Question 1

Since total risk is greater than systematic risk, should standard deviation be always greater than beta?

Accepted Answer

Standard deviation and beta ar

Question 2

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 3

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 4

Your retirement portfolio comprises 200 shares of the S&P 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $134 and that of AGG is $110. If you expect the return on SPY to be 10% in the next year and the return on AGG to be 8%, what is the expected return for your retirement portfolio?

Accepted Answer

A)  8.48% 
B)  154.10% 
C)  9.89% 
D)  9.42% 
A)  8.48% 
B)  154.10% 
C)  9.89% 
D)  9.42%

Question 5

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 6

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 7

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 8

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 9

The S&P 500 index traditionally is a(n) ________ portfolio of the 500 largest U.S. stocks.

Accepted Answer

A)  value weighted 
B)  equally weighted 
C)  chain weighted 
D)  price weighted 
A)  value weighted 
B)  equally weighted 
C)  chain weighted 
D)  price weighted

Question 10

A portfolio has 30% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 35% and 30%, respectively, and the correlation between IBM and MSFT is 0.5. What is the standard deviation of the portfolio?

Accepted Answer

A)  23.61% 
B)  27.78% 
C)  31.95% 
D)  30.56% 
A)  23.61% 
B)  27.78% 
C)  31.95% 
D)  30.56%

Question 11

How does the S&P 500 index rank in terms of number and market capitalization of U.S. public firms?

Accepted Answer

The S&P 500 is a relatively sm

Question 12

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 13

Your estimate of the market risk premium is 7%. The risk-free rate of return is 4%, 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)  10.4% 
B)  11.7% 
C)  13.1% 
D)  13.8% 
A)  10.4% 
B)  11.7% 
C)  13.1% 
D)  13.8%

Question 14

Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT) at $55 per share, 200 shares of Lowes (LOW) at $35 per share, and 100 shares of Ball Corporation (BLL) at $45 per share. The weight of Abbott Labs in your portfolio is ________.

Accepted Answer

A)  48.89% 
B)  39.11% 
C)  29.33% 
D)  19.56% 
A)  48.89% 
B)  39.11% 
C)  29.33% 
D)  19.56%

Question 15

While we are using historic return to estimate a stock's beta, why can't we use historic data to forecast the expected return for the stock?

Accepted Answer

It is extremely difficult to infer the a

Question 16

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 17

The price of Microsoft is $25 per share and that of Apple is $50 per share. The price of Microsoft increases to $36 per share after one year and to $41 after two years. Also, shares of Apple increase to $56 after one year and to $66 after two years. If your portfolio comprises 100 shares of each security, what is your portfolio return over year 1 and year 2? Assume no dividends are paid.

Accepted Answer

A)  21.53%, 14.67% 
B)  22.67%, 16.30% 
C)  24.93%, 18.75% 
D)  22.21%, 18.26% 
A)  21.53%, 14.67% 
B)  22.67%, 16.30% 
C)  24.93%, 18.75% 
D)  22.21%, 18.26%

Question 18

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 19

What is the lowest risk possible by selecting two stocks that are perfectly negatively correlated?

Accepted Answer

By selecting the weights caref

Question 20

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

Accepted Answer

A)  15% 
B)  14% 
C)  30% 
D)  45% 
A)  15% 
B)  14% 
C)  30% 
D)  45%

Exam 12: Systematic Risk and the Equity Risk Premium

Since total risk is greater than systematic risk, should standard deviation be always greater than beta?

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 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.

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

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

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

Which of the following statements is FALSE?

The S&P 500 index traditionally is a(n) ________ portfolio of the 500 largest U.S. stocks.

A portfolio has 30% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 35% and 30%, respectively, and the correlation between IBM and MSFT is 0.5. What is the standard deviation of the portfolio?

How does the S&P 500 index rank in terms of number and market capitalization of U.S. public firms?

Your estimate of the market risk premium is 7%. The risk-free rate of return is 4%, and General Motors has a beta of 1.4. According to the Capital Asset Pricing Model (CAPM), what is its expected return?

Suppose you invest $22,500 by purchasing 200 shares of Abbott Labs (ABT) at $55 per share, 200 shares of Lowes (LOW) at $35 per share, and 100 shares of Ball Corporation (BLL) at $45 per share. The weight of Abbott Labs in your portfolio is ________.

While we are using historic return to estimate a stock's beta, why can't we use historic data to forecast the expected return for the stock?

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

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.

What is the lowest risk possible by selecting two stocks that are perfectly negatively correlated?

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

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.