Question 1

Which of the following correctly identifies the factors included in the Fama-French three-factor model?

Accepted Answer

A) standard deviation, beta, and company size 
B) the risk-free rate, beta, and the market risk premium 
C) company size, company industry, and beta 
D) price-earnings ratios, beta, and book-to-market ratios 
E) beta, company size, and book-to-market ratios 
A) standard deviation, beta, and company size 
B) the risk-free rate, beta, and the market risk premium 
C) company size, company industry, and beta 
D) price-earnings ratios, beta, and book-to-market ratios 
E) beta, company size, and book-to-market ratios

Question 2

Which one of the following betas represents the greatest level of systematic risk?

Accepted Answer

A) .05 
B) .68 
C) 1.00 
D) 1.19 
E) 1.27 
A) .05 
B) .68 
C) 1.00 
D) 1.19 
E) 1.27

Question 3

A stock has a standard deviation of 21.0% and a covariance with the market of .0110. The market has a standard deviation of 12.0%. What is the beta of this stock?

Accepted Answer

A) .294 
B) .572 
C) .764 
D) .973 
E) 1.075 
A) .294 
B) .572 
C) .764 
D) .973 
E) 1.075

Question 4

Stock X has a beta of .88 and an expected return of 10.8%. Stock Y has a beta of 1.15 and an expected return of 13.1%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

Accepted Answer

A) 1.10% 
B) 1.20% 
C) 2.06% 
D) 3.30% 
E) 3.50% 
A) 1.10% 
B) 1.20% 
C) 2.06% 
D) 3.30% 
E) 3.50%

Question 5

Stock X has a beta of 1.02 and an expected return of 11.8%. Stock Y has a beta of 1.15 and an expected return of 13.1%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

Accepted Answer

A) 1.10% 
B) 1.60% 
C) 2.06% 
D) 3.30% 
E) 3.50% 
A) 1.10% 
B) 1.60% 
C) 2.06% 
D) 3.30% 
E) 3.50%

Question 6

A portfolio consists of one risky asset and one risk-free asset. The risky asset has an expected return of 13.2% and a beta of 1.32. The risk-free asset has an expected return of 1.5%. How much of the portfolio is invested in the risk-free asset if the portfolio beta is 1.02?

Accepted Answer

A) 16% 
B) 23% 
C) 32% 
D) 45% 
E) 54% 
A) 16% 
B) 23% 
C) 32% 
D) 45% 
E) 54%

Question 7

What is the covariance of Security A to the market given the following information?
$$\begin{array} { c c c } 
\text { Year } & \text { Security A Returns } & \text { Market Returns } \
1 & 1\% & - 6\% \
2 & 9 & 14 \
3 & - 2 & 7 \
4 & 18 & 12
\end{array}$$

Accepted Answer

A) 23.14 
B) 29.88 
C) 48.83 
D) 99.18 
E) 114.01 
A) 23.14 
B) 29.88 
C) 48.83 
D) 99.18 
E) 114.01

Question 8

Stock A is a risky asset that has a beta of 1.4 and an expected return of 13.2%. Stock B is also a risky asset and has a beta of 1.25. The risk-free rate is 5.5%. Assuming both stocks are correctly priced, what is the expected return on Stock B?

Accepted Answer

A) 11.90% 
B) 12.11% 
C) 12.29% 
D) 12.38% 
E) 12.46% 
A) 11.90% 
B) 12.11% 
C) 12.29% 
D) 12.38% 
E) 12.46%

Question 9

Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month. This announcement will cause the firm's stock price to:

Accepted Answer

A) increase. 
B) either increase or remain constant. 
C) remain constant. 
D) decrease. 
E) either increase, decrease, or remain constant. 
A) increase. 
B) either increase or remain constant. 
C) remain constant. 
D) decrease. 
E) either increase, decrease, or remain constant.

Question 10

Pat realized a total return of 13.2%, which is more than his expected return of 12.5%. What is the amount of his unexpected return?

Accepted Answer

A) −1.4% 
B) −.7% 
C) .7% 
D) 1.4% 
E) 1.8% 
A) −1.4% 
B) −.7% 
C) .7% 
D) 1.4% 
E) 1.8%

Question 11

Which one of the following is the best example of unsystematic risk?

