Question 1

Which of the following statements is FALSE?

Accepted Answer

A)  We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. 
B)  We can rule out inefficient portfolios because they represent inferior investment choices. 
C)  The volatility of the portfolio will differ, depending on the correlation between the securities in the portfolio. 
D)  Correlation has no effect on the expected return on a portfolio. 
A)  We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. 
B)  We can rule out inefficient portfolios because they represent inferior investment choices. 
C)  The volatility of the portfolio will differ, depending on the correlation between the securities in the portfolio. 
D)  Correlation has no effect on the expected return on a portfolio.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

You observe that AT&T stock and the S&P 500 have the following weekly returns:   If this pattern of stock returns is typical of AT&T stock, and you calculated a beta against the S&P 500, which of the following is true?

Accepted Answer

A)  AT&T's beta is negative. 
B)  AT&T's beta is zero. 
C)  AT&T's beta is positive. 
D)  Cannot be determined from information given. 
A)  AT&T's beta is negative. 
B)  AT&T's beta is zero. 
C)  AT&T's beta is positive. 
D)  Cannot be determined from information given.

Question 4

Which of the following statements is FALSE?

Accepted Answer

A)  Stock returns will tend to move together if they are affected similarly by economic events. 
B)  Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. 
C)  Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. 
D)  With a positive amount invested in each stock, the more the stocks move together and the higher their covariance or correlation, the more volatile the portfolio will be. 
A)  Stock returns will tend to move together if they are affected similarly by economic events. 
B)  Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. 
C)  Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. 
D)  With a positive amount invested in each stock, the more the stocks move together and the higher their covariance or correlation, the more volatile the portfolio will be.

Question 5

A stock market comprises 4700 shares of stock A and 2300 shares of stock B. Assume the share prices for stocks A and B are $25 and $30, respectively. What proportion of the market portfolio is comprised of stock A?

Accepted Answer

A)  63.0% 
B)  62.0% 
C)  61.3% 
D)  79% 
A)  63.0% 
B)  62.0% 
C)  61.3% 
D)  79%

Question 6

Your estimate of the market risk premium is 9%. The risk-free rate of return is 3.8% and General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

Accepted Answer

A)  14.8% 
B)  15.6% 
C)  16.4% 
D)  17.2% 
A)  14.8% 
B)  15.6% 
C)  16.4% 
D)  17.2%

Question 7

Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a(n) 6% interest rate to invest in the stock market. You invest the entire $20,000 in an exchange-traded fund (ETF) with a 11% expected return and a 20% volatility. The expected return on your of your investment is closest to ________.

Accepted Answer

A)  7% 
B)  8% 
C)  4% 
D)  9.1% 
A)  7% 
B)  8% 
C)  4% 
D)  9.1%

Question 8

Suppose you invest $20,000 by purchasing 200 shares of Abbott Labs (ABT) at $50 per share, 200 shares of Lowes (LOW) at $30 per share, and 100 shares of Ball Corporation (BLL) at $40 per share. Suppose over the next year Ball has a return of 12.5%, Lowes has a return of 21%, and Abbott Labs has a return of -10%. The return on your portfolio over the year is ________.

Accepted Answer

A)  0% 
B)  7.6% 
C)  3.8% 
D)  5.7% 
A)  0% 
B)  7.6% 
C)  3.8% 
D)  5.7%

Question 9

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 10

The systematic risk (beta) of a portfolio will ________ by holding more stocks, even if they each had the same systematic risk.

Accepted Answer

A)  change 
B)  stay the same 
C)  turn negative 
D)  turn to 0 
A)  change 
B)  stay the same 
C)  turn negative 
D)  turn to 0

Question 11

A portfolio has three stocks - 300 shares of Yahoo (YHOO), 300Shares of General Motors (GM), and 80 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO is $20, the price of GM is $30, and the price of SPY is $150, calculate the portfolio weight of YHOO and GM.

