Question 1

You are considering buying some stock in Continental Grain.Which of the following is an example of nondiversifiable risk?

Accepted Answer

A) Risk resulting from a general decline in the stock market 
B) Risk resulting from a news release that several of Continental's grain silos were tainted 
C) Risk resulting from an explosion in a grain elevator owned by Continental 
D) Risk resulting from an impending lawsuit against Continental 
A) Risk resulting from a general decline in the stock market 
B) Risk resulting from a news release that several of Continental's grain silos were tainted 
C) Risk resulting from an explosion in a grain elevator owned by Continental 
D) Risk resulting from an impending lawsuit against Continental

Question 2

The Elvis Alive Corporation,makers of Elvis memorabilia,has a beta of 2.35.The return on the market portfolio is 12%,and the risk-free rate is 2.5%.According to CAPM,what is the risk premium on a stock with a beta of 1.0?

Accepted Answer

A) 12.00% 
B) 22.33% 
C) 9.5% 
D) 14.5% 
A) 12.00% 
B) 22.33% 
C) 9.5% 
D) 14.5%

Question 3

The portfolio standard deviation will always be less than the standard deviation of any asset in the portfolio.

Accepted Answer

A) True 
 B)False

Question 4

It is impossible to eliminate all risk through diversification.

Accepted Answer

A) True 
 B)False

Question 5

You hold a portfolio with the following securities:
Percent
Security of Portfolio Beta Return
X Corporation 20% 1.35 14%
Y Corporation 35% .95 10%
Z Corporation 45% .75 8%
Compute the expected return and beta for the portfolio.

Accepted Answer

A) 10.67%,1.02 
B) 9.9%,1.02 
C) 34.4%,.94 
D) 9.9%,.94 
A) 10.67%,1.02 
B) 9.9%,1.02 
C) 34.4%,.94 
D) 9.9%,.94

Question 6

Investment risk is

Accepted Answer

A) the probability of achieving a return that is greater than what was expected. 
B) the probability of achieving a beta coefficient that is less than what was expected. 
C) the probability of achieving a return that is less than what was expected. 
D) the probability of achieving a standard deviation that is less than what was expected. 
A) the probability of achieving a return that is greater than what was expected. 
B) the probability of achieving a beta coefficient that is less than what was expected. 
C) the probability of achieving a return that is less than what was expected. 
D) the probability of achieving a standard deviation that is less than what was expected.

Question 7

Total risk equals unique security risk times systematic risk.

Accepted Answer

A) True 
 B)False

Question 8

Increasing a portfolio from 2 stocks to 4 stocks will reduce risk more than increasing a portfolio from 10 stocks to 12 stocks.

Accepted Answer

A) True 
 B)False

Question 9

Currently,the expected return on the market is 12.5% and the required rate of return for Alpha,Inc.is 12.5%.Therefore,Alpha's beta must be

Accepted Answer

A) less than 1.0. 
B) greater than 1.0. 
C) equal to 1.0. 
D) unknown based on the information provided. 
A) less than 1.0. 
B) greater than 1.0. 
C) equal to 1.0. 
D) unknown based on the information provided.

Question 10

Beta is a statistical measure of

Accepted Answer

A) hyperbolic. 
B) total risk. 
C) the standard deviation. 
D) the relationship between an investment's returns and the market return. 
A) hyperbolic. 
B) total risk. 
C) the standard deviation. 
D) the relationship between an investment's returns and the market return.

Question 11

Which of the following is NOT an example of systematic risk?

Accepted Answer

A) Inflation 
B) Recession 
C) Management risk 
D) Interest rate risk 
A) Inflation 
B) Recession 
C) Management risk 
D) Interest rate risk

Question 12

AA & Co.has a beta of .656.If the expected market return is 13.2% and the risk-free rate is 5.7%,what is the appropriate required return of AA & Co.using the CAPM model?

Accepted Answer

Required Rate of Return = Risk

Question 13

The security market line can drawn by connecting the risk-free rate and the expected return on the market portfolio.

Accepted Answer

A) True 
 B)False

Question 14

Changes in the general economy,such as changes in interest rates or tax laws,represent what type of risk?

Accepted Answer

A) Firm-specific risk 
B) Market risk 
C) Unsystematic risk 
D) Diversifiable risk 
A) Firm-specific risk 
B) Market risk 
C) Unsystematic risk 
D) Diversifiable risk

Question 15

Tanzlin Manufacturing's common stock has a beta of 1.5.If the expected risk-free return is 2% and the expected return on the market is 14%,what is the expected return on the stock?

Accepted Answer

A) 13.5% 
B) 21.0% 
C) 16.8% 
D) 20.0% 
A) 13.5% 
B) 21.0% 
C) 16.8% 
D) 20.0%

Question 16

The beta of ABC Co.stock is the slope of

Accepted Answer

A) the security market line. 
B) the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills. 
C) the arbitrage pricing line. 
D) the line of best fit for a plot of ABC Co.returns against the returns of the market portfolio for the same period. 
A) the security market line. 
B) the characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills. 
C) the arbitrage pricing line. 
D) the line of best fit for a plot of ABC Co.returns against the returns of the market portfolio for the same period.

