Question 1

Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else held constant?

Accepted Answer

A) An increase in the risk level of that security as measured by standard deviation 
B) An increase in the risk-free rate given a security beta of 1.42 
C) A decrease in the market rate of return given a security beta of 1.13 
D) A decrease in the market rate of return given a security beta of .78 
E) A decrease in the risk-free rate given a security beta of 1.06 
A) An increase in the risk level of that security as measured by standard deviation 
B) An increase in the risk-free rate given a security beta of 1.42 
C) A decrease in the market rate of return given a security beta of 1.13 
D) A decrease in the market rate of return given a security beta of .78 
E) A decrease in the risk-free rate given a security beta of 1.06

Question 2

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

Accepted Answer

A) Risk-free rate 
B) Market risk premium 
C) Expected return minus the risk-free rate 
D) Market rate of return 
E) Cost of capital 
A) Risk-free rate 
B) Market risk premium 
C) Expected return minus the risk-free rate 
D) Market rate of return 
E) Cost of capital

Question 3

Unsystematic risk can be defined by all of the following except:

Accepted Answer

A) unrewarded risk. 
B) diversifiable risk. 
C) market risk. 
D) unique risk. 
E) asset-specific risk. 
A) unrewarded risk. 
B) diversifiable risk. 
C) market risk. 
D) unique risk. 
E) asset-specific risk.

Question 4

Stock J has a beta of 1.06 and an expected return of 12.3 percent, while Stock K has a beta of .74 and an expected return of 6.7 percent.If you create portfolio with the same risk as the market, what rate of return should you expect to earn?

Accepted Answer

A) 10.67 percent 
B) 11.18 percent 
C) 11.62 percent 
D) 11.25 percent 
E) 11.13 percent 
A) 10.67 percent 
B) 11.18 percent 
C) 11.62 percent 
D) 11.25 percent 
E) 11.13 percent

Question 5

Stock J has a beta of 1.52 and an expected return of 15.76percent.Stock K has a beta of .98 and an expected return of 11.44 percent.What is the risk-free rate if these securities both plot on the security market line?

Accepted Answer

A) 3.60 percent 
B) 3.34 percent 
C) 3.57 percent 
D) 3.52 percent 
E) 3.64 percent 
A) 3.60 percent 
B) 3.34 percent 
C) 3.57 percent 
D) 3.52 percent 
E) 3.64 percent

Question 6

Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

Accepted Answer

A) Systematic 
B) Unsystematic 
C) Diversification 
D) Security market line 
E) Capital asset pricing model 
A) Systematic 
B) Unsystematic 
C) Diversification 
D) Security market line 
E) Capital asset pricing model

Question 7

The beta of a risky portfolio cannot be less than _____ nor greater than ____.

Accepted Answer

A) 0; 1 
B) 1; the market beta 
C) the lowest individual beta in the portfolio; market beta 
D) the market beta; the highest individual beta in the portfolio 
E) the lowest individual beta in the portfolio; the highest individual beta in the portfolio 
A) 0; 1 
B) 1; the market beta 
C) the lowest individual beta in the portfolio; market beta 
D) the market beta; the highest individual beta in the portfolio 
E) the lowest individual beta in the portfolio; the highest individual beta in the portfolio

Question 8

You own a $58,600 portfolio comprised of four stocks.The values of Stocks A, B, and C are $11,200, $17,400, and $20,400, respectively.What is the portfolio weight of Stock D?

Accepted Answer

A) 16.38 percent 
B) 15.39 percent 
C) 10.33 percent 
D) 12.10 percent 
E) 12.58 percent 
A) 16.38 percent 
B) 15.39 percent 
C) 10.33 percent 
D) 12.10 percent 
E) 12.58 percent

Question 9

Sarina Stable Supply stock has a risk premium of 6.2 percent while the inflation rate is 1.7 percent and the risk-free rate is 3.1 percent.What is the expected return on this stock?

Accepted Answer

A) 10.2 percent 
B) 7.63 percent 
C) 9.3 percent 
D) 10.9 percent 
E) 12.4 percent 
A) 10.2 percent 
B) 7.63 percent 
C) 9.3 percent 
D) 10.9 percent 
E) 12.4 percent

Question 10

Currently, the risk-free rate is 3.2 percent.Stock A has an expected return of 11.4 percent and a beta of 1.11.Stock B has an expected return of 13.7 percent.The stocks have equal reward-to-risk ratios.What is the beta of Stock B?

Accepted Answer

A) 1.27 
B) 1.33 
C) 1.36 
D) 1.08 
E) 1.42 
A) 1.27 
B) 1.33 
C) 1.36 
D) 1.08 
E) 1.42

Question 11

Stock A comprises 28 percent of Susan's portfolio.Which one of the following terms applies to the 28 percent?

Accepted Answer

A) Portfolio variance 
B) Portfolio standard deviation 
C) Portfolio weight 
D) Portfolio expected return 
E) Portfolio beta 
A) Portfolio variance 
B) Portfolio standard deviation 
C) Portfolio weight 
D) Portfolio expected return 
E) Portfolio beta

Question 12

The stock of Wiley United has a beta of .98.The market risk premium is 7.6 percent and the risk-free rate is 3.9 percent.What is the expected return on this stock?

