Question 1

A risky asset has a beta of 0.90 and an expected return of 7.4 percent.What is the reward-to-risk ratio if the risk-free rate is 2.69 percent?

Accepted Answer

A)  4.04 percent 
B)  5.23 percent 
C)  6.51 percent 
D)  8.41 percent 
E)  11.59 percent

Question 2

A portfolio beta is computed as which one of the following?

Accepted Answer

A)  weighted average 
B)  arithmetic average 
C)  geometric average 
D)  correlated value 
E)  covariance value

Question 3

Design Interior's stock has an expected return of 11.00 percent and a beta of 1.4.The market return is 10.75 percent and the risk-free rate is 4.0 percent.This stock is ________ because the CAPM return for the stock is ________ percent.

Accepted Answer

A)  greatly overvalued; 13.45 
B)  slightly overvalued; 12.91 
C)  priced correctly; 13.25 
D)  slightly undervalued; 12.91 
E)  greatly undervalued; 13.45

Question 4

Which one of the following is the type of risk that only affects either a single firm or just a small number of firms?

Accepted Answer

A)  unexpected 
B)  market 
C)  systematic 
D)  unsystematic 
E)  expected

Question 5

The market has a standard deviation of 10.8 percent (0.108)while a risky security has a standard deviation of 22.5 (0.225)percent.The covariance of the stock with the market is .0149.What is the beta of the stock?

Accepted Answer

A)  1.09 
B)  1.11 
C)  1.15 
D)  1.19 
E)  1.28

Question 6

Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money,the reward for bearing systematic risk,and the amount of systematic risk?

Accepted Answer

A)  reward-to-risk theory 
B)  capital asset pricing model 
C)  risk premium proposal 
D)  market slope hypothesis 
E)  security market line proposition

Question 7

What is the beta of an average asset?

Accepted Answer

A)  0 
B)  > 0 but  1

Question 8

Stocks D,E,and F have actual reward-to-risk ratios of 7.1,6.8,and 7.4,respectively.Given this,you know for certain that:

Accepted Answer

A)  stock E is preferable to stock F. 
B)  stock D has a higher beta than stock F. 
C)  the market risk premium is greater than 6.8 and less than 7.4. 
D)  stock F is riskier than stock D. 
E)  at least two of the securities are mispriced.

Exam 12: Return,Risk,and the Security Market Line