Question 1

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 unpredictable 
D) stocks are always affected by the market 
E) some stocks have lower returns than others 
A) stocks do not move identically 
B) stocks have common risks 
C) stocks are unpredictable 
D) stocks are always affected by the market 
E) some stocks have lower returns than others

Question 2

What diversification,if any,is achieved if two stocks in a portfolio are perfectly positively correlated?

Accepted Answer

No diversification benefit is

Question 3

Suppose you buy 50 shares of RBC at $90 per share,and 70 shares of TD at $78 per share.If RBC's stock goes up to $94 per share and TD's stock falls to $72 per share,what is your portfolio return?

Accepted Answer

A) -2.2% 
B) 0% 
C) 6.4% 
D) 4.4% 
E) -7.7% 
A) -2.2% 
B) 0% 
C) 6.4% 
D) 4.4% 
E) -7.7%

Question 4

Which of the following combinations of stocks would give you the biggest reduction in risk?

Accepted Answer

A) Duke Energy and Wal-Mart 
B) Wal-Mart and Microsoft 
C) Microsoft and Duke Energy 
D) Duke Energy by itself 
E) Wal-Mart by itself 
A) Duke Energy and Wal-Mart 
B) Wal-Mart and Microsoft 
C) Microsoft and Duke Energy 
D) Duke Energy by itself 
E) Wal-Mart by itself

Question 5

If you build a large enough portfolio,you can diversify away all the risks of a portfolio.

Accepted Answer

A) True 
 B)False

Question 6

When we combine stocks in a portfolio,the amount of risk that is eliminated depends on the degree to which the stocks face common risks and move together.

Accepted Answer

A) True 
 B)False

Question 7

A linear regression was done to estimate the relation between Sprint's stock returns and the market's return.The intercept of the line was found to be 0.23 and the slope was 1.47.Which of the following statements is TRUE regarding Sprint's stock?

Accepted Answer

A) Sprint's beta is 0.23. 
B) Sprint's beta is 1.47. 
C) The risk-free rate is 1.47%. 
D) The standard deviation of Sprint's excess returns is 23%. 
E) Sprint's beta is between 0.23 and 1.47. 
A) Sprint's beta is 0.23. 
B) Sprint's beta is 1.47. 
C) The risk-free rate is 1.47%. 
D) The standard deviation of Sprint's excess returns is 23%. 
E) Sprint's beta is between 0.23 and 1.47.

Question 8

The Capital Asset Pricing Model (CAPM)says that the excess return on a stock is equal to its beta times the market risk premium.

Accepted Answer

A) True 
 B)False

Question 9

You expect General Motors (GM)to have a beta of 1.3 over the next year and the beta of Exxon Mobil (XOM)to be 0.9 over the next year.Also,you expect the volatility of General Motors to be 40% and that of Exxon Mobil to be 30% over the next year.Which stock has more systematic risk? Which stock has more total risk?

Accepted Answer

A) XOM,GM 
B) XOM,XOM 
C) GM,XOM 
D) GM,GM 
E) They both have the same risks. 
A) XOM,GM 
B) XOM,XOM 
C) GM,XOM 
D) GM,GM 
E) They both have the same risks.

Question 10

Your portfolio contains $33,000 of CP Rail Stock,which has a beta of 1.3,and $41,000 of Lululemon stock,which has a beta of 1.05.What is the beta of your portfolio?

Accepted Answer

A) 1.17 
B) 1.16 
C) 1.18 
D) 1.21 
E) 1.31 
A) 1.17 
B) 1.16 
C) 1.18 
D) 1.21 
E) 1.31

Question 11

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
  
-The expected return of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to:

Accepted Answer

A) 10.0% 
B) 17.8% 
C) 26.3% 
D) 29.0% 
E) 18.5% 
A) 10.0% 
B) 17.8% 
C) 26.3% 
D) 29.0% 
E) 18.5%

Question 12

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
  
-The volatility of a portfolio that is consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

Accepted Answer

A) 9% 
B) 14% 
C) 11% 
D) 12% 
E) 10% 
A) 9% 
B) 14% 
C) 11% 
D) 12% 
E) 10%

Question 13

Use the table for the question(s)below.
Consider the following returns:
  
-The covariance between Lowes' and Home Depot's returns is closest to:

Accepted Answer

A) 0.10 
B) 0.29 
C) 0.12 
D) 0.69 
E) 0.41 
A) 0.10 
B) 0.29 
C) 0.12 
D) 0.69 
E) 0.41

Question 14

RBC stock has a beta of 0.85,while TD stock has a beta of 1.21.The risk-free rate is 1.5%,and the expected return on a portfolio with 50% weight in RBC and the remainder in TD is 9.74%.What is the market risk premium?