Accepted Answer

A) 7.53 percent 
B) 7.69 percent 
C) 11.35 percent 
D) 11.52 percent 
E) 12.01 percent 
A) 7.53 percent 
B) 7.69 percent 
C) 11.35 percent 
D) 11.52 percent 
E) 12.01 percent

Question 13

Crabby Shores stock is expected to return 15.7 percent in a booming economy, 9.8 percent in a normal economy, and 2.3 percent in a recession.The probabilities of an economic boom, normal state, or recession are 15 percent, 73 percent, and 12 percent, respectively.What is the expected rate of return on this stock?

Accepted Answer

A) 10.07 percent 
B) 10.74 percent 
C) 10.61 percent 
D) 9.79 percent 
E) 8.68 percent 
A) 10.07 percent 
B) 10.74 percent 
C) 10.61 percent 
D) 9.79 percent 
E) 8.68 percent

Question 14

A stock has a beta of 1.04, the expected return on the market is 11.75, and the risk-free rate is 3.75.What must the expected return on this stock be?

Accepted Answer

A) 9.89 percent 
B) 38.32 percent 
C) 13.56 percent 
D) 19.16 percent 
E) 12.07 percent 
A) 9.89 percent 
B) 38.32 percent 
C) 13.56 percent 
D) 19.16 percent 
E) 12.07 percent

Question 15

Bass Clef Music Stores' stock has a risk premium of 7 percent while the inflation rate is 1.9 percent and the risk-free rate is 2.2 percent.What is the expected return on this stock?

Accepted Answer

A) 10.9 percent 
B) 7.3 percent 
C) 9.2 percent 
D) 10.8 percent 
E) 12.3 percent 
A) 10.9 percent 
B) 7.3 percent 
C) 9.2 percent 
D) 10.8 percent 
E) 12.3 percent

Question 16

You would like to create a portfolio that is equally invested in a risk-free asset and two stocks.One stock has a beta of 1.39.What does the beta of the second stock have to be if you want the portfolio to be equally as risky as the overall market?

Accepted Answer

A) .72 
B) .97 
C) 1.23 
D) 1.55 
E) 1.61 
A) .72 
B) .97 
C) 1.23 
D) 1.55 
E) 1.61

Question 17

You currently own a portfolio valued at $52,000 that has a beta of 1.16.You have another $10,000 to invest and would like to invest it in a manner such that the portfolio beta decreases to 1.15.What does the beta of the new investment have to be?

Accepted Answer

A) 1.098 
B) .889 
C) .869 
D) .924 
E) 1.125 
A) 1.098 
B) .889 
C) .869 
D) .924 
E) 1.125

Question 18

BJB stock has an expected return of 17.82 percent.The risk-free rate is 4.6 percent and the market risk premium is 8.2 percent.What is the stock's beta?

Accepted Answer

A) 1.47 
B) 1.51 
C) 1.61 
D) 1.48 
E) 1.68 
A) 1.47 
B) 1.51 
C) 1.61 
D) 1.48 
E) 1.68

Question 19

The addition of a risky security to a fully diversified portfolio:

Accepted Answer

A) must decrease the portfolio's expected return. 
B) must increase the portfolio beta. 
C) may or may not affect the portfolio beta. 
D) will increase the unsystematic risk of the portfolio. 
E) will have no effect on the portfolio beta or its expected return. 
A) must decrease the portfolio's expected return. 
B) must increase the portfolio beta. 
C) may or may not affect the portfolio beta. 
D) will increase the unsystematic risk of the portfolio. 
E) will have no effect on the portfolio beta or its expected return.

Question 20

A stock has a beta of 1.48 and an expected return of 17.3 percent.A risk-free asset currently earns 4.6 percent.If a portfolio of the two assets has a beta of .98, then the weight of the stock must be ___ and the risk-free weight must be___.

Accepted Answer

A) .56; .44 
B) .34; .66 
C) .44; .56 
D) .66; .34 
E) .72; .28 
A) .56; .44 
B) .34; .66 
C) .44; .56 
D) .66; .34 
E) .72; .28

Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else held constant?

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

Unsystematic risk can be defined by all of the following except:

Stock J has a beta of 1.06 and an expected return of 12.3 percent, while Stock K has a beta of .74 and an expected return of 6.7 percent.If you create portfolio with the same risk as the market, what rate of return should you expect to earn?

Stock J has a beta of 1.52 and an expected return of 15.76percent.Stock K has a beta of .98 and an expected return of 11.44 percent.What is the risk-free rate if these securities both plot on the security market line?

Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

The beta of a risky portfolio cannot be less than _ nor greater than .

You own a $58,600 portfolio comprised of four stocks.The values of Stocks A, B, and C are $11,200, $17,400, and $20,400, respectively.What is the portfolio weight of Stock D?

Sarina Stable Supply stock has a risk premium of 6.2 percent while the inflation rate is 1.7 percent and the risk-free rate is 3.1 percent.What is the expected return on this stock?