Accepted Answer

A) decrease in company sales 
B) increase in market interest rates 
C) change in corporate tax rates 
D) increase in inflation 
E) decrease in market interest rates 
A) decrease in company sales 
B) increase in market interest rates 
C) change in corporate tax rates 
D) increase in inflation 
E) decrease in market interest rates

Question 12

The market has an expected return of 11.3% and a risky asset with a beta of 1.18 has an expected return of 13%. Based on this information, what is the pure time value of money?

Accepted Answer

A) 1.86% 
B) 1.90% 
C) 2.38% 
D) 2.51% 
E) 2.90% 
A) 1.86% 
B) 1.90% 
C) 2.38% 
D) 2.51% 
E) 2.90%

Question 13

Which one of the following will increase the slope of the security market line? Assume all else constant.

Accepted Answer

A) increasing the beta of an efficiently-priced portfolio 
B) increasing the risk-free rate 
C) increasing the market risk premium 
D) decreasing the market rate of return 
E) replacing a low-beta stock with a high-beta stock within a portfolio 
A) increasing the beta of an efficiently-priced portfolio 
B) increasing the risk-free rate 
C) increasing the market risk premium 
D) decreasing the market rate of return 
E) replacing a low-beta stock with a high-beta stock within a portfolio

Question 14

Stocks D, E, and F have actual reward-to-risk ratios of 7.1, 6.8, and 7.4, respectively. Given this, you know for certain that:

Accepted Answer

A) Stock E is preferable to Stock F. 
B) Stock D has a higher beta than Stock F. 
C) the market risk premium is greater than 6.8 and less than 7.4. 
D) Stock F is riskier than Stock D. 
E) at least two of the securities are mispriced. 
A) Stock E is preferable to Stock F. 
B) Stock D has a higher beta than Stock F. 
C) the market risk premium is greater than 6.8 and less than 7.4. 
D) Stock F is riskier than Stock D. 
E) at least two of the securities are mispriced.

Question 15

Where will a security plot in relation to the security market line (SML)if it has a beta of 1.1 and is overvalued?

Accepted Answer

A) to the right of the overall market and above the SML 
B) to the right of the overall market and below the SML 
C) to the left of the overall market and above the SML 
D) to the left of the overall market and below the SML 
E) on the SML 
A) to the right of the overall market and above the SML 
B) to the right of the overall market and below the SML 
C) to the left of the overall market and above the SML 
D) to the left of the overall market and below the SML 
E) on the SML

Question 16

Which one of the following statements is true?

Accepted Answer

A) Risk and return are inversely related. 
B) Investors are compensated only for diversifiable risk. 
C) The beta of a portfolio may be lower than the lowest beta of any individual security held within the portfolio. 
D) How a security affects the risk of a portfolio is less important than the actual risk of the security itself. 
E) Investing has two dimensions: risk and return. 
A) Risk and return are inversely related. 
B) Investors are compensated only for diversifiable risk. 
C) The beta of a portfolio may be lower than the lowest beta of any individual security held within the portfolio. 
D) How a security affects the risk of a portfolio is less important than the actual risk of the security itself. 
E) Investing has two dimensions: risk and return.

Question 17

A security has a zero covariance with the market. This means that:

Accepted Answer

A) the return on the security is always equal to that of the market. 
B) the return on the security moves in the same direction as the market return. 
C) the security is a risk-free security. 
D) there is no identifiable relationship between the return on the security and that of the market. 
E) the return on the security must vary more than that of the market. 
A) the return on the security is always equal to that of the market. 
B) the return on the security moves in the same direction as the market return. 
C) the security is a risk-free security. 
D) there is no identifiable relationship between the return on the security and that of the market. 
E) the return on the security must vary more than that of the market.

Question 18

The risk-free rate is 4.0% and the expected return on the market is 8%. Stock A has a beta of 1.35. For a given year, Stock A returned 12.0% while the market returned 8.80%. The systematic portion of Stock A's unexpected return was ________% and the unsystematic portion was ________%.

