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The market has an expected rate of return of 10.7 percent. The long-term government bond is expected to yield 5.8 percent and the U.S. Treasury bill is expected to yield 3.9 percent. The inflation rate is 3.6 percent. What is the market risk premium?


A) 6.0 percent
B) 6.8 percent
C) 7.5 percent
D) 8.5 percent
E) 9.3 percent

F) B) and C)
G) B) and D)

Correct Answer

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Treynor Industries is investing in a new project. The minimum rate of return the firm requires on this project is referred to as the:


A) average arithmetic return.
B) expected return.
C) market rate of return.
D) internal rate of return.
E) cost of capital.

F) B) and D)
G) B) and C)

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Your portfolio has a beta of 1.12. The portfolio consists of 20 percent U.S. Treasury bills, 50 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?


A) 1.47
B) 1.52
C) 1.69
D) 1.84
E) 2.07

F) B) and D)
G) All of the above

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The market risk premium is computed by:


A) adding the risk-free rate of return to the inflation rate.
B) adding the risk-free rate of return to the market rate of return.
C) 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.

F) B) and C)
G) A) and E)

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You own a portfolio that has $2,000 invested in Stock A and $1,400 invested in Stock B. The expected returns on these stocks are 14 percent and 9 percent, respectively. What is the expected return on the portfolio?


A) 11.06 percent
B) 11.50 percent
C) 11.94 percent
D) 12.13 percent
E) 12.41 percent

F) A) and B)
G) A) and C)

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Which one of the following is least apt to reduce the unsystematic risk of a portfolio?


A) reducing the number of stocks held in the portfolio
B) adding bonds to a stock portfolio
C) adding international securities into a portfolio of U.S.stocks
D) adding U.S.Treasury bills to a risky portfolio
E) adding technology stocks to a portfolio of industrial stocks

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

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The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.


A) efficient markets hypothesis
B) systematic risk principle
C) open markets theorem
D) law of one price
E) principle of diversification

F) C) and D)
G) A) and D)

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The expected return on a portfolio: I. can never exceed the expected return of the best performing security in the portfolio. II. must be equal to or greater than the expected return of the worst performing security in the portfolio. III. is independent of the unsystematic risks of the individual securities held in the portfolio. IV. is independent of the allocation of the portfolio amongst individual securities.


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

F) All of the above
G) A) and B)

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What is the expected return and standard deviation for the following stock? What is the expected return and standard deviation for the following stock? A) 15.49 percent; 14.28 percent B) 15.49 percent; 14.67 percent C) 17.00 percent; 15.24 percent D) 17.00 percent; 15.74 percent E) 17.00 percent'; 16.01 percent


A) 15.49 percent; 14.28 percent
B) 15.49 percent; 14.67 percent
C) 17.00 percent; 15.24 percent
D) 17.00 percent; 15.74 percent
E) 17.00 percent'; 16.01 percent

F) A) and B)
G) None of the above

Correct Answer

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Consider the following information on three stocks: 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 3.8 percent? A) 11.47 percent B) 12.38 percent C) 16.67 percent D) 24.29 percent E) 29.99 percent 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 3.8 percent?


A) 11.47 percent
B) 12.38 percent
C) 16.67 percent
D) 24.29 percent
E) 29.99 percent

F) All of the above
G) A) and D)

Correct Answer

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The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent. What is the expected rate of return on a stock with a beta of 1.21?


A) 10.92 percent
B) 11.40 percent
C) 12.22 percent
D) 12.47 percent
E) 12.79 percent

F) None of the above
G) A) and B)

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Which one of the following statements is correct?


A) The unexpected return is always negative.
B) The expected return minus the unexpected return is equal to the total return.
C) Over time, the average return is equal to the unexpected return.
D) The expected return includes the surprise portion of news announcements.
E) Over time, the average unexpected return will be zero.

F) D) and E)
G) B) and E)

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Suppose you observe the following situation: Suppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, what is the return on the market? A) 13.99 percent B) 14.42 percent C) 14.67 percent D) 14.78 percent E) 15.01 percent Assume these securities are correctly priced. Based on the CAPM, what is the return on the market?


A) 13.99 percent
B) 14.42 percent
C) 14.67 percent
D) 14.78 percent
E) 15.01 percent

F) C) and D)
G) A) and C)

Correct Answer

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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.
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 B)
G) B) and D)

Correct Answer

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The rate of return on the common stock of Lancaster Woolens is expected to be 21 percent in a boom economy, 11 percent in a normal economy, and only 3 percent in a recessionary economy. The probabilities of these economic states are 10 percent for a boom, 70 percent for a normal economy, and 20 percent for a recession. What is the variance of the returns on this common stock?


A) 0.002150
B) 0.002606
C) 0.002244
D) 0.002359
E) 0.002421

F) C) and D)
G) B) and D)

Correct Answer

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Consider the following information on Stocks I and II: Consider the following information on Stocks I and II: The market risk premium is 8 percent, and the risk-free rate is 3.6 percent. The beta of stock I is _____ and the beta of stock II is _____. A) 2.08; 2.47 B) 2.08; 2.76 C) 3.21; 3.84 D) 4.47; 3.89 E) 4.47; 4.26 The market risk premium is 8 percent, and the risk-free rate is 3.6 percent. The beta of stock I is _____ and the beta of stock II is _____.


A) 2.08; 2.47
B) 2.08; 2.76
C) 3.21; 3.84
D) 4.47; 3.89
E) 4.47; 4.26

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

Correct Answer

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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.
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) B) and D)
G) B) and C)

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The expected return on a stock computed using economic probabilities is:


A) guaranteed to equal the actual average return on the stock for the next five years.
B) guaranteed to be the minimal rate of return on the stock over the next two years.
C) 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.

F) All of the above
G) C) and D)

Correct Answer

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Which one of the following is the best example of a diversifiable risk?


A) interest rates increase
B) energy costs increase
C) core inflation increases
D) a firm's sales decrease
E) taxes decrease

F) A) and B)
G) All of the above

Correct Answer

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The standard deviation of a portfolio:


A) is a measure of that portfolio's systematic risk.
B) is a weighed average of the standard deviations of the individual securities held in that portfolio.
C) measures the amount of diversifiable risk inherent in the portfolio.
D) serves as the basis for computing the appropriate risk premium for that portfolio.
E) can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

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

Correct Answer

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