Question 1

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)  This risk is related to expected portfolio returns 
A)  decrease in company sales 
B)  increase in market interest rates 
C)  change in corporate tax rates 
D)  increase in inflation 
E)  This risk is related to expected portfolio returns

Question 2

A stock with which one of the following betas has an expected return that most resembles the overall market expected rate of return?

Accepted Answer

A)  0.33 
B)  0.74 
C)  0.99 
D)  1.06 
E)  1.22 
A)  0.33 
B)  0.74 
C)  0.99 
D)  1.06 
E)  1.22

Question 3

You own three stocks which have betas of 1.16,1.34,and 1.02.You would like to add a fourth security such that your portfolio beta will match that of the market.Given this situation,the new security:

Accepted Answer

A)  must have a beta of 1.0. 
B)  must have a beta of zero. 
C)  could be a U.S. Treasury bill. 
D)  could have any beta greater than 1.0. 
E)  must have a portfolio weight of 50 percent or more. 
A)  must have a beta of 1.0. 
B)  must have a beta of zero. 
C)  could be a U.S. Treasury bill. 
D)  could have any beta greater than 1.0. 
E)  must have a portfolio weight of 50 percent or more.

Question 4

What is the beta of a portfolio which consists of the following?

Accepted Answer

A)  1.01 
B)  1.24 
C)  1.26 
D)  1.29 
E)  1.32 
A)  1.01 
B)  1.24 
C)  1.26 
D)  1.29 
E)  1.32

Question 5

Which one of the following measures systematic risk?

Accepted Answer

A)  beta 
B)  alpha 
C)  variance 
D)  standard deviation 
E)  correlation coefficient 
A)  beta 
B)  alpha 
C)  variance 
D)  standard deviation 
E)  correlation coefficient

Question 6

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

Accepted Answer

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

Question 7

What is the covariance of security A to the market given the following information?

Accepted Answer

A)  505.0 
B)  514.1 
C)  517.5 
D)  523.5 
E)  540.6 
A)  505.0 
B)  514.1 
C)  517.5 
D)  523.5 
E)  540.6

Question 8

A stock has a beta of 1.58 and an expected return of 16.2 percent.The risk-free rate is 3.8 percent.What is the market risk premium?

Accepted Answer

A)  7.85 percent 
B)  10.01 percent 
C)  11.72 percent 
D)  12.50 percent 
E)  13.40 percent 
A)  7.85 percent 
B)  10.01 percent 
C)  11.72 percent 
D)  12.50 percent 
E)  13.40 percent

Question 9

Which one of the following announcements is most apt to cause the price of a firm's stock to increase?

Accepted Answer

A)  The firm met its quarterly earnings forecast. 
B)  An unpopular CEO unexpectedly announced he is resigning effective immediately. 
C)  A firm officially confirmed the rumors that it is merging with a competitor. 
D)  The firm just lowered its projected earnings per share for next year. 
E)  Analysts are expected to lower the firm's credit rating on its debt. 
A)  The firm met its quarterly earnings forecast. 
B)  An unpopular CEO unexpectedly announced he is resigning effective immediately. 
C)  A firm officially confirmed the rumors that it is merging with a competitor. 
D)  The firm just lowered its projected earnings per share for next year. 
E)  Analysts are expected to lower the firm's credit rating on its debt.

Question 10

Of the following,Stock ________ has the greatest level of total risk and Stock ________ has the highest risk premium.

Accepted Answer

A)  A; B 
B)  B; E 
C)  C; D 
D)  D; C 
E)  C; E 
A)  A; B 
B)  B; E 
C)  C; D 
D)  D; C 
E)  C; E

Question 11

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 12

A portfolio of securities has a beta of 1.14.Given this,you know that:

Accepted Answer

A)  adding another security to the portfolio must lower the portfolio beta. 
B)  the portfolio has more risk than a risk-free asset but less risk than the market. 
C)  each of the securities in the portfolio has more risk than an average security. 
D)  the portfolio has 14 percent more risk than a risk-free security. 
E)  the expected return on the portfolio is greater than the expected market return. 
A)  adding another security to the portfolio must lower the portfolio beta. 
B)  the portfolio has more risk than a risk-free asset but less risk than the market. 
C)  each of the securities in the portfolio has more risk than an average security. 
D)  the portfolio has 14 percent more risk than a risk-free security. 
E)  the expected return on the portfolio is greater than the expected market return.

Question 13

A stock has an expected return of 15.10 percent and a beta of 1.30.What is the risk-free rate if the market rate is 13.1 percent?

Accepted Answer

A)  6.43 percent 
B)  6.92 percent 
C)  7.01 percent 
D)  7.30 percent 
E)  7.90 percent 
A)  6.43 percent 
B)  6.92 percent 
C)  7.01 percent 
D)  7.30 percent 
E)  7.90 percent

Question 14

What is the covariance of security A to the market given the following information?

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 15

Which of the following will affect the beta value of an individual security?
I.interval of time frequency used for the data sample
II.length of the time period used for the data sample
III.particular time period selected for the sampling
IV.choice of index used as the measure of the market

Accepted Answer

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

Question 16

Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases.

Accepted Answer

A)  large market capitalization and high book-to-market ratio 
B)  large market capitalization and low book-to-market ratio 
C)  small market capitalization and high book-to-market ratio 
D)  small market capitalization and a book-to-market ratio of 1.0 
E)  small market capitalization and a low book-to-market ratio 
A)  large market capitalization and high book-to-market ratio 
B)  large market capitalization and low book-to-market ratio 
C)  small market capitalization and high book-to-market ratio 
D)  small market capitalization and a book-to-market ratio of 1.0 
E)  small market capitalization and a low book-to-market ratio

Question 17

A portfolio is comprised of two stocks.Stock A comprises 65 percent of the portfolio and has a beta of 1.31.Stock B has a beta of .98.What is the portfolio beta?