Question 17

Long-term bonds issued by large,established corporations are commonly used to estimate the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 18

The greater the dispersion of possible returns,the riskier is the investment.

Accepted Answer

A) True 
 B)False

Question 19

A stock's beta is a measure of its

Accepted Answer

A) systematic risk. 
B) unsystematic risk. 
C) company-specific risk. 
D) diversifiable risk. 
A) systematic risk. 
B) unsystematic risk. 
C) company-specific risk. 
D) diversifiable risk.

Question 20

Security A has an expected rate of return of 22% and a beta of 2.5.Security B has a beta of 1.20.If the Treasury bill rate is 2.0%,what is the expected rate of return for security B?

Accepted Answer

R_A = R_F + B_A(R_m - R_f) .22 = .02 + 2

You are considering buying some stock in Continental Grain.Which of the following is an example of nondiversifiable risk?

The Elvis Alive Corporation,makers of Elvis memorabilia,has a beta of 2.35.The return on the market portfolio is 12%,and the risk-free rate is 2.5%.According to CAPM,what is the risk premium on a stock with a beta of 1.0?

The portfolio standard deviation will always be less than the standard deviation of any asset in the portfolio.

It is impossible to eliminate all risk through diversification.

You hold a portfolio with the following securities: Percent Security of Portfolio Beta Return X Corporation 20% 1.35 14% Y Corporation 35% .95 10% Z Corporation 45% .75 8% Compute the expected return and beta for the portfolio.

Investment risk is

Total risk equals unique security risk times systematic risk.

Increasing a portfolio from 2 stocks to 4 stocks will reduce risk more than increasing a portfolio from 10 stocks to 12 stocks.

Currently,the expected return on the market is 12.5% and the required rate of return for Alpha,Inc.is 12.5%.Therefore,Alpha's beta must be

Beta is a statistical measure of

Which of the following is NOT an example of systematic risk?

AA & Co.has a beta of .656.If the expected market return is 13.2% and the risk-free rate is 5.7%,what is the appropriate required return of AA & Co.using the CAPM model?

The security market line can drawn by connecting the risk-free rate and the expected return on the market portfolio.

Changes in the general economy,such as changes in interest rates or tax laws,represent what type of risk?

Tanzlin Manufacturing's common stock has a beta of 1.5.If the expected risk-free return is 2% and the expected return on the market is 14%,what is the expected return on the stock?

The beta of ABC Co.stock is the slope of

Long-term bonds issued by large,established corporations are commonly used to estimate the risk-free rate.

The greater the dispersion of possible returns,the riskier is the investment.

A stock's beta is a measure of its

Security A has an expected rate of return of 22% and a beta of 2.5.Security B has a beta of 1.20.If the Treasury bill rate is 2.0%,what is the expected rate of return for security B?

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements,taxes,and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters

Exam 8: Risk and Return-Capital Market Theory

You are considering buying some stock in Continental Grain.Which of the following is an example of nondiversifiable risk?

The Elvis Alive Corporation,makers of Elvis memorabilia,has a beta of 2.35.The return on the market portfolio is 12%,and the risk-free rate is 2.5%.According to CAPM,what is the risk premium on a stock with a beta of 1.0?

The portfolio standard deviation will always be less than the standard deviation of any asset in the portfolio.

It is impossible to eliminate all risk through diversification.

You hold a portfolio with the following securities: Percent Security of Portfolio Beta Return X Corporation 20% 1.35 14% Y Corporation 35% .95 10% Z Corporation 45% .75 8% Compute the expected return and beta for the portfolio.

Investment risk is

Total risk equals unique security risk times systematic risk.

Increasing a portfolio from 2 stocks to 4 stocks will reduce risk more than increasing a portfolio from 10 stocks to 12 stocks.

Currently,the expected return on the market is 12.5% and the required rate of return for Alpha,Inc.is 12.5%.Therefore,Alpha's beta must be

Beta is a statistical measure of

Which of the following is NOT an example of systematic risk?

AA & Co.has a beta of .656.If the expected market return is 13.2% and the risk-free rate is 5.7%,what is the appropriate required return of AA & Co.using the CAPM model?

The security market line can drawn by connecting the risk-free rate and the expected return on the market portfolio.

Changes in the general economy,such as changes in interest rates or tax laws,represent what type of risk?

Tanzlin Manufacturing's common stock has a beta of 1.5.If the expected risk-free return is 2% and the expected return on the market is 14%,what is the expected return on the stock?

The beta of ABC Co.stock is the slope of

Long-term bonds issued by large,established corporations are commonly used to estimate the risk-free rate.

The greater the dispersion of possible returns,the riskier is the investment.

A stock's beta is a measure of its

Security A has an expected rate of return of 22% and a beta of 2.5.Security B has a beta of 1.20.If the Treasury bill rate is 2.0%,what is the expected rate of return for security B?

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements,taxes,and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters