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  False

Question 2

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. C

Question 3

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 a high total risk and yet a low systematic risk. A firm's stock may have a significant amount of volatility, but it may also have low correlation with the general market. Low market correlation would imply a low beta, thus a low level of systematic risk.

Question 4

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

Accepted Answer

A)  4.0% 
B)  0.7% 
C)  6.7% 
D)  20.1% 
A)  4.0% 
B)  0.7% 
C)  6.7% 
D)  20.1%

Question 5

You expect General Motors (GM) to have a beta of 1 over the next year and the beta of Exxon Mobil (XOM) to be 1.2 over the next year. Also, you expect the volatility of General Motors to be 30% and that of Exxon Mobil to be 40% over the next year. Which stock has more systematic risk? Which stock has more total risk?

Accepted Answer

A)  GM, GM 
B)  GM, XOM 
C)  XOM, XOM 
D)  XOM, GM 
A)  GM, GM 
B)  GM, XOM 
C)  XOM, XOM 
D)  XOM, GM

Question 6

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 7

UPS, a delivery services company, has a beta of 1.4, and Wal-Mart has a beta of 0.9. The risk-free rate of interest is 4% and the market risk premium is 6%. What is the expected return on a portfolio with 50% of its money in UPS and the balance in Wal-Mart?

Accepted Answer

A)  10.9% 
B)  10.4% 
C)  12.0% 
D)  13.1% 
A)  10.9% 
B)  10.4% 
C)  12.0% 
D)  13.1%

Question 8

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 9

The security market line is a graph of the expected return of a stock as a function of its beta with the market.

Accepted Answer

A) True 
 B)False

Question 10

The beta of the market portfolio is ________.

Accepted Answer

A)  0 
B)  -1 
C)  2 
D)  1 
A)  0 
B)  -1 
C)  2 
D)  1

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

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

Accepted Answer

A) True 
 B)False

Question 13

A portfolio comprises Coke (beta of 1.4) and Wal-Mart (beta of 0.8). The amount invested in Coke is $20,000 and in Wal-Mart is $30,000. What is the beta of the portfolio?

Accepted Answer

A)  1.04 
B)  1.20 
C)  1.35 
D)  1.25 
A)  1.04 
B)  1.20 
C)  1.35 
D)  1.25

Question 14

Suppose you invest $15,000 by purchasing 200 shares of Abbott Labs (ABT) at $40 per share, 200 shares of Lowes (LOW) at $20 per share, and 100 shares of Ball Corporation (BLL) at $30 per share. The weight of Ball Corporation in your portfolio is ________.

Accepted Answer

A)  50.00% 
B)  40.00% 
C)  20.00% 
D)  30.00% 
A)  50.00% 
B)  40.00% 
C)  20.00% 
D)  30.00%

Question 15

Which of the following statements is FALSE?

Accepted Answer

A)  Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. 
B)  The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio. 
C)  Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. 
D)  A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio. 
A)  Without trading, the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return. 
B)  The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio. 
C)  Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio. 
D)  A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.

Question 16

If two stocks are perfectly negatively correlated, a portfolio with equal weighting in each stock will always have a volatility (standard deviation) of 0.

Accepted Answer

A) True 
 B)False

Question 17

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 18

Which of the following statements is FALSE?

Accepted Answer

A)  If two stocks move in opposite directions, the covariance will be negative. 
B)  The correlation between two stocks has the same sign as their covariance, so it has a similar interpretation. 
C)  The covariance of a stock with itself is simply its variance. 
D)  The covariance allows us to gauge the strength of the relationship between stocks. 
A)  If two stocks move in opposite directions, the covariance will be negative. 
B)  The correlation between two stocks has the same sign as their covariance, so it has a similar interpretation. 
C)  The covariance of a stock with itself is simply its variance. 
D)  The covariance allows us to gauge the strength of the relationship between stocks.

Question 19

A linear regression to estimate the relation between General Motors' stock returns and the market's return gives the best-fitting line that represents the relation between the stock and the market. The slope of this line is our estimate of ________.

Accepted Answer

A)  alpha 
B)  beta 
C)  risk-free rate 
D)  volatility 
A)  alpha 
B)  beta 
C)  risk-free rate 
D)  volatility

Question 20

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

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.

Which of the following statements is FALSE?

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

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

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?

UPS, a delivery services company, has a beta of 1.4, and Wal-Mart has a beta of 0.9. The risk-free rate of interest is 4% and the market risk premium is 6%. What is the expected return on a portfolio with 50% of its money in UPS and the balance in Wal-Mart?

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.

The security market line is a graph of the expected return of a stock as a function of its beta with the market.

The beta of the market portfolio is ________.

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?

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

A portfolio comprises Coke (beta of 1.4) and Wal-Mart (beta of 0.8). The amount invested in Coke is $20,000 and in Wal-Mart is $30,000. What is the beta of the portfolio?

Suppose you invest $15,000 by purchasing 200 shares of Abbott Labs (ABT) at $40 per share, 200 shares of Lowes (LOW) at $20 per share, and 100 shares of Ball Corporation (BLL) at $30 per share. The weight of Ball Corporation in your portfolio is ________.

Which of the following statements is FALSE?

If two stocks are perfectly negatively correlated, a portfolio with equal weighting in each stock will always have a volatility (standard deviation) of 0.

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?

Which of the following statements is FALSE?

A linear regression to estimate the relation between General Motors' stock returns and the market's return gives the best-fitting line that represents the relation between the stock and the market. The slope of this line is our estimate of ________.

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.

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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