Question 1

Assume you are looking at a security market line graph.Where would an overpriced stock with a beta of 0.98 plot on that graph?

Accepted Answer

A) To the right of the market and below the security market line 
B) To the left of the market and below the security market line 
C) To the right of the market and above the security market line 
D) To the left of the market and above the security market line 
E) To the right of the market on the security market line 
A) To the right of the market and below the security market line 
B) To the left of the market and below the security market line 
C) To the right of the market and above the security market line 
D) To the left of the market and above the security market line 
E) To the right of the market on the security market line

Question 2

The correlation between stocks A and B is equal to the

Accepted Answer

A) standard deviation of A divided by the standard deviation of B. 
B) covarianceAB divided by the product of the standard deviations of A and B. 
C) standard deviation of B divided by the covarianceAB. 
D) sum of the variances of A and B divided by the covarianceAB. 
E) product of the standard deviation of A multiplied by the standard deviation of B divided by covarianceAB. 
A) standard deviation of A divided by the standard deviation of B. 
B) covarianceAB divided by the product of the standard deviations of A and B. 
C) standard deviation of B divided by the covarianceAB. 
D) sum of the variances of A and B divided by the covarianceAB. 
E) product of the standard deviation of A multiplied by the standard deviation of B divided by covarianceAB.

Question 3

The standard deviation of a risk-free asset is

Accepted Answer

A) 0. 
B) −1. 
C) +1. 
D) between 0 and −1. 
E) between 0 and +1. 
A) 0. 
B) −1. 
C) +1. 
D) between 0 and −1. 
E) between 0 and +1.

Question 4

A security that is fairly priced will have a return that lies ________ the security market line.

Accepted Answer

A) below 
B) on or below 
C) on 
D) on or above 
E) above 
A) below 
B) on or below 
C) on 
D) on or above 
E) above

Question 5

You have a two-stock portfolio with an expected return of 11.7 percent.Stock A has an expected return of 13.8 percent while Stock B is expected to return 9.2 percent.What is the portfolio weight of Stock A?

Accepted Answer

A) 59.09% 
B) 57.82% 
C) 63.33% 
D) 54.35% 
E) 60.33% 
A) 59.09% 
B) 57.82% 
C) 63.33% 
D) 54.35% 
E) 60.33%

Question 6

RTF stock is expected to return 11 percent in a normal economy and lose 15 percent in a recession.The probability of a recession is 33 percent and the probability of a booming economy is zero.What is the variance of the returns on RTF stock?

Accepted Answer

A) 0.019093 
B) 0.013760 
C) 0.017864 
D) 0.014946 
E) 0.019394 
A) 0.019093 
B) 0.013760 
C) 0.017864 
D) 0.014946 
E) 0.019394

Question 7

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

Accepted Answer

A) The price of tomatoes declines sharply. 
B) Inflation rises unexpectedly. 
C) Commercial airline pilots go on strike. 
D) A hurricane hits a tourist destination. 
E) People become diet conscious and avoid fast food restaurants. 
A) The price of tomatoes declines sharply. 
B) Inflation rises unexpectedly. 
C) Commercial airline pilots go on strike. 
D) A hurricane hits a tourist destination. 
E) People become diet conscious and avoid fast food restaurants.

Question 8

The beta of a security is calculated by dividing the

Accepted Answer

A) variance of the market by the covariance of the security with the market. 
B) correlation of the security with the market by the variance of the security. 
C) variance of the market by the correlation of the security with the market. 
D) covariance of the security with the market by the variance of the market. 
E) covariance of the security with the market by the variance of the security. 
A) variance of the market by the covariance of the security with the market. 
B) correlation of the security with the market by the variance of the security. 
C) variance of the market by the correlation of the security with the market. 
D) covariance of the security with the market by the variance of the market. 
E) covariance of the security with the market by the variance of the security.

Question 9

The rate of return on the common stock of Flowers by Flo is expected to be 13 percent in a boom economy,11 percent in a normal economy,and only 6 percent in a recessionary economy.The probabilities of these economic states are 15 percent for a boom,80 percent for a normal economy,and 5 percent for a recession.What is the variance of the returns on this stock?