Currently, the risk-free rate is 3.2 percent.Stock A has an expected return of 11.4 percent and a beta of 1.11.Stock B has an expected return of 13.7 percent.The stocks have equal reward-to-risk ratios.What is the beta of Stock B?

Stock A comprises 28 percent of Susan's portfolio.Which one of the following terms applies to the 28 percent?

The stock of Wiley United has a beta of .98.The market risk premium is 7.6 percent and the risk-free rate is 3.9 percent.What is the expected return on this stock?

A stock has a beta of 1.04, the expected return on the market is 11.75, and the risk-free rate is 3.75.What must the expected return on this stock be?

Bass Clef Music Stores' stock has a risk premium of 7 percent while the inflation rate is 1.9 percent and the risk-free rate is 2.2 percent.What is the expected return on this stock?

You would like to create a portfolio that is equally invested in a risk-free asset and two stocks.One stock has a beta of 1.39.What does the beta of the second stock have to be if you want the portfolio to be equally as risky as the overall market?

You currently own a portfolio valued at $52,000 that has a beta of 1.16.You have another $10,000 to invest and would like to invest it in a manner such that the portfolio beta decreases to 1.15.What does the beta of the new investment have to be?

BJB stock has an expected return of 17.82 percent.The risk-free rate is 4.6 percent and the market risk premium is 8.2 percent.What is the stock's beta?

The addition of a risky security to a fully diversified portfolio:

A stock has a beta of 1.48 and an expected return of 17.3 percent.A risk-free asset currently earns 4.6 percent.If a portfolio of the two assets has a beta of .98, then the weight of the stock must be _ and the risk-free weight must be_.

Introduction to Financial Management

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Equity Markets and Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Some Lessons From Capital Market History

Cost of Capital

Leverage and Capital Structure

Dividends and Dividend Policy

Raising Capital

Short-Term Financial Planning

Working Capital Management

International Aspects of Financial Management

Filters

Exam 11: Risk and Return

Based on the capital asset pricing model, which one of the following must increase the expected return on an individual security, all else held constant?

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

Unsystematic risk can be defined by all of the following except:

Stock J has a beta of 1.06 and an expected return of 12.3 percent, while Stock K has a beta of .74 and an expected return of 6.7 percent.If you create portfolio with the same risk as the market, what rate of return should you expect to earn?

Stock J has a beta of 1.52 and an expected return of 15.76percent.Stock K has a beta of .98 and an expected return of 11.44 percent.What is the risk-free rate if these securities both plot on the security market line?

Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

The beta of a risky portfolio cannot be less than _____ nor greater than ____.

You own a $58,600 portfolio comprised of four stocks.The values of Stocks A, B, and C are $11,200, $17,400, and $20,400, respectively.What is the portfolio weight of Stock D?

Sarina Stable Supply stock has a risk premium of 6.2 percent while the inflation rate is 1.7 percent and the risk-free rate is 3.1 percent.What is the expected return on this stock?

Currently, the risk-free rate is 3.2 percent.Stock A has an expected return of 11.4 percent and a beta of 1.11.Stock B has an expected return of 13.7 percent.The stocks have equal reward-to-risk ratios.What is the beta of Stock B?

Stock A comprises 28 percent of Susan's portfolio.Which one of the following terms applies to the 28 percent?

The stock of Wiley United has a beta of .98.The market risk premium is 7.6 percent and the risk-free rate is 3.9 percent.What is the expected return on this stock?

A stock has a beta of 1.04, the expected return on the market is 11.75, and the risk-free rate is 3.75.What must the expected return on this stock be?

Bass Clef Music Stores' stock has a risk premium of 7 percent while the inflation rate is 1.9 percent and the risk-free rate is 2.2 percent.What is the expected return on this stock?

You would like to create a portfolio that is equally invested in a risk-free asset and two stocks.One stock has a beta of 1.39.What does the beta of the second stock have to be if you want the portfolio to be equally as risky as the overall market?

You currently own a portfolio valued at $52,000 that has a beta of 1.16.You have another $10,000 to invest and would like to invest it in a manner such that the portfolio beta decreases to 1.15.What does the beta of the new investment have to be?

BJB stock has an expected return of 17.82 percent.The risk-free rate is 4.6 percent and the market risk premium is 8.2 percent.What is the stock's beta?

The addition of a risky security to a fully diversified portfolio:

A stock has a beta of 1.48 and an expected return of 17.3 percent.A risk-free asset currently earns 4.6 percent.If a portfolio of the two assets has a beta of .98, then the weight of the stock must be ___ and the risk-free weight must be___.

Introduction to Financial Management

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Equity Markets and Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Some Lessons From Capital Market History

Cost of Capital

Leverage and Capital Structure

Dividends and Dividend Policy

Raising Capital

Short-Term Financial Planning

Working Capital Management

International Aspects of Financial Management

Filters

The beta of a risky portfolio cannot be less than _ nor greater than .

A stock has a beta of 1.48 and an expected return of 17.3 percent.A risk-free asset currently earns 4.6 percent.If a portfolio of the two assets has a beta of .98, then the weight of the stock must be _ and the risk-free weight must be_.