Question 1

Stocks have both diversifiable risk and undiversifiable risk, but only diversifiable risk is rewarded with higher expected returns.

Accepted Answer

A) True 
 B)False

Question 2

Diversification reduces the risk of a portfolio because ________, and some of the risks are averaged out of the portfolio.

Accepted Answer

A) stocks do not move identically 
B) stocks have common risks 
C) stocks are fully predictable 
D) stocks are not affected by the market 
A) stocks do not move identically 
B) stocks have common risks 
C) stocks are fully predictable 
D) stocks are not affected by the market

Question 3

Correlation is the degree to which the returns of two stocks share common risks.

Accepted Answer

A) True 
 B)False

Question 4

The volatility of Home Depot share prices is 30% and that of General Motors shares is 15%. When I hold both stocks in my portfolio and the stocks returns have a correlation of 1, the overall volatility of returns of the portfolio is ________.

Accepted Answer

A) more than 15% 
B) less than 30% 
C) unchanged at 30% 
D) equal to 15% 
A) more than 15% 
B) less than 30% 
C) unchanged at 30% 
D) equal to 15%

Question 5

For each 1% change in the market portfolio's excess return, the investment's excess return is expected to change by ________ due to risks that it has in common with the market.

Accepted Answer

A) beta 
B) alpha 
C) 0% 
D) 1% 
A) beta 
B) alpha 
C) 0% 
D) 1%

Question 6

Historically, the average excess return of the S&P 500 over the return of U.S. Treasury bonds has been ________ and is proxy for the market risk premium.

Accepted Answer

A) between 10% and 12% 
B) between 14% and 16% 
C) between 5% and 7% 
D) between 11% and 13% 
A) between 10% and 12% 
B) between 14% and 16% 
C) between 5% and 7% 
D) between 11% and 13%

Question 7

Is it possible for a stock to have high total risk but low systematic risk?

Accepted Answer

Yes, it is possible for a stock to have

Question 8

A portfolio has 40% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 40% and 30%, respectively, and the correlation between IBM and MSFT is -0.3. What is the standard deviation of the portfolio?

Accepted Answer

A) 19.17% 
B) 18.16% 
C) 22.20% 
D) 20.18% 
A) 19.17% 
B) 18.16% 
C) 22.20% 
D) 20.18%

Question 9

What role does the correlation of two assets play in computation of the expected return of the two asset portfolio?

Accepted Answer

The correlation of the two ass

Question 10

Your retirement portfolio comprises 300 shares of the S&P 500 fund (SPY)and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $136 and that of AGG is $97. If you expect the return on SPY to be 11% in the next year and the return on AGG to be 10%, what is the expected return for your retirement portfolio?

Accepted Answer

A) 9.73% 
B) 8.65% 
C) 10.81% 
D) 10.27% 
A) 9.73% 
B) 8.65% 
C) 10.81% 
D) 10.27%

Question 11

A stock market comprises 1500 shares of stock A and 3000 shares of stock B. The share prices for stocks A and B are $24 and $34, respectively. What is the capitalization of the market portfolio?

Accepted Answer

A) $138,000 
B) $117,300 
C) $110,400 
D) $151,800 
A) $138,000 
B) $117,300 
C) $110,400 
D) $151,800

Question 12

A portfolio comprises Coke (beta of 1.6)and Wal-Mart (beta of 0.6). The amount invested in Coke is $10,000 and in Wal-Mart is $20,000. What is the beta of the portfolio?

Accepted Answer

A) 0.93 
B) 0.84 
C) 1.03 
D) 0.98 
A) 0.93 
B) 0.84 
C) 1.03 
D) 0.98

Question 13

If you build a large enough portfolio, you can diversify away all ________ risk, but you will be left with ________ risk.

Accepted Answer

A) diversifiable, unsystematic 
B) unsystematic, systematic 
C) systematic, undiversifiable 
D) undiversifiable, diversifiable 
A) diversifiable, unsystematic 
B) unsystematic, systematic 
C) systematic, undiversifiable 
D) undiversifiable, diversifiable

Question 14

Consider the following returns:   The covariance between Lowes' and Home Depot's returns is closest to ________.

Accepted Answer

A) 0.10 
B) 0.31 
C) 0.12 
D) 0.73 
A) 0.10 
B) 0.31 
C) 0.12 
D) 0.73

Question 15

Consider the following returns:   The volatility on Home Depot's returns is closest to ________.

