Question 1

Is it possible for an asset to have a negative beta? (Hint: yes) What would the expected return on
such an asset be? Why?

Accepted Answer

While it is unlikely to observe a negati...

Question 2

Which one of the following statements is correct about a portfolio that is invested 30% in stock A, 40% in stock B, and 30% in stock C?

Accepted Answer

A)   The expected return on the portfolio is equal to the summation of the returns on the individual securities within the portfolio divided by three.
B)   The standard deviation of the portfolio is equal to the summation of the weights of each security multiplied by the standard deviation of each respective security.
C)   The expected return on the portfolio is equal to the portfolio beta times the weighted average of the expected returns of each of the individual securities in the portfolio.
D)   The standard deviation of the portfolio is equal to the square root of the summation of the individual security variances.
E)   The expected return of the portfolio is equal to the risk free rate of return plus a risk premium based on a weighted average of the betas of the individual securities and theMarket risk premium.F) D) and E)
G) A) and B)

Question 3

Which of the following is correct?

Accepted Answer

A)   Security Z has the greatest total risk because it has the largest standard deviation.
B)   Security X has the greatest total risk because it has the largest beta.
C)   Security X has the greatest diversiﬁable risk because it has the largest beta.
D)   Security Y has the lowest total risk because it has the lowest beta.
E)   An equally-weighted portfolio of XYZ will have the same systematic risk as the market portfolio.F) B) and E)
G) None of the above

Question 4

A stock has a beta of 1.2 and an expected return of 12%. The market is expected to yield 11%. What is the security market line intercept point?

Accepted Answer

A)   0%
B)   1.20%
C)   3.5%
D)   5.00%
E)   6.00%F) C) and D)
G) A) and C)

Question 5

The projected risk premium is deﬁned as the sum of the expected return on a risky investment and
the return on a risk-free investment.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A)   26.89%
B)   28.06%
C)   33.39%
D)   34.18%
E)   36.10%F) B) and D)
G) A) and C)

Question 7

The market risk premium of an individual security is dependent upon the risk-free rate of return.

Accepted Answer

A) True 
 B)False

Question 8

Which security has the greatest systematic risk?

Accepted Answer

A)   Z because it has the largest standard deviation.
B)   X because it has the largest beta coeﬃcient.
C)   Z because it has a high beta and the largest standard deviation.
D)   Y because it has the greatest diversiﬁable risk.
E)   It is not possible to tell given the information above.F) B) and C)
G) B) and D)

Question 9

Nuvo, Inc. stock has a beta of .86 and an expected return of 10.5%. The risk-free rate of return is 3.2% and the market rate of return is 11.2%. Which one of the following statements is true given this
Information?

Accepted Answer

A)   The return on Nuvo stock will graph below the Security Market Line.
B)   Nuvo stock is underpriced.
C)   The expected return on Nuvo stock based on the Capital Asset Pricing Model is 9.88%.
D)   Nuvo stock has more systematic risk than the overall market.
E)   Nuvo stock is correctly priced.F) A) and B)
G) C) and D)

Question 10

Which one of the following statements is correct?

Accepted Answer

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

Question 11

Systematic risk is relevant to a well-diversiﬁed investor.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A)   The price of electricity just increased.
B)   The employees of Textile, Inc. just voted to go on strike.
C)   The government just imposed new safety standards for all employees.
D)   The government just lowered corporate income tax rates.
E)   The Workers Compensation Premiums just increased nationwide.F) A) and D)
G) B) and E)

Question 13

A stock has a beta of .8 and an expected return of 6%. The risk-free rate is 3%. What is the expected return on the market?

Accepted Answer

A)   3.50%
B)   3.75
C)   4.50%
D)   5.25%
E)   6.75%F) A) and E)
G) A) and D)

Question 14

Which of the following is the best deﬁnition of arbitrage pricing theory (APT) ?