Accepted Answer

A) 7% 
B) 9.5% 
C) 8% 
D) 8.2% 
E) 7.2% 
A) 7% 
B) 9.5% 
C) 8% 
D) 8.2% 
E) 7.2%

Question 15

The amount of a stock's risk that is diversified away:

Accepted Answer

A) is independent of the portfolio that you add it to. 
B) depends on market risk premium. 
C) depends on the risk-free rate of interest. 
D) depends on the portfolio that you add it to. 
E) depends on its market capitalization. 
A) is independent of the portfolio that you add it to. 
B) depends on market risk premium. 
C) depends on the risk-free rate of interest. 
D) depends on the portfolio that you add it to. 
E) depends on its market capitalization.

Question 16

You expect General Motors (GM)to have a beta of 1.5 over the next year and the beta of Exxon Mobil (XOM)to be 1.9 over the next year.Also,you expect the volatility of General Motors to be 50% and that of Exxon Mobil to be 35% over the next year.Which stock has more systematic risk? Which stock has more total risk?

Accepted Answer

A) XOM,GM 
B) GM,XOM 
C) GM,GM 
D) XOM,XOM 
E) They both have the same risks. 
A) XOM,GM 
B) GM,XOM 
C) GM,GM 
D) XOM,XOM 
E) They both have the same risks.

Question 17

The expected return on your of your investment is closest to:

Accepted Answer

A) 18% 
B) 20% 
C) 12% 
D) 24% 
E) 32% 
A) 18% 
B) 20% 
C) 12% 
D) 24% 
E) 32%

Question 18

Potash Corp stock has a beta of 1.1,while Tim Horton's stock has a beta of 1.4.The risk-free rate is 1.9%,and the expected return on a portfolio with 30% weight in Potash and the remainder in Tim Horton's is 9.76%.What is the market risk premium?

Accepted Answer

A) 7% 
B) 7.9% 
C) 6% 
D) 6.9% 
E) 7.2% 
A) 7% 
B) 7.9% 
C) 6% 
D) 6.9% 
E) 7.2%

Question 19

The expected return is usually ________ the baseline risk-free rate of return that we demand to compensate for inflation and time value of money.

Accepted Answer

A) lower than 
B) higher than 
C) similar to 
D) much lower than 
E) independent of 
A) lower than 
B) higher than 
C) similar to 
D) much lower than 
E) independent of

Question 20

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

Exam 11: Systematic Risk and the Equity Risk Premium

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

What diversification,if any,is achieved if two stocks in a portfolio are perfectly positively correlated?

Suppose you buy 50 shares of RBC at $90 per share,and 70 shares of TD at $78 per share.If RBC's stock goes up to $94 per share and TD's stock falls to $72 per share,what is your portfolio return?

Which of the following combinations of stocks would give you the biggest reduction in risk?

If you build a large enough portfolio,you can diversify away all the risks of a portfolio.

When we combine stocks in a portfolio,the amount of risk that is eliminated depends on the degree to which the stocks face common risks and move together.

A linear regression was done to estimate the relation between Sprint's stock returns and the market's return.The intercept of the line was found to be 0.23 and the slope was 1.47.Which of the following statements is TRUE regarding Sprint's stock?

The Capital Asset Pricing Model (CAPM)says that the excess return on a stock is equal to its beta times the market risk premium.

Your portfolio contains $33,000 of CP Rail Stock,which has a beta of 1.3,and $41,000 of Lululemon stock,which has a beta of 1.05.What is the beta of your portfolio?

Use the table for the question(s)below. Consider the following expected returns,volatilities,and correlations: -The expected return of a portfolio that is equally invested in Wal-Mart and Duke Energy is closest to:

Use the table for the question(s)below. Consider the following expected returns,volatilities,and correlations: -The volatility of a portfolio that is consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

Use the table for the question(s)below. Consider the following returns: -The covariance between Lowes' and Home Depot's returns is closest to:

RBC stock has a beta of 0.85,while TD stock has a beta of 1.21.The risk-free rate is 1.5%,and the expected return on a portfolio with 50% weight in RBC and the remainder in TD is 9.74%.What is the market risk premium?

The amount of a stock's risk that is diversified away:

The expected return on your of your investment is closest to:

Potash Corp stock has a beta of 1.1,while Tim Horton's stock has a beta of 1.4.The risk-free rate is 1.9%,and the expected return on a portfolio with 30% weight in Potash and the remainder in Tim Horton's is 9.76%.What is the market risk premium?

The expected return is usually ________ the baseline risk-free rate of return that we demand to compensate for inflation and time value of money.

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.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters