Question 1

The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.

Accepted Answer

A)  Efficient Markets Hypothesis (EMH) 
B)  systematic risk principle 
C)  Open Markets Theorem 
D)  Law of One Price 
E)  principle of diversification

Question 2

Which one of the following is an example of systematic risk?

Accepted Answer

A)  the price of lumber declines sharply 
B)  airline pilots go on strike 
C)  the Federal Reserve increases interest rates 
D)  a hurricane hits a tourist destination 
E)  people become diet conscious and avoid fast food restaurants

Question 3

We routinely assume that investors are risk-averse return-seekers; i.e.,they like returns and dislike risk. If so,why do we contend that only systematic risk and not total risk is important?

Accepted Answer

The answer of We routinely assume that investors are risk-averse...

Question 4

An efficient set of portfolios is:

Accepted Answer

A)  the complete opportunity set. 
B)  the portion of the opportunity set below the minimum variance portfolio. 
C)  only the minimum variance portfolio. 
D)  the dominant portion of the opportunity set. 
E)  only the maximum return portfolio.

Question 5

A portfolio contains four assets. Asset 1 has a beta of .8 and comprises 30% of the portfolio. Asset 2 has a beta of 1.1 and comprises 30% of the portfolio. Asset 3 has a beta of 1.5 and comprises 20% of the portfolio. Asset 4 has a beta of 1.6 and comprises the remaining 20% of the portfolio. If the riskless rate is expected to be 3% and the market risk premium is 6%,what is the beta of the portfolio?

Accepted Answer

A)  0.80 
B)  1.10 
C)  1.19 
D)  1.25 
E)  1.40

Question 6

A risk that affects a large number of assets,each to a greater or lesser degree is called:

Accepted Answer

A)  total risk. 
B)  systematic risk. 
C)  unsystematic risk. 
D)  economic risk. 
E)  standard error.

Question 7

Total risk can be divided into:

Accepted Answer

A)  standard deviation and variance. 
B)  standard deviation and covariance. 
C)  portfolio risk and beta. 
D)  systematic risk and unsystematic risk. 
E)  portfolio risk and covariancE.

Question 8

The Rotor Co. stock is expected to earn 16% in a recession,7% in a normal economy,and lose 3% in a booming economy. The probability of a boom is 20% while the probability of a normal economy is 55% and the chance of a recession is 25%. What is the expected rate of return on this stock?

Accepted Answer

A)  6.67% 
B)  7.25% 
C)  7.32% 
D)  8.40% 
E)  12.50%

Question 9

What is the standard deviation of a portfolio which is comprised of $4,500 invested in stock S and $3,000 in stock T?

Accepted Answer

A)  1.4% 
B)  1.9% 
C)  2.6% 
D)  5.7% 
E)  7.2%

Question 10

The relationship between the covariance of the security with the market to the variance is called the:

Accepted Answer

A)  alpha. 
B)  beta. 
C)  total risk. 
D)  standard deviation. 
E)  expected return.

Question 11

You want your portfolio beta to be 1.20. Currently,your portfolio consists of $100 invested in stock A with a beta of 1.4 and $300 in stock B with a beta of .6. You have another $400 to invest and want to divide it between an asset with a beta of 1.6 and a risk-free asset. How much should you invest in the risk-free asset?

Accepted Answer

A)  $0 
B)  $140 
C)  $200 
D)  $320 
E)  $400

Question 12

The excess return earned by an asset that has a beta of 1.0 over that earned by a risk-free asset is referred to as the:

Accepted Answer

A)  market rate of return. 
B)  market risk premium. 
C)  systematic return. 
D)  total return. 
E)  real rate of return.

Question 13

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in:

Accepted Answer

A)  the capital market line which shows that all investors will only invest in the riskless asset. 
B)  the capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio. 
C)  the security market line which shows that all investors will invest in the riskless asset only. 
D)  the security market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio. 
E)  None of these.

Question 14

Zoom,Inc. stock has a beta of 1.5. The risk-free rate of return is 3.7% and the market rate of return is 9.5%. What is the amount of the risk premium on Zoom stock?

Accepted Answer

A)  5.8% 
B)  8.7% 
C)  9.5% 
D)  10.25% 
E)  14.25%

Question 15

You have a portfolio of two risky stocks which turns out to have no diversification benefit. The reason you have no diversification is the returns:

Accepted Answer

A)  are too small. 
B)  move perfectly opposite of one another. 
C)  are too large to offset. 
D)  move perfectly with one another. 
E)  are completely unrelated to one another.

Question 16

The majority of the benefits from portfolio diversification can generally be achieved with just _____ diverse securities.

Accepted Answer

A)  3 
B)  6 
C)  30 
D)  50 
E)  75

Question 17

A portfolio contains two assets. The first asset comprises 40% of the portfolio and has a beta of 1.2. The other asset has a beta of 1.5. The portfolio beta is:

Accepted Answer

A)  1.35 
B)  1.38 
C)  1.42 
D)  1.50 
E)  1.55

Question 18

Diversification can effectively reduce risk. Once a portfolio is diversified,the type of risk remaining is:

Accepted Answer

A)  individual security risk. 
B)  riskless security risk. 
C)  risk related to the market portfolio. 
D)  total standard deviations. 
E)  None of these.

Question 19

Your portfolio is comprised of 30% of stock X,50% of stock Y,and 20% of stock Z. Stock X has a beta of .64,stock Y has a beta of 1.48,and stock Z has a beta of 1.04. What is the beta of your portfolio?

Accepted Answer

A)  1.01 
B)  1.05 
C)  1.09 
D)  1.14 
E)  1.18

Question 20

You own the following portfolio of stocks. What is the portfolio weight of stock C?

Accepted Answer

A)  30.8% 
B)  37.4% 
C)  42.3% 
D)  45.2% 
E)  47.9%

Exam 11: Return and Risk: the Capital Asset Pricing Model Capm