Accepted Answer

A)   A theory showing that the expected return on any risky asset is a linear combination of various factors.
B)   A risk that affects at most a small number of assets. Also called unique or asset-speciﬁc risks.
C)   A risk that inﬂuences a large number of assets. Also called market risk.
D)   Positively sloped straight line displaying the relationship between expected return and beta.
E)   Principle stating that spreading an investment across a number of assets eliminates some, but not all, of the risk.F) A) and B)
G) A) and E)

Question 15

What type of risk is exhibited in section A of the graph?

Accepted Answer

A)   Systematic risk.
B)   Unsystematic risk.
C)   Political risk.
D)   Correlation risk.
E)   Stock risk.F) A) and D)
G) C) and D)

Question 16

The security market line can be deﬁned as:

Accepted Answer

A)   Rm + (Rm - Rf) .
B)   Rm + (Rf - Rm) .
C)   Rf + (Rf - Rm) .
D)   Rf + (Rm + Rf) .
E)   Rf + (Rm - Rf) .F) A) and E)
G) C) and D)

Question 17

For a stock with beta equal to 1.5 signiﬁes that the market risk premium is 10%, and the expected
return on the stock is 15%.

Accepted Answer

A) True 
 B)False

Question 18

The market has an expected rate of return of 11.4%. The long-term government bond is expected to yield 5.4% and the U.S. Treasury bill is expected to yield 4.6%. The inﬂation rate is 3.9%. What is the
Market risk premium?

Accepted Answer

A)   6.0%
B)   6.8%
C)   7.5%
D)   8.5%
E)   9.3%F) D) and E)
G) A) and B)

Question 19

What is the portfolio beta if 75% of your money is invested in the market portfolio, and the remainder is invested in a risk-free asset?

Accepted Answer

A)   0.50
B)   0.25
C)   1.25
D)   1.00
E)   0.75F) B) and E)
G) A) and B)

Question 20

Quarterly proﬁt for Imperial Oil equals expectations is considered an example of systematic risk.

Accepted Answer

A) True 
 B)False

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

For a stock with beta equal to 1.5 signiﬁes that the market risk premium is 10%, and the expected return on the stock is 15%.

Correct AnswerverifiedShow Answer

Which one of the following statements is correct about a portfolio that is invested 30% in stock A, 40% in stock B, and 30% in stock C?

Correct AnswerverifiedShow Answer

What type of risk is exhibited in section A of the graph?

Correct AnswerverifiedShow Answer

The market has an expected rate of return of 11.4%. The long-term government bond is expected to yield 5.4% and the U.S. Treasury bill is expected to yield 4.6%. The inﬂation rate is 3.9%. What is the Market risk premium?

Correct AnswerverifiedShow Answer

Which security has the greatest systematic risk?

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A stock has a beta of 1.2 and an expected return of 12%. The market is expected to yield 11%. What is the security market line intercept point?

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The market risk premium of an individual security is dependent upon the risk-free rate of return.

Correct AnswerverifiedShow Answer

What is the portfolio beta if 75% of your money is invested in the market portfolio, and the remainder is invested in a risk-free asset?

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Which of the following is correct?

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Nuvo, Inc. stock has a beta of .86 and an expected return of 10.5%. The risk-free rate of return is 3.2% and the market rate of return is 11.2%. Which one of the following statements is true given this Information?

Correct AnswerverifiedShow Answer

A stock has a beta of .8 and an expected return of 6%. The risk-free rate is 3%. What is the expected return on the market?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The security market line can be deﬁned as:

Correct AnswerverifiedShow Answer

Systematic risk is relevant to a well-diversiﬁed investor.

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Which of the following is the best deﬁnition of arbitrage pricing theory (APT) ?

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

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

Correct AnswerverifiedShow Answer

Quarterly proﬁt for Imperial Oil equals expectations is considered an example of systematic risk.

Correct AnswerverifiedShow Answer

Is it possible for an asset to have a negative beta? (Hint: yes) What would the expected return on such an asset be? Why?

Correct AnswerverifiedWhile it is unlikely to observe a negati...View AnswerShow Answer

The projected risk premium is deﬁned as the sum of the expected return on a risky investment and the return on a risk-free investment.

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While it is unlikely to observe a negati...
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