Accepted Answer

A) .80; 1.30 
B) .90; 1.40 
C) 1.08; 1.52 
D) 1.40; .90 
E) 4.62; 1.41 
A) .80; 1.30 
B) .90; 1.40 
C) 1.08; 1.52 
D) 1.40; .90 
E) 4.62; 1.41

Question 19

The amount of risk premium allocated to Security A is dependent upon which one of the following?

Accepted Answer

A) unsystematic risk associated only with Security A 
B) total risk associated with Security A's classification 
C) total surprise associated with Security A 
D) the difference between the expected return and the actual return on Security A 
E) systematic risk associated with Security A 
A) unsystematic risk associated only with Security A 
B) total risk associated with Security A's classification 
C) total surprise associated with Security A 
D) the difference between the expected return and the actual return on Security A 
E) systematic risk associated with Security A

Question 20

The slope of the security market line is equal to the:

Accepted Answer

A) market risk premium. 
B) risk-free rate of return. 
C) market rate of return. 
D) market rate of return multiplied by any security's beta, given an inefficient market. 
E) market rate of return multiplied by the risk-free rate. 
A) market risk premium. 
B) risk-free rate of return. 
C) market rate of return. 
D) market rate of return multiplied by any security's beta, given an inefficient market. 
E) market rate of return multiplied by the risk-free rate.

Exam 12: Return, Risk, and the Security Market Line

Which of the following correctly identifies the factors included in the Fama-French three-factor model?

Which one of the following betas represents the greatest level of systematic risk?

A stock has a standard deviation of 21.0% and a covariance with the market of .0110. The market has a standard deviation of 12.0%. What is the beta of this stock?

Stock X has a beta of .88 and an expected return of 10.8%. Stock Y has a beta of 1.15 and an expected return of 13.1%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

Stock X has a beta of 1.02 and an expected return of 11.8%. Stock Y has a beta of 1.15 and an expected return of 13.1%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?

A portfolio consists of one risky asset and one risk-free asset. The risky asset has an expected return of 13.2% and a beta of 1.32. The risk-free asset has an expected return of 1.5%. How much of the portfolio is invested in the risk-free asset if the portfolio beta is 1.02?

What is the covariance of Security A to the market given the following information? Year Security A Returns Market Returns 1 1\% -6\% 2 9 14 3 -2 7 4 18 12

Stock A is a risky asset that has a beta of 1.4 and an expected return of 13.2%. Stock B is also a risky asset and has a beta of 1.25. The risk-free rate is 5.5%. Assuming both stocks are correctly priced, what is the expected return on Stock B?

Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month. This announcement will cause the firm's stock price to:

Pat realized a total return of 13.2%, which is more than his expected return of 12.5%. What is the amount of his unexpected return?

Which one of the following is the best example of unsystematic risk?

The market has an expected return of 11.3% and a risky asset with a beta of 1.18 has an expected return of 13%. Based on this information, what is the pure time value of money?

Which one of the following will increase the slope of the security market line? Assume all else constant.

Stocks D, E, and F have actual reward-to-risk ratios of 7.1, 6.8, and 7.4, respectively. Given this, you know for certain that:

Where will a security plot in relation to the security market line (SML)if it has a beta of 1.1 and is overvalued?

Which one of the following statements is true?

A security has a zero covariance with the market. This means that:

The risk-free rate is 4.0% and the expected return on the market is 8%. Stock A has a beta of 1.35. For a given year, Stock A returned 12.0% while the market returned 8.80%. The systematic portion of Stock A's unexpected return was ________% and the unsystematic portion was ________%.

The amount of risk premium allocated to Security A is dependent upon which one of the following?

The slope of the security market line is equal to the:

A Brief History of Risk and Return

The Investment Process

Overview of Security Tips

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Alternative Investments

Corporate and Government Bonds

Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters

The risk-free rate is 4.0% and the expected return on the market is 8%. Stock A has a beta of 1.35. For a given year, Stock A returned 12.0% while the market returned 8.80%. The systematic portion of Stock A's unexpected return was % and the unsystematic portion was %.