Accepted Answer

A)  0.98 
B)  1.03 
C)  1.08 
D)  1.19 
E)  1.22 
A)  0.98 
B)  1.03 
C)  1.08 
D)  1.19 
E)  1.22

Question 18

A portfolio consists of two stocks and has a beta of 1.20.The first stock has a beta of 1.02 and comprises 30 percent of the portfolio.What is the beta of the second stock?

Accepted Answer

A)  0.41 
B)  0.66 
C)  0.82 
D)  1.28 
E)  1.35 
A)  0.41 
B)  0.66 
C)  0.82 
D)  1.28 
E)  1.35

Question 19

A risky security has a variance of .036190 and a covariance with the market of .0222.The variance of the market is .01975.What is the correlation of the risky security to the market?

Accepted Answer

A)  0.51 
B)  0.65 
C)  0.72 
D)  0.83 
E)  0.85 
A)  0.51 
B)  0.65 
C)  0.72 
D)  0.83 
E)  0.85

Question 20

A portfolio consists of one risky asset and one risk-free asset.The risky asset has an expected return of 11.2 percent and a beta of 1.39.The risk-free asset has an expected return of 3.4 percent.How much of the portfolio is invested in the risk-free asset if the portfolio beta is 1.07?

Accepted Answer

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

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

A stock with which one of the following betas has an expected return that most resembles the overall market expected rate of return?

You own three stocks which have betas of 1.16,1.34,and 1.02.You would like to add a fourth security such that your portfolio beta will match that of the market.Given this situation,the new security:

What is the beta of a portfolio which consists of the following?

Which one of the following measures systematic risk?

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

What is the covariance of security A to the market given the following information?

A stock has a beta of 1.58 and an expected return of 16.2 percent.The risk-free rate is 3.8 percent.What is the market risk premium?

Which one of the following announcements is most apt to cause the price of a firm's stock to increase?

Of the following,Stock has the greatest level of total risk and Stock has the highest risk premium.

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

A portfolio of securities has a beta of 1.14.Given this,you know that:

A stock has an expected return of 15.10 percent and a beta of 1.30.What is the risk-free rate if the market rate is 13.1 percent?

What is the covariance of security A to the market given the following information?

Which of the following will affect the beta value of an individual security? I.interval of time frequency used for the data sample II.length of the time period used for the data sample III.particular time period selected for the sampling IV.choice of index used as the measure of the market

Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases.

A portfolio is comprised of two stocks.Stock A comprises 65 percent of the portfolio and has a beta of 1.31.Stock B has a beta of .98.What is the portfolio beta?

A portfolio consists of two stocks and has a beta of 1.20.The first stock has a beta of 1.02 and comprises 30 percent of the portfolio.What is the beta of the second stock?

A risky security has a variance of .036190 and a covariance with the market of .0222.The variance of the market is .01975.What is the correlation of the risky security to the market?

A portfolio consists of one risky asset and one risk-free asset.The risky asset has an expected return of 11.2 percent and a beta of 1.39.The risk-free asset has an expected return of 3.4 percent.How much of the portfolio is invested in the risk-free asset if the portfolio beta is 1.07?

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

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

Projecting Cash Flow and Earnings

Corporate and Government Bonds

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters

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

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

A stock with which one of the following betas has an expected return that most resembles the overall market expected rate of return?

You own three stocks which have betas of 1.16,1.34,and 1.02.You would like to add a fourth security such that your portfolio beta will match that of the market.Given this situation,the new security:

What is the beta of a portfolio which consists of the following?

Which one of the following measures systematic risk?

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

What is the covariance of security A to the market given the following information?

A stock has a beta of 1.58 and an expected return of 16.2 percent.The risk-free rate is 3.8 percent.What is the market risk premium?

Which one of the following announcements is most apt to cause the price of a firm's stock to increase?

Of the following,Stock ________ has the greatest level of total risk and Stock ________ has the highest risk premium.

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

A portfolio of securities has a beta of 1.14.Given this,you know that:

A stock has an expected return of 15.10 percent and a beta of 1.30.What is the risk-free rate if the market rate is 13.1 percent?

What is the covariance of security A to the market given the following information?

Which of the following will affect the beta value of an individual security? I.interval of time frequency used for the data sample II.length of the time period used for the data sample III.particular time period selected for the sampling IV.choice of index used as the measure of the market

Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases.

A portfolio is comprised of two stocks.Stock A comprises 65 percent of the portfolio and has a beta of 1.31.Stock B has a beta of .98.What is the portfolio beta?

A portfolio consists of two stocks and has a beta of 1.20.The first stock has a beta of 1.02 and comprises 30 percent of the portfolio.What is the beta of the second stock?

A risky security has a variance of .036190 and a covariance with the market of .0222.The variance of the market is .01975.What is the correlation of the risky security to the market?

A portfolio consists of one risky asset and one risk-free asset.The risky asset has an expected return of 11.2 percent and a beta of 1.39.The risk-free asset has an expected return of 3.4 percent.How much of the portfolio is invested in the risk-free asset if the portfolio beta is 1.07?

A Brief History of Risk and Return

The Investment Process

Overview of Security Types

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

Projecting Cash Flow and Earnings

Corporate and Government Bonds

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters

Of the following,Stock has the greatest level of total risk and Stock has the highest risk premium.