced according to CAPM, the stock should have an expected return of 21.95 percent.
D)  The stock has less systematic risk than the overall market.
E)  The actual expected stock return indicates the stock is currently overpriced.F) All of the above
G) A) and D) E

Question 3

The primary purpose of portfolio diversification is to:

Accepted Answer

A)  increase returns and risks.
B)  eliminate all risks.
C)  eliminate asset-specific risk.
D)  eliminate systematic risk.
E)  lower both returns and risks.F) C) and D)
G) B) and D)

Question 4

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 D)
G) A) and C)

Question 5

You are comparing stock A to stock B. Given the following information, what is the difference in the expected returns of these two securities?

Accepted Answer

A)  -0.85 percent
B)  1.95 percent
C)  2.05 percent
D)  13.45 percent
E)  13.55 percentF) A) and D)
G) B) and D)

Question 6

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 E)
G) A) and B)

Question 7

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 D)
G) D) and E)

Question 8

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.

Accepted Answer

CAPM suggests the expected return is a function of (1) the risk-free rate of return, which is the pure time value of money, (2) the market risk premium, which is the reward for bearing systematic risk, and (3) beta, which is the amount of systematic risk present in a particular asset. Better answers will point out that both the pure time value of money and the reward for bearing systematic risk are exogenously determined and can change on a daily basis, while the amount of systematic risk for a particular asset is determined by the firm's decision-makers.

Question 9

What is the expected return on a portfolio that is equally weighted between stocks K and L given the following information?

Accepted Answer

A)  11.13 percent
B)  11.86 percent
C)  12.25 percent
D)  13.32 percent
E)  14.40 percentF) A) and D)
G) A) and C) A

Question 10

A stock has an expected return of 11 percent, the risk-free rate is 6.1 percent, and the market risk premium is 4 percent. What is the stock's beta?

Accepted Answer

A)  1.18
B)  1.23
C)  1.29
D)  1.32
E)  1.35F) C) and D)
G) B) and E)

Question 11

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) None of the above
G) B) and C)

Question 12

The common stock of Manchester & Moore is expected to earn 13 percent in a recession, 6 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 5 percent while the probability of a recession is 45 percent. What is the expected rate of return on this stock?

Accepted Answer

A)  8.52 percent
B)  8.74 percent
C)  8.65 percent
D)  9.05 percent
E)  9.28 percentF) A) and B)
G) None of the above

Question 13

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 14

Thayer Farms stock has a beta of 1.12. The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent. What is the expected rate of return on this stock?

Accepted Answer

A)  8.35 percent
B)  9.01 percent
C)  10.23 percent
D)  13.21 percent
E)  13.73 percentF) A) and D)
G) B) and E)

Question 15

You recently purchased a stock that is expected to earn 22 percent in a booming economy, 9 percent in a normal economy, and lose 33 percent in a recessionary economy. There is a 5 percent probability of a boom and a 75 percent chance of a normal economy. What is your expected rate of return on this stock?

Accepted Answer

A)  -3.40 percent
B)  -2.25 percent
C)  1.25 percent
D)  2.60 percent
E)  3.50 percentF) A) and D)
G) A) and C)

Question 16

What is the standard deviation of the returns on a portfolio that is invested 52 percent in stock Q and 48 percent in stock R?

Accepted Answer

A)  1.66 percent
B)  2.47 percent
C)  2.63 percent
D)  3.28 percent
E)  3.41 percentF) B) and C)
G) A) and E)

Question 17

If the economy is normal, Charleston Freight stock is expected to return 15.7 percent. If the economy falls into a recession, the stock's return is projected at a negative 11.6 percent. The probability of a normal economy is 80 percent while the probability of a recession is 20 percent. What is the variance of the returns on this stock?

Accepted Answer

A)  0.010346
B)  0.011925
C)  0.013420
D)  0.013927
E)  0.014315F) A) and B)
G) A) and C)

Question 18

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments?