Accepted Answer

A) 0.000185 
B) 0.001580 
C) 0.001963 
D) 0.000301 
E) 0.000471 
A) 0.000185 
B) 0.001580 
C) 0.001963 
D) 0.000301 
E) 0.000471

Question 10

Which one of the following statements is correct concerning the standard deviation of a portfolio?

Accepted Answer

A) Standard deviation is used to determine the amount of risk premium that should apply to a portfolio. 
B) The greater the diversification of a portfolio,the greater the standard deviation of that portfolio. 
C) Standard deviation measures only the systematic risk of a portfolio. 
D) The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio. 
E) The standard deviation of a portfolio must equal the weighted average of the standard deviations of the individual securities held within the portfolio. 
A) Standard deviation is used to determine the amount of risk premium that should apply to a portfolio. 
B) The greater the diversification of a portfolio,the greater the standard deviation of that portfolio. 
C) Standard deviation measures only the systematic risk of a portfolio. 
D) The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio. 
E) The standard deviation of a portfolio must equal the weighted average of the standard deviations of the individual securities held within the portfolio.

Question 11

Your desired portfolio beta is 1.2.Currently,your portfolio consists of $2,300 invested in Stock A with a beta of 1.43 and $3,800 in Stock B with a beta of 0.79.You have an additional $1,500 to invest and want to divide it between Stock C with a beta of 1.59 and a risk-free asset.How much should you invest in the risk-free asset?

Accepted Answer

A) −$279.25 
B) $50.25 
C) −$200.15 
D) $182.35 
E) $246.08 
A) −$279.25 
B) $50.25 
C) −$200.15 
D) $182.35 
E) $246.08

Question 12

A stock has an expected return of 13.74 percent.The return on the market is 12.68 percent,and the risk-free rate of return is 3.24 percent.What is the beta of this stock?

Accepted Answer

A) 0.658 
B) 1.093 
C) 1.402 
D) 1.112 
E) 1.780 
A) 0.658 
B) 1.093 
C) 1.402 
D) 1.112 
E) 1.780

Question 13

Stock A is expected to return 14 percent in a normal economy and lose 21 percent in a recession.Stock B deals with inferior goods and has expected returns of 6 percent in a normal economy and 15 percent in a recession.The probability of a recession occurring is 25 percent with a zero probability of a boom.What is the standard deviation of a portfolio that is equally weighted between the two stocks?

Accepted Answer

A) 5.63% 
B) 6.08% 
C) 4.29% 
D) 5.13% 
E) 6.36% 
A) 5.63% 
B) 6.08% 
C) 4.29% 
D) 5.13% 
E) 6.36%

Question 14

Which one of these measures the squared deviations of actual returns from expected returns?

Accepted Answer

A) Variance 
B) Covariance 
C) Beta 
D) Correlation 
E) Alpha 
A) Variance 
B) Covariance 
C) Beta 
D) Correlation 
E) Alpha

Question 15

The market has an expected rate of return of 10.29 percent.The long-term government bond is expected to yield 4.73 percent,and the U.S.Treasury bill is expected to yield 3.21 percent.The inflation rate is 3.09 percent.What is the market risk premium?

Accepted Answer

A) 7.20% 
B) 9.73% 
C) 6.78% 
D) 8.33% 
E) 7.08% 
A) 7.20% 
B) 9.73% 
C) 6.78% 
D) 8.33% 
E) 7.08%

Question 16

The probability of the economy booming is 24 percent.Otherwise,the economy will be normal.Stock G is expected to return 19 percent in a boom and 12 percent in a normal economy.Stock H is expected to return 9 percent in a boom and 8 percent in a normal economy.What is the variance of a portfolio consisting of $3,800 of stock G and $7,400 of stock H?

Accepted Answer

A) 0.000193 
B) 0.000168 
C) 0.000219 
D) 0.001387 
E) 0.001402 
A) 0.000193 
B) 0.000168 
C) 0.000219 
D) 0.001387 
E) 0.001402

Question 17

The systematic risk of the market is assigned a

Accepted Answer

A) beta of 1. 
B) beta of 0. 
C) standard deviation of 1. 
D) standard deviation of 0. 
E) variance of 1. 
A) beta of 1. 
B) beta of 0. 
C) standard deviation of 1. 
D) standard deviation of 0. 
E) variance of 1.