Accepted Answer

A) 35% 
B) 32% 
C) 42% 
D) 17% 
A) 35% 
B) 32% 
C) 42% 
D) 17%

Question 16

A stock market comprises 2400 shares of stock A and 2400 shares of stock B. The share prices for stocks A and B are $15 and $5, respectively. What is the capitalization of the market portfolio?

Accepted Answer

A) $43,200 
B) $48,000 
C) $55,200 
D) $52,800 
A) $43,200 
B) $48,000 
C) $55,200 
D) $52,800

Question 17

When we form an equally weighted portfolio of stocks and keep increasing the number of stocks in the portfolio, the volatility of the portfolio also increases.

Accepted Answer

A) True 
 B)False

Question 18

Consider the following expected returns, volatilities, and correlations:   The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to ________.

Accepted Answer

A) 8.1% 
B) 9.0% 
C) 10.8% 
D) 5.4% 
A) 8.1% 
B) 9.0% 
C) 10.8% 
D) 5.4%

Question 19

A stock market comprises 2100 shares of stock A and 2100 shares of stock B. The share prices for stocks A and B are $25 and $15, respectively. What proportion of the market portfolio is comprised of each stock?

Accepted Answer

A) Stock A is 62.5% and Stock B is 37.5%. 
B) Stock A is 37.5% and Stock B is 62.5%. 
C) Stock A is 50% and Stock B is 50%. 
D) Stock A is 200% and Stock B is 100%. 
A) Stock A is 62.5% and Stock B is 37.5%. 
B) Stock A is 37.5% and Stock B is 62.5%. 
C) Stock A is 50% and Stock B is 50%. 
D) Stock A is 200% and Stock B is 100%.

Question 20

The price of Microsoft is $37 per share and that of Apple is $43 per share. The price of Microsoft increases to $42 per share after one year and to $47 after two years. Also, shares of Apple increase to $49 after one year and to $59 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return in year 1 and year 2? Assume no dividends are paid.

Accepted Answer

A) 13.06%, 14.84% 
B) 10.31%, 18.96% 
C) 13.75%, 16.48% 
D) 11.69%, 19.78% 
A) 13.06%, 14.84% 
B) 10.31%, 18.96% 
C) 13.75%, 16.48% 
D) 11.69%, 19.78%

Exam 12: Systematic Risk and the Equity Risk Premium

Stocks have both diversifiable risk and undiversifiable risk, but only diversifiable risk is rewarded with higher expected returns.

Diversification reduces the risk of a portfolio because ________, and some of the risks are averaged out of the portfolio.

Correlation is the degree to which the returns of two stocks share common risks.

The volatility of Home Depot share prices is 30% and that of General Motors shares is 15%. When I hold both stocks in my portfolio and the stocks returns have a correlation of 1, the overall volatility of returns of the portfolio is ________.

For each 1% change in the market portfolio's excess return, the investment's excess return is expected to change by ________ due to risks that it has in common with the market.

Historically, the average excess return of the S&P 500 over the return of U.S. Treasury bonds has been ________ and is proxy for the market risk premium.

Is it possible for a stock to have high total risk but low systematic risk?

A portfolio has 40% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 40% and 30%, respectively, and the correlation between IBM and MSFT is -0.3. What is the standard deviation of the portfolio?

What role does the correlation of two assets play in computation of the expected return of the two asset portfolio?

A stock market comprises 1500 shares of stock A and 3000 shares of stock B. The share prices for stocks A and B are $24 and $34, respectively. What is the capitalization of the market portfolio?

A portfolio comprises Coke (beta of 1.6)and Wal-Mart (beta of 0.6). The amount invested in Coke is $10,000 and in Wal-Mart is $20,000. What is the beta of the portfolio?

If you build a large enough portfolio, you can diversify away all ________ risk, but you will be left with ________ risk.

Consider the following returns: The covariance between Lowes' and Home Depot's returns is closest to ________.

Consider the following returns: The volatility on Home Depot's returns is closest to ________.

A stock market comprises 2400 shares of stock A and 2400 shares of stock B. The share prices for stocks A and B are $15 and $5, respectively. What is the capitalization of the market portfolio?

When we form an equally weighted portfolio of stocks and keep increasing the number of stocks in the portfolio, the volatility of the portfolio also increases.

Consider the following expected returns, volatilities, and correlations: The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to ________.

A stock market comprises 2100 shares of stock A and 2100 shares of stock B. The share prices for stocks A and B are $25 and $15, respectively. What proportion of the market portfolio is comprised of each stock?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

If you build a large enough portfolio, you can diversify away all risk, but you will be left with risk.