Question 1

The standard deviation of a portfolio is always just the weighted average of the standard deviations of assets in the portfolio.

Accepted Answer

A) True 
 B)False  False

Question 2

You are considering investing in a portfolio consisting of 40% Electric General and 60% Buckstar. If the expected rate of return on Electric General is 16% and the expected return on Buckstar is 9%, what is the expected return on the portfolio?

Accepted Answer

A)  12.50% 
B)  13.20% 
C)  11.80% 
D)  10.00% 
A)  12.50% 
B)  13.20% 
C)  11.80% 
D)  10.00% C

Question 3

Unsystematic risk can be eliminated through diversification.

Accepted Answer

A) True 
 B)False  True

Question 4

The security market line (SML) relates risk to return, for a given set of market conditions. If expected inflation increases, which of the following would most likely occur?

Accepted Answer

A)  The market risk premium would increase. 
B)  Beta would increase. 
C)  The slope of the SML would increase. 
D)  The SML line would shift up. 
A)  The market risk premium would increase. 
B)  Beta would increase. 
C)  The slope of the SML would increase. 
D)  The SML line would shift up.

Question 5

The expected return on ZV next year is 12% with a standard deviation of 20%. The expected return on TNA next year is 24% with a standard deviation of 30%. The correlation between the two stocks is -.6. If Hannah makes equal investments in ZV and TNA, what is the standard deviation of her portfolio?

Accepted Answer

A)  22.47%. 
B)  12.04% 
C)  1.45%. 
D)  16.00%. 
A)  22.47%. 
B)  12.04% 
C)  1.45%. 
D)  16.00%.

Question 6

The market risk premium is

Accepted Answer

A)  2%. 
B)  4%. 
C)  6%. 
D)  8%. 
A)  2%. 
B)  4%. 
C)  6%. 
D)  8%.

Question 7

The capital asset pricing model

Accepted Answer

A)  provides a risk-return trade-off in which risk is measured in terms of the market returns. 
B)  provides a risk-return trade-off in which risk is measured in terms of beta. 
C)  measures risk as the correlation coefficient between a security and market rates of return. 
D)  depicts the total risk of a security. 
A)  provides a risk-return trade-off in which risk is measured in terms of the market returns. 
B)  provides a risk-return trade-off in which risk is measured in terms of beta. 
C)  measures risk as the correlation coefficient between a security and market rates of return. 
D)  depicts the total risk of a security.

Question 8

What is the expected dollar return on a portfolio which consists of $9,000 invested in an S&P 500 Index fund, $32,500 in a technology fund, and $8,500 in Treasury Bills. The expected rate of return is 11% on the S&P Index fund, 14% on the technology fund and 2% on the Treasury Bills.

Accepted Answer

A)  $13,640 
B)  $571 
C)  $4,500 
D)  $5,710 
A)  $13,640 
B)  $571 
C)  $4,500 
D)  $5,710

Question 9

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 10

The return for the market during the next period is expected to be 11.5%; the risk-free rate is 2.5%. Calculate the required rate of return for a stock with a beta of 1.5.

Accepted Answer

K = 2.5% +

Question 11

If an investor must choose between investing in either portfolio X or portfolio Y, then

Accepted Answer

A)  she will always choose portfolio X over portfolio Y. 
B)  she will always choose portfolio Y over portfolio X. 
C)  she will be indifferent between investing in portfolio X and portfolio Y. 
D)  none of the above. 
A)  she will always choose portfolio X over portfolio Y. 
B)  she will always choose portfolio Y over portfolio X. 
C)  she will be indifferent between investing in portfolio X and portfolio Y. 
D)  none of the above.

Question 12

Beta is a measurement of the relationship between a security's returns and the general market's returns.

Accepted Answer

A) True 
 B)False

Question 13

A portfolio will always have less risk than the riskiest asset in it if the correlation of assets is less than perfectly positive.

Accepted Answer

A) True 
 B)False

Question 14

If you hold a portfolio made up of the following stocks: Investment Value Beta
Stock A $2,000 1.5
Stock B $5,000 1.2
Stock C $3,000 .8
What is the beta of the portfolio?

Accepted Answer

A)  1.17 
B)  1.14 
C)  1.32 
D)  Can't be determined from information given 
A)  1.17 
B)  1.14 
C)  1.32 
D)  Can't be determined from information given

Question 15

The Security Market Line intercepts the vertical axis at

Accepted Answer

A)  beta = 1. 
B)  the risk-free rate. 
C)  the market risk premium. 
D)  the expected return on asseti equals the expected rate of return on the market portfolio. 
A)  beta = 1. 
B)  the risk-free rate. 
C)  the market risk premium. 
D)  the expected return on asseti equals the expected rate of return on the market portfolio.

Question 16

Stocks with higher betas are usually more stable than stocks with lower betas.