Question 18

The risk-free rate of return is 2.2 percent,and the market risk premium is 7.46 percent.What is the expected rate of return on a stock with a beta of 1.08?

Accepted Answer

A) 9.82% 
B) 10.10% 
C) 10.26% 
D) 12.73% 
E) 14.36% 
A) 9.82% 
B) 10.10% 
C) 10.26% 
D) 12.73% 
E) 14.36%

Question 19

Stock A has a beta of 0.87 and an expected return of 9.21 percent.Stock B has a beta of 1.36 and an expected return of 10.58 percent.Stock C has a beta of 1.12 and an expected return of 10.68 percent.The risk-free rate is 2.7 percent,and the market risk premium is 6.8 percent.Which of these stocks are underpriced?

Accepted Answer

A) A only 
B) C only 
C) A and B only 
D) B and C only 
E) A and C only 
A) A only 
B) C only 
C) A and B only 
D) B and C only 
E) A and C only

Question 20

The risk of an individual security that will be compensated by the market depends upon the

Accepted Answer

A) standard deviation of that security. 
B) covariance of that security with the market. 
C) expected rate of return on that security. 
D) security's historical variance. 
E) industry most associated with that security. 
A) standard deviation of that security. 
B) covariance of that security with the market. 
C) expected rate of return on that security. 
D) security's historical variance. 
E) industry most associated with that security.

Assume you are looking at a security market line graph.Where would an overpriced stock with a beta of 0.98 plot on that graph?

The correlation between stocks A and B is equal to the

The standard deviation of a risk-free asset is

A security that is fairly priced will have a return that lies ________ the security market line.

You have a two-stock portfolio with an expected return of 11.7 percent.Stock A has an expected return of 13.8 percent while Stock B is expected to return 9.2 percent.What is the portfolio weight of Stock A?

RTF stock is expected to return 11 percent in a normal economy and lose 15 percent in a recession.The probability of a recession is 33 percent and the probability of a booming economy is zero.What is the variance of the returns on RTF stock?

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

The beta of a security is calculated by dividing the

Which one of the following statements is correct concerning the standard deviation of a portfolio?

A stock has an expected return of 13.74 percent.The return on the market is 12.68 percent,and the risk-free rate of return is 3.24 percent.What is the beta of this stock?

Which one of these measures the squared deviations of actual returns from expected returns?

The market has an expected rate of return of 10.29 percent.The long-term government bond is expected to yield 4.73 percent,and the U.S.Treasury bill is expected to yield 3.21 percent.The inflation rate is 3.09 percent.What is the market risk premium?

The systematic risk of the market is assigned a

The risk-free rate of return is 2.2 percent,and the market risk premium is 7.46 percent.What is the expected rate of return on a stock with a beta of 1.08?

The risk of an individual security that will be compensated by the market depends upon the

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

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Exam 11: Return and Risk: The Capital Asset Pricing Model Capm

Assume you are looking at a security market line graph.Where would an overpriced stock with a beta of 0.98 plot on that graph?

The correlation between stocks A and B is equal to the

The standard deviation of a risk-free asset is

A security that is fairly priced will have a return that lies ________ the security market line.

You have a two-stock portfolio with an expected return of 11.7 percent.Stock A has an expected return of 13.8 percent while Stock B is expected to return 9.2 percent.What is the portfolio weight of Stock A?

RTF stock is expected to return 11 percent in a normal economy and lose 15 percent in a recession.The probability of a recession is 33 percent and the probability of a booming economy is zero.What is the variance of the returns on RTF stock?

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

The beta of a security is calculated by dividing the

Which one of the following statements is correct concerning the standard deviation of a portfolio?

A stock has an expected return of 13.74 percent.The return on the market is 12.68 percent,and the risk-free rate of return is 3.24 percent.What is the beta of this stock?

Which one of these measures the squared deviations of actual returns from expected returns?

The market has an expected rate of return of 10.29 percent.The long-term government bond is expected to yield 4.73 percent,and the U.S.Treasury bill is expected to yield 3.21 percent.The inflation rate is 3.09 percent.What is the market risk premium?

The systematic risk of the market is assigned a

The risk-free rate of return is 2.2 percent,and the market risk premium is 7.46 percent.What is the expected rate of return on a stock with a beta of 1.08?

The risk of an individual security that will be compensated by the market depends upon the

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

Filters