Accepted Answer

A)  11.1%, 20.0% 
B)  16.7%, 28.3% 
C)  22.2%, 33.3% 
D)  22.2%, 43.3% 
A)  11.1%, 20.0% 
B)  16.7%, 28.3% 
C)  22.2%, 33.3% 
D)  22.2%, 43.3%

Question 12

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%. 
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%.

Question 13

Why should an investor invest in a negative-beta stock knowing that it will have an expected return lower than the risk-free rate?

Accepted Answer

An investor will invest in a n

Question 14

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 15

Which of the following statements is FALSE?

Accepted Answer

A)  When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. 
B)  An investor seeking high returns and low volatility should only invest in an efficient portfolio. 
C)  When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification. 
D)  Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns. 
A)  When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. 
B)  An investor seeking high returns and low volatility should only invest in an efficient portfolio. 
C)  When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification. 
D)  Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

Question 16

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 17

Suppose you invest in 110 shares of Merck (MRK) at $40 per share and 120 shares of Yahoo (YHOO)at $25 per share. If the price of Merck increases to $45 and the price of Yahoo decreases to $22 per share, what is the return on your portfolio?

Accepted Answer

A)  7.70% 
B)  4.11% 
C)  2.57% 
D)  3.47% 
A)  7.70% 
B)  4.11% 
C)  2.57% 
D)  3.47%

Question 18

Consider the following returns:   The volatility on Lowes' returns is closest to ________.

Accepted Answer

A)  35% 
B)  11% 
C)  14% 
D)  42% 
A)  35% 
B)  11% 
C)  14% 
D)  42%

Question 19

A stock market comprises 4600 shares of stock A and 2000 shares of stock B. Assume the share prices for stocks A and B are $25 and $35, respectively. What is the capitalization of the market portfolio?

Accepted Answer

A)  $185,000 
B)  $157,250 
C)  $175,750 
D)  $203,500 
A)  $185,000 
B)  $157,250 
C)  $175,750 
D)  $203,500

Question 20

The market or equity risk premium can be estimated by computing the historical average excess return on the market portfolio.

Accepted Answer

A) True 
 B)False

Exam 12: Systematic Risk and the Equity Risk Premium

Which of the following statements is FALSE?

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

You observe that AT&T stock and the S&P 500 have the following weekly returns: If this pattern of stock returns is typical of AT&T stock, and you calculated a beta against the S&P 500, which of the following is true?

Which of the following statements is FALSE?

A stock market comprises 4700 shares of stock A and 2300 shares of stock B. Assume the share prices for stocks A and B are $25 and $30, respectively. What proportion of the market portfolio is comprised of stock A?

Your estimate of the market risk premium is 9%. The risk-free rate of return is 3.8% and General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

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.

The systematic risk (beta) of a portfolio will ________ by holding more stocks, even if they each had the same systematic risk.

A portfolio has three stocks - 300 shares of Yahoo (YHOO), 300Shares of General Motors (GM), and 80 shares of Standard and Poor's Index Fund (SPY). If the price of YHOO is $20, the price of GM is $30, and the price of SPY is $150, calculate the portfolio weight of YHOO and GM.

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?

Why should an investor invest in a negative-beta stock knowing that it will have an expected return lower than the risk-free rate?

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?

Which of the following statements is FALSE?

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.

Suppose you invest in 110 shares of Merck (MRK) at $40 per share and 120 shares of Yahoo (YHOO)at $25 per share. If the price of Merck increases to $45 and the price of Yahoo decreases to $22 per share, what is the return on your portfolio?

Consider the following returns: The volatility on Lowes' returns is closest to ________.

A stock market comprises 4600 shares of stock A and 2000 shares of stock B. Assume the share prices for stocks A and B are $25 and $35, respectively. What is the capitalization of the market portfolio?

The market or equity risk premium can be estimated by computing the historical average excess return on the market portfolio.

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

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