Accepted Answer

A) True 
 B)False

Question 17

The risk-return relationship for each financial asset is shown on

Accepted Answer

A)  the capital market line. 
B)  the New York Stock Exchange market line. 
C)  the security market line. 
D)  none of the above. 
A)  the capital market line. 
B)  the New York Stock Exchange market line. 
C)  the security market line. 
D)  none of the above.

Question 18

Most financial assets have correlation coefficients between 0 and 1.

Accepted Answer

A) True 
 B)False

Question 19

Given the capital asset pricing model, a security with a beta of 1.5 should return ________, if the risk-free rate is 3% and the market return is 11%.

Accepted Answer

A)  16.5% 
B)  14.0% 
C)  14.5% 
D)  15.0% 
A)  16.5% 
B)  14.0% 
C)  14.5% 
D)  15.0%

Question 20

Provide an intuitive discussion of beta and its importance for measuring risk.

Accepted Answer

Beta is an important measure that indica

The standard deviation of a portfolio is always just the weighted average of the standard deviations of assets in the portfolio.

You are considering investing in a portfolio consisting of 40% Electric General and 60% Buckstar. If the expected rate of return on Electric General is 16% and the expected return on Buckstar is 9%, what is the expected return on the portfolio?

Unsystematic risk can be eliminated through diversification.

The security market line (SML) relates risk to return, for a given set of market conditions. If expected inflation increases, which of the following would most likely occur?

The expected return on ZV next year is 12% with a standard deviation of 20%. The expected return on TNA next year is 24% with a standard deviation of 30%. The correlation between the two stocks is -.6. If Hannah makes equal investments in ZV and TNA, what is the standard deviation of her portfolio?

The market risk premium is

The capital asset pricing model

What is the expected dollar return on a portfolio which consists of $9,000 invested in an S&P 500 Index fund, $32,500 in a technology fund, and $8,500 in Treasury Bills. The expected rate of return is 11% on the S&P Index fund, 14% on the technology fund and 2% on the Treasury Bills.

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

The return for the market during the next period is expected to be 11.5%; the risk-free rate is 2.5%. Calculate the required rate of return for a stock with a beta of 1.5.

If an investor must choose between investing in either portfolio X or portfolio Y, then

Beta is a measurement of the relationship between a security's returns and the general market's returns.

A portfolio will always have less risk than the riskiest asset in it if the correlation of assets is less than perfectly positive.

If you hold a portfolio made up of the following stocks: Investment Value Beta Stock A $2,000 1.5 Stock B $5,000 1.2 Stock C $3,000 .8 What is the beta of the portfolio?

The Security Market Line intercepts the vertical axis at

Stocks with higher betas are usually more stable than stocks with lower betas.

The risk-return relationship for each financial asset is shown on

Most financial assets have correlation coefficients between 0 and 1.

Given the capital asset pricing model, a security with a beta of 1.5 should return ________, if the risk-free rate is 3% and the market return is 11%.

Provide an intuitive discussion of beta and its importance for measuring risk.

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

The standard deviation of a portfolio is always just the weighted average of the standard deviations of assets in the portfolio.

You are considering investing in a portfolio consisting of 40% Electric General and 60% Buckstar. If the expected rate of return on Electric General is 16% and the expected return on Buckstar is 9%, what is the expected return on the portfolio?

Unsystematic risk can be eliminated through diversification.

The security market line (SML) relates risk to return, for a given set of market conditions. If expected inflation increases, which of the following would most likely occur?

The expected return on ZV next year is 12% with a standard deviation of 20%. The expected return on TNA next year is 24% with a standard deviation of 30%. The correlation between the two stocks is -.6. If Hannah makes equal investments in ZV and TNA, what is the standard deviation of her portfolio?

The market risk premium is

The capital asset pricing model

What is the expected dollar return on a portfolio which consists of $9,000 invested in an S&P 500 Index fund, $32,500 in a technology fund, and $8,500 in Treasury Bills. The expected rate of return is 11% on the S&P Index fund, 14% on the technology fund and 2% on the Treasury Bills.

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

The return for the market during the next period is expected to be 11.5%; the risk-free rate is 2.5%. Calculate the required rate of return for a stock with a beta of 1.5.

If an investor must choose between investing in either portfolio X or portfolio Y, then

Beta is a measurement of the relationship between a security's returns and the general market's returns.

A portfolio will always have less risk than the riskiest asset in it if the correlation of assets is less than perfectly positive.

If you hold a portfolio made up of the following stocks: Investment Value Beta Stock A $2,000 1.5 Stock B $5,000 1.2 Stock C $3,000 .8 What is the beta of the portfolio?

The Security Market Line intercepts the vertical axis at

Stocks with higher betas are usually more stable than stocks with lower betas.

The risk-return relationship for each financial asset is shown on

Most financial assets have correlation coefficients between 0 and 1.

Given the capital asset pricing model, a security with a beta of 1.5 should return ________, if the risk-free rate is 3% and the market return is 11%.

Provide an intuitive discussion of beta and its importance for measuring risk.

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