Accepted Answer

A)  index
B)  portfolio
C)  collection
D)  grouping
E)  risk-freeF) None of the above
G) C) and E)

Question 19

Which one of the following statements related to risk is correct?

Accepted Answer

A)  The beta of a portfolio must increase when a stock with a high standard deviation is added to the portfolio.
B)  Every portfolio that contains 25 or more securities is free of unsystematic risk.
C)  The systematic risk of a portfolio can be effectively lowered by adding T-bills to the portfolio.
D)  Adding five additional stocks to a diversified portfolio will lower the portfolio's beta.
E)  Stocks that move in tandem with the overall market have zero betas.F) B) and E)
G) C) and E)

Question 20

Which one of the following is most directly affected by the level of systematic risk in a security?

Accepted Answer

A)  variance of the returns
B)  standard deviation of the returns
C)  expected rate of return
D)  risk-free rate
E)  market risk premiumF) B) and E)
G) C) and D)

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

At a minimum, which of the following would 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? I. asset's standard deviation II. asset's beta III. risk-free rate of return IV. market risk premium

Correct Answer
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The common stock of Alpha Manufacturers has a beta of 1.47 and an actual expected return of 15.26 percent. The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 percent. Which one of the following statements is true given this information?

Correct Answer
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E

The primary purpose of portfolio diversification is to:

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

Correct Answer
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You are comparing stock A to stock B. Given the following information, what is the difference in the expected returns of these two securities?

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 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:

Correct Answer
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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.

What is the expected return on a portfolio that is equally weighted between stocks K and L given the following information?

Correct Answer
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A

A stock has an expected return of 11 percent, the risk-free rate is 6.1 percent, and the market risk premium is 4 percent. What is the stock's beta?

Correct Answer
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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 Answer
verified

The common stock of Manchester & Moore is expected to earn 13 percent in a recession, 6 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 5 percent while the probability of a recession is 45 percent. What is the expected rate of return on this stock?

Correct Answer
verified

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 Answer
verified

Thayer Farms stock has a beta of 1.12. The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent. What is the expected rate of return on this stock?

Correct Answer
verified

Correct Answer
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What is the standard deviation of the returns on a portfolio that is invested 52 percent in stock Q and 48 percent in stock R?

Correct Answer
verified

Correct Answer
verified

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments?

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

Correct Answer
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Which one of the following is most directly affected by the level of systematic risk in a security?

Correct Answer
verified

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

At a minimum, which of the following would 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? I. asset's standard deviation II. asset's beta III. risk-free rate of return IV. market risk premium

Correct AnswerverifiedShow Answer

The common stock of Alpha Manufacturers has a beta of 1.47 and an actual expected return of 15.26 percent. The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 percent. Which one of the following statements is true given this information?

Correct AnswerverifiedE

The primary purpose of portfolio diversification is to:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

You are comparing stock A to stock B. Given the following information, what is the difference in the expected returns of these two securities?

Correct AnswerverifiedShow Answer

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 AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

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.

What is the expected return on a portfolio that is equally weighted between stocks K and L given the following information?

Correct AnswerverifiedA

A stock has an expected return of 11 percent, the risk-free rate is 6.1 percent, and the market risk premium is 4 percent. What is the stock's beta?

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

The common stock of Manchester & Moore is expected to earn 13 percent in a recession, 6 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 5 percent while the probability of a recession is 45 percent. What is the expected rate of return on this stock?

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

Thayer Farms stock has a beta of 1.12. The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent. What is the expected rate of return on this stock?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the standard deviation of the returns on a portfolio that is invested 52 percent in stock Q and 48 percent in stock R?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Suzie owns five different bonds valued at $36,000 and twelve different stocks valued at $82,500 total. Which one of the following terms most applies to Suzie's investments?

Correct AnswerverifiedShow Answer

Which one of the following statements related to risk is correct?

Correct AnswerverifiedShow Answer

Which one of the following is most directly affected by the level of systematic risk in a security?

Correct AnswerverifiedShow Answer

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